The operation of offshore banking, which was deregulated as early as late 1980s in China, has been constantly trailing onshore businesses. It was largely because both Chinese companies and individuals were discouraged from siphoning assets abroad, especially after the Asian financial crisis in late 1990s, so that domestic growth could be sustained.
As China has stepped into an inflationary cycle in recent years while a hefty amount of speculative capital inflows, or so-called ot money hit the mainland every year, Beijing has launched a o-out campaign with an aim to diversify the nation massive foreign-exchange reserves. Although the Chinese central government largely relies on state-owned enterprises to invest abroad, private firms and entrepreneurs also see business opportunities during the process, spurring demand for banking services in an overseas markets.
Offshore advantages
By definition, an offshore bank account refers to one opened with a bank located out of the country of residence of the account holder. Usually, these accounts are held within offshore jurisdictions. However, most of banks in China now also provide similar Non-Resident Account, which allows offshore firms set up by Chinese citizens to conduct overseas transactions onshore.
Like onshore financial agencies, offshore lenders provide traditional banking services covering deposit taking, credit facilities, international wire transfers, asset management, trade financing, and foreign exchange.
Key advantages of offshore banking lie in its flexibility in managing multi-currency accounts and lower fees to receive international payments. Privacy and confidentiality in offshore accounts are usually better ensured, a priority for business people and high net worth individuals.
In many offshore jurisdictions, individuals and offshore companies don need to pay tax on their interest incomes. In addition, offshore accounts can be accessed from all over the world, without being subject to restrictions on time zones or currencies, via internet banking or international ATM machines.
Offshore banking services include maintaining bank accounts with internet banking as well as credit or debit card facilities. They are now increasingly being tapped by business owners and high net worth individuals.
Such offshore banking services can facilitate general taxation planning, inheritance tax planning, estate planning, pre-immigration or repatriation planning as well as privacy and asset protection. They also can be used to receive payments, salaries and commissions swiftly.
For a Chinese mainland resident, it possible to directly open an account with a foreign bank in some overseas jurisdictions. However, a US$50,000 yearly quota on foreign-exchange purchase set by the State Administration of Foreign Exchange means it difficult to manage massive assets overseas through this kind of individual account.
Due to these restrictions, a growing number of intermediary agencies provide offshore banking services in China as part of an offshore incorporation package for their wealthy clients, if they don have an offshore company registered.
Usually recommend my clients to open offshore bank accounts under a corporate name to avoid being subject to foreign-exchange quotas as individuals, said Stephen Xue, an agent for overseas corporate registration.
Clients only need to offer certain application documents instead of travelling to an offshore jurisdiction to show up at a bank. We will do the rest of things and the whole process of setting up a bank account won take longer than a month, Xue said.
Clients are not only introduced to banking services in well-established global financial centers like Hong Kong and Singapore, but also in emerging offshore jurisdictions such as Seychelles and Brunei.
Although offshore banks claim they operate within highly regulated environments under local government bodies such as a central bank and financial regulators and maintain capital adequacy requirement, they are widely believed to be subject to less supervision than their onshore counterparts.
Early development in China
Offshore banking services in China have a short history of just two decades. There were a limited number of players until the country virtually opened the business to all lenders based on the mainland in late 2000s.
The People Bank of China and The State Administration of Foreign Exchange issued rules in 1989 to allow five Chinese banks based in the southern city of Shenzhen to become the first batch on the mainland to conduct offshore banking business.
They were Shenzhen-based China Merchants Bank, the Shenzhen branch of Industrial and Commercial Bank of China, the Shenzhen branch of Agricultural Bank of China, Shenzhen Development Bank and the Shenzhen branch of Guangdong Development Bank.
Apparently, banks in Shenzhen took advantage of the preferential policies in the Shenzhen Special Economic Zone, China first such economic zone under its reform and opening-up program, and the geographic edge of neighboring Hong Kong SAR.
However, the offshore banking business grew slowly in the following decade partly because there were no rules governing the sector and local lenders mainly targeted Asian and African enterprises instead of European and US firms.
The first set of rules governing offshore banking in China was introduced in 1998, almost a decade after the business trial started in the country, indicating the difficulty authorities have in setting up a unified supervisory framework.
he profitability of offshore banking lagged far behind other businesses at these Chinese banks due to a lack of channels to use capital and the difficulty to attract deposits, Zhang Cong and Yizhenxing with Shanghai-based Tong Ji University said in a research report. Banks also faced big potential risks as they were unable to gain sufficient information on credit profiles of their clients.
As these problems surfaced, the offshore banking business at the first batch of Chinese lenders was halted in January 1999 on the heels of the Asian financial crisis and hefty amounts of sour debt at mainland banks as Beijing hopes to reduce financial risks to ensure economic stability.
A policy shift occurred after China joined the World Trade Organization. In June 2002, just six months after China became a WTO member, financial authorities resumed the offshore banking services by Chinese lenders by allowing China Merchants Bank and Shenzhen Development Bank to restart the business. Meanwhile, Shanghai-based Bank of Communications and Shanghai Pudong Development Bank were also enrolled in the program.
The move was largely due to China commitment to the WTO as the country delivered on its promise to gradually deregulate the banking sector to foreign participation. Two Shanghai-based banks were allowed in the trial as the central government hoped to develop the city into a global financial hub with a solid offshore banking sector.
During the next several years, offshore banking services developed faster for foreign banks than Chinese peers. The main offshore-banking clients were state-owned enterprises and entrepreneurs involved in cross-border trading.
Offshore banking seemed to be a gray area at that time; although regulators issued rules governing the business, local banks initially didn have the ideas of how to implement them and faced problems such as verifying applications of opening accounts, said a Chinese banker familiar with the development of the business. n addition, it a business that was not that encouraged by authorities with regard to the risks associated with capital flows.
A new episode
However, China's increasing involvement in globalization has seen an increase in the opening of foreign-exchange accounts by overseas institutions necessitating an industry-wide rule to regulate the issue.
In 2009, China virtually allowed all lenders to conduct overseas banking business by launching the so-called Non-Resident Account and unveiled a new set of rules on regulating foreign-exchange accounts opened by non-resident entities at banks based on the mainland. The locally-incorporated units of foreign lenders are also subject to the rules.
The foreign-exchange regulator acknowledged at that time that he lack of regulations in the area can make it easy for illegal activities and could become the channel for illegal capital flow especially amid the financial turmoil. /p>
Under the rules, like offshore accounts, transfers between these NRA accounts and those of domestic agencies or individuals should be managed as cross-border transactions. However, NRA accounts are subject to tighter regulatory oversight as banks face total foreign-exchange quotas on the business.
A lot of our NRA clients are companies set up by Chinese citizens in Hong Kong and many of them deal with cross-border trading, said a banker at a British lender in Shanghai. he arrangement can help them effectively bypass complicated settlement process and conduct swift transactions with customers in overseas accounts.
According to the banker, more than two-thirds of total NRAs at lenders in China are held by Hong Kong-based companies that are established by Chinese mainland individuals.
In addition to helping Chinese businessmen facilitate their dealings, offshore banking may have the chance to catch up as demand from the rich people for wealth management jumps. The growing wave of emigration tends to make offshore banking "onshore" for China wealthiest.
Why not buy a house in US or Australia if its price is similar to those in Shanghai and Beijing," said Zhu Weimin, who owns a trade firm specializing in textile shipments. "The price is no higher there and you can enjoy extra benefits such as education and healthcare. Anyway, it seems to be a way to move some of my assets broad to diversify risks amid a lackluster domestic property market."
According to a recent survey jointly conducted by Hurun Report, which publishes a well-known annual China rich list, and Bank of China, about half of Chinese worth more than 10 million yuan have considered emigrating, mainly to seek better opportunities for their children's education.
The survey showed that 46 percent of the 980 millionaires surveyed are considering leaving China, with the United States and Canada the most popular destinations. Another 14 percent had already
begun the process by either having emigrated or applied, according to the survey.
Almost 60 percent of them said that they want to leave to seek a better education for their children overseas while many also cited concerns about the security of their assets in China. The survey was done in 18 Chinese cities from May to September this year.
Many of China wealthiest citizens have made their money in the country construction and property sectors, as well as a growing domestic retail market. But the rigid education system, rising living costs, food safety concerns and widespread corruption have led many to look for homes abroad. High inflation and the difficulty of investing overseas were also cited in the survey.
One third of the people surveyed have engaged in nvestment immigration, which allows a person to emigrate after he or she agrees at first to invest a certain amount of money in the host country. The average respondent was 42 years old and worth more than 60 million yuan, the survey said.
The emigration crowd grows bigger, demand for banking services overseas will definitely surge, said Chris Wu, an independent investment consultant in Shanghai. with a foreign residency, these wealthy people will no longer face restrictions as Chinese nationals; they are the group of clients both Chinese and foreign banks will target in the future. The trend will certainly change the original definition of offshore banking.
Wealthy Chinese
More than 30 years of booming economic growth have allowed some Chinese to build up vast fortunes once unthinkable in the nominally communist nation. China now has 271 dollar billionaires, according to Hurun's 2011 rich list, up from 189 last year, despite the global economic crisis. The latest report said that 960,000 people in China are now worth more than 10 million yuan, up by 9.7 percent from 2010.
The Chinese wealthy community is also expected to show a marked increase this year, widening the gap between the rich and the poor. The total amount of personal investable assets in the country will rise 14.8 percent to 62 trillion yuan by the end of the year from 2010's 54 trillion yuan. And the number of families with investable assets of more than 6 million yuan will grow from last year's 1.01 million to 1.21 million, the Boston Consulting Group and China Construction Bank predicted in a joint study in December.
The investable assets owned by wealthy families should reach 27 trillion yuan in 2011, compared with 23 trillion yuan in 2010, the study said. Around 70 percent of such families are concentrated in 10 provinces in China. Up to 35 percent of them live in Shanghai, Beijing and Guangdong Province. The study was based on surveys among more than 2,100 high-net-worth individuals.
Savings, though still the biggest category, dropped from 61 percent of their asset portfolios in 2008 to 55 percent in 2010 while financial products issued by commercial banks advanced to second spot with relatively high yields and tolerable risks as wealth safety still comes before life quality for China's rich, the study said.
Up to 57 percent and 53 percent of survey participants expressed interest in fixed-income and trust assets respectively. The scale of latter has grown 65 percent annually in China over the past three years, it said.
People in big cities like Shanghai and Beijing and those in costal areas of Zhejiang and Guangdong provinces are set to accumulate a growing number of investable assets in the next few years and will definitely seek to go diversified due to weakness in mainland property and stock markets," said investment consultant Wu. "Even if they don't emigrate, they will seek to channel assets abroad via setting up an offshore company or investing in offshore products, which will benefit banks getting well prepared for that."
Recognizing the change of investors' needs, some Chinese banks have already started to boost their offshore businesses.
China Construction Bank was studying plans to launch offshore trust products to its private banking clients, its vice president Zhu Xiaohuang said recently. Sources noted that the Beijing-based lender is planning to provide a variety of offshore banking services and is open to cooperation with foreign counterparts. It already has a private-banking center in Hong Kong.
Meanwhile, Agricultural Bank of China has also teamed up with Bank of Montreal to trial cross-border private-banking business. Cross-border financial services and solutions will be provided to Chinese high net worth individuals in such aspects of education, emigration and investment. The two banks has set up a joint team to serve these high-end clients in China.
However, the attitude of Chinese regulators towards offshore banking is still mixed. Some worried that with more Chinese seeking to emigrate and move assets abroad, supervision over capital flows will go even tighter.
"The foreign-exchange watchdog has made it very clear that it would step up efforts to clamp down on any type of money laundering and illegal cross-border capital flows," said the banker at the British lender. "Regulators are tracking more closely on our NRAs and urging us to keep the amount of deposits under relevant foreign-exchange quotas. For offshore accounts, they are checking frequently transactions between offshore accounts and onshore accounts and verifying underlying deals to ensure they are not misused."
Offshore Accounts at Domestic Banks
SPD BANK: SPDB Offshore Account offered in eight currencies (USD?HKD?EUR?GBP?JPY?CAD?AUD?SGD) to legal entities registered outside Mainland China (including Hong Kong, Macao and Taiwan areas) and non-resident individuals (including Hong Kong, Macao and Taiwan areas). The Offshore account is SWIFT transfer enabled and offers real time transfers between SPD offshore and domestic accounts.
SHENZHEN DEVELOPMENT BANK: All non-residents within offshore banking objects, including registered offshore companies, firms, enterprises, factories, organizations, banks, deposit companies and fund organizations, as well as governmental organizations, non-governmental organizations and individuals, can open an offshore account at Shenzhen Development Bank (SDB). The bank maintains a specific provision for the documents required to open an account for LLC incorporated in Hong Kong, BVI, Samoa or the Seychelles and encourages customers to contact the bank to discuss the documents required to open an account for an LLC incorporated in other jurisdictions.
XIAMEN INTERNATIONAL BANK: In addition to opening offshore accounts for non-residents (including overseas Chinese, and Hong Kong, Macau and Taiwan residents), the bank offers corporate accounts for overseas companies and organizations, including those registered in Hong Kong, Macau and Taiwan. These accounts are not subject to foreign exchange controls and enjoy a fast money transfer times.
BANK INTERNATIONAL NINGBO: The bank will open an offshore account for all non-residents of China , including registered offshore companies, businesses, factories, organizations, banks, deposit companies, fund organizations, and individuals.
BANK OF COMMUNICATIONS: The Bank of Communications advertises offshore-wealth management solutions, promising to specially assigned professional managers for customer accounts with deposits exceeding USD10 million. They offer ynchronous floating interest rates of LIBOR and HIBOR, time deposits with a maturity term as short as 1 day for US currency exceeding USD 10 million which the bank claims offer interest rates that far exceed those mandated by the People Bank of China.
