Exclusive | Foreign banks shun China's Shanghai free-trade zone amid uncertain rules

Beijing's move to eliminate bureaucratic approval processes to encourage foreign banks to open branches in the Shanghai free-trade zone has met with a lukewarm response.

The Shanghai free-trade zone, the mainland's first such zone, was launched at the end of September. The hope was that a wide range of banking services, a freer foreign exchange regime and market-oriented interest rate reforms would take root in the zone.

So far, some 10 banks have applied for and received permission to open branches in the zone. But among them, only two are foreign - Citigroup, once the world's largest financial services provider, and DBS, the Singapore-based bank that is Southeast Asia's largest lender. The rest are all major state-owned banks.

"Originally, the government was expecting more foreign banks to join the first batch of free-trade zone banks, and that would have grabbed attention from around the world," said one government source familiar with the matter. "That would have been good for the city's image as the global financial centre."

The Shanghai branch of the China Banking Regulatory Commission (CBRC) held several meetings with about a dozen foreign banks in August and September to encourage them to set up in the zone, according to government sources and bankers present at the meetings. The CBRC even sent questionnaires to foreign banks to ask them why they were hesitant to open offices in the zone, according to two bankers who saw the questionnaires.

"One concern that many foreign banks have is whether we really need to make the free-trade zone branch completely separate from our existing branches in China," said one banker, referring to the CBRC requirement that foreign banks in the zone have completely distinct systems of internal compliance, risk management and human resources from their operations in the rest of the mainland.