FOCUS: NEW INVESTMENT OPTIONS Foreign Minority Equity Investments in Chinese Commercial

Nicholas C. Howson and Lester Ross

everal formal announcements and rumors over the last year indicate that foreign investors—both Sindustry players and financial and private equity investors—are taking an increasingly serious look at the acquisition of minority equity stakes in small and medium- sized commercial banking institutions in . The serious dispute developing as this article goes to press between Newbridge Capital, Inc. (Newbridge) and certain government shareholders of Development (SDB) regarding Newbridge’s proposed acquisition of such government shareholders’ shares in SDB will only intensify interest in these deals. These transactions began in 1996 and accelerated in 2001 (see p.20). Market rumors and sometimes opaque announce- ments continue to circulate regarding other potential minority equity investments by foreign institutions in the likes of the , , China Merchants

Nicholas C. Howson and Lester Ross, are Of Counsel and Counsel, respectively, at Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York and .

18 July–August 2003 THE CHINA BUSINESS REVIEW Newbridge notwithstanding, passive stakes can be a growth activity

Bank, and —in fact, almost Through Shares in Insurance Companies and any other than the 2001 Notice Concerning Standardization of wholly state-owned banks: Agricultural Bank of Certain Items in the Absorption of Foreign China, , , Investment through Share Purchases in Chinese- and Industrial and Commercial Bank of China. Invested Insurance Companies. Foreign investors that have already participated Thus, each equity investment in a Chinese include multilateral institutions like the Asian commercial bank has been undertaken pursuant Development Bank (ADB) and the International to case-by-case approvals of the State Council Corp. (IFC), financial institutions like acting on the advice of China’s and Citigroup Inc. and The HSBC Group, and US pri- commercial banking regulator, PBOC. The for- vate equity institutions such as Newbridge, mulation and “imminent” release of a regulation although it is now extremely unlikely that explicitly allowing foreign equity participation Newbridge’s deal will go through. Rumored new in Chinese commercial banking institutions has entrants include of been a staple of the rumor mill in Beijing and , -based Bank of , for more than a year. With the estab- and private equity powerhouse The Carlyle Group. lishment of the China Banking Regulatory Commission (CBRC), to which the PBOC has The regulatory environment ceded supervisory responsibility over commer- cial banks, the prospects for formal regulations No PRC legislation specifically authorizes any governing these transactions have improved. of these transactions. Several PRC laws and reg- What seems certain is that CBRC alone will ulations exist concerning foreign investment in issue regulations governing these transactions Chinese commercial banks, and rules govern and that the successor to the PRC Ministry of foreign purchases of equity in Chinese compa- Foreign Trade and Economic Cooperation nies in private transactions (see p.21). But no (MOFTEC)—the Ministry of Commerce law or regulation yet provides a specific legal (MOFCOM)—will not exercise its authority basis for foreign or foreign-invested entities to under the 1995 Several Issues Concerning the purchase stock in Chinese commercial banks Establishment of Foreign-Invested Companies organized as companies limited by shares (CLSs) Limited by Shares (FICLS provisions) or play its in private transactions, and such investments traditional role as the gatekeeper for all foreign were prohibited by a 1994 People’s Bank of investment. CBRC, like PBOC, will limit aggre- China (PBOC) notice. Contrast this with foreign gate foreign ownership to 24.9 percent in any investments in Chinese insurance CLSs, which one entity. PBOC, so far, has also tacitly set a 15 are undertaken in accordance with the China percent limit on ownership for any single for- Insurance Regulatory Commission’s (CIRC) eign investor (although the Newbridge/SDB deal 2000 Provisional Regulations on Investment was announced in October 2002 at more than

THE CHINA BUSINESS REVIEW July–August 2003 19 18 percent). This is higher than the 10 percent financial institutions or integrate them into a permitted for individual foreign equity invest- global business. ments in Chinese insurance CLSs. Second, PBOC approvals to date indicate that CBRC will likely take the same line as CIRC the “minority” equity interest made available to by deeming that foreign total investment of less any single foreign shareholder may be as high as than 25 percent in a CLS will bring the transac- 15 percent, up from 3 to 8 percent in the earliest tions outside the purview of the 1995 FICLS approvals. provisions (and MOFCOM approval) and thus Third, China is beginning to accept foreign will deprive the foreign investor or the investee direct investment in small Chinese banking entity of preferential treatment bestowed on tra- institutions that have already listed on the ditional foreign-invested enterprises (FIEs). By domestic A-share market. Fourth, as confirmed the same token, however, foreign investors will by the 2002 Notice Regarding the Transfer to not likely be subject to the regulated financial Foreign Investors of State-owned Shares and institution, two-year representative office, and Legal Person Shares of Listed Companies and minimum net assets requirements for FIE banks the Citigroup transaction structure, Chinese or branches of a foreign commercial bank. state institutions are being permitted to sell their Even without explicit regulations, a pattern existing interests in such banks, not merely suf- in the approvals rendered by the highest levels of fer dilution as new investors enter the fray. Fifth, China’s government seems to be emerging. First, and perhaps most significant, PRC central bank- China is moving away from approval of invest- ing regulators seem to be considering allowing ments by “safe” multilateral institutions, such as certain foreign investors to exercise real manage- ADB and IFC, and qualified “red chips” (off- ment control. The Newbridge/SDB deal origi- shore establishments of PRC institutions) and nally offered full management control (by toward major private foreign banking institu- contract—now apparently terminated) and tions and, with less certainty, even pure financial board representation for Newbridge. or private equity investors such as Newbridge. In fact, the Chinese government may be more will- Why not expand by ing to cede minority participation to such non- branching or through FIEs? strategic investors, which, unlike large financial services groups, may be less likely, in the view of Given China’s World Trade Organization PRC authorities, to dominate smaller Chinese (WTO) entry and new arrangements with

Foreign Minority Investments in PRC Banks to Date

has foreign invest- control of SDB through both the establish- operation focusing on the development of a ment from the Asian Development Bank (3.03 ment of an eight-person “acquisition transi- credit card business with, Shanghai Pudong percent, 1996) and PRC-invested but Hong tion management committee,” which Development Bank, through its banking sub- Kong-domiciled China Everbright Holding Co. presumably was to evolve into some kind of sidiary, with options to increase its stake to Ltd. (Hong Kong) (20.07 percent, 1997). permanent, Newbridge-appointed executive as much as 24.9 percent. The shares were has foreign investment team, and at the board level. purchased from two state institutions, and from the International Finance Corp. (IFC) After months of conflicting rumors, on May the stake was diluted to 4.62 percent when (total 7 percent, 1999 and 2001), HSBC (8 per- 12, 2003, SDB announced that it would not go Shanghai Pudong Development Bank issued cent, 2001), and forward with closing the deal and that it was 300 million new shares days later. (Hong Kong) (3 percent, 2001). disbanding the transition management com- PRC shareholder China Orient Group Nanjing City Commercial Bank has for- mittee. Newbridge responded on the same announced on May 14, 2003 that it had eign investment from IFC (15 percent, 2001). day with a strongly worded press release in agreed to sell almost 41 million shares in A- IFC and Canada’s in which it stated: “The announcement made share listed China Minsheng Bank—reputed- September 2002 signed a memorandum of today by the Shenzhen Development Bank has ly China’s only commercial bank without state understanding under which IFC and no effect on our binding agreement with the investment—to IFC for $23.5 million, giving Scotiabank would acquire 12.5 percent and Shenzhen government shareholders signed in IFC a 1.22 percent equity interest in the bank. 12.4 percent, respectively, of Xi’an City June of 2002. We expect that the Shenzhen Subject to government approvals, the price of Commercial Bank (XCCB), for a total of 24.9 government... to [sic] respect its international ¥4.70 ($.057) per share is at a discount to the percent of XCCB. commitments and honor its obligations under same day A-share trading price of ¥11.30 Shenzhen Exchange A-share-listed this binding international contract with us.” ($1.37) per share. Later it was reported that Shenzhen Development Bank (SDB) Judging from the Newbridge press release, Hong Kong’s will purchase 8 announced in October 2002 that Newbridge pricing of the equity to be sold by Shenzhen percent of China Minsheng Bank for ¥1.4 bil- Capital Inc. (Newbridge) had negotiated a state shareholders (likely tied to reserves and lion ($169.4 million). stake of 18.02 percent in SDB via an invest- valuation of SDB) is at issue. ment of new capital and the acquisition of Citigroup Inc. announced on January 2, existing holdings from PRC state sharehold- 2003 that it would purchase a 5 percent stake ers. Newbridge would assume management in, and enter into a broader strategic co- —Nicholas C. Howson and Lester Ross

20 July–August 2003 THE CHINA BUSINESS REVIEW respect to the financial sector generally, it may restrictions: a foreign bank investor making a seem strange that foreign banking institutions minority investment in an existing Chinese Selected Relevant are expressing such interest in China’s banking commercial bank will be able to reach a broader Regulations sector via minority equity investments in estab- range of retail customers more quickly, and its lished Chinese banks. As of April 30, 2003, for- investee bank will not be subject to the same eign banks had established 148 branches and 9 restrictions or requirements. In addition, Foreign investment in sub-branches in China, as well as 210 represen- approvals for branches of the investee bank will Chinese commercial tative offices, and 16 foreign-invested banks and be far easier, and the investment will be more banks finance companies had been established with 7 liquid (via either the private sale of its stock branches. Even prior to China’s WTO entry, for- interest or participation in some kind of capital 1995 Commercial Bank Law eign banks had established strong beachheads in market transaction). There will also be opportu- 2001 Regulations on the the PRC—with 221 representative offices of for- nities to co-brand or jointly market products, Administration of Foreign- eign commercial banks, 158 foreign bank such as credit cards. Conversely, the 24.9 percent invested Financial Institutions branches (and 6 sub-branches), and 13 foreign- ceiling limits foreign investors’ interest for the (superseding 1994 regulations invested banks and finance companies. foreseeable future, with attendant constraints on of the same name) Though WTO entry promised improvements control—absent extensive minority rights or the 2002 Implementing Rules for in the regulatory landscape for foreign banks in proposed Newbridge/SDB-type structure. the Administration of Foreign- China, subsequent PBOC regulation has bur- invested Financial Institutions dened foreign banks with significant constraints State-owned shares and legal on their activities in China. Thus, though geo- person shares Rules governing foreign graphical restrictions on (RMB) busi- purchases of equity in ness by foreign bank branches are to be removed The announced Newbridge/SDB transaction Chinese companies in completely by December 11, 2006, foreign banks originally attracted a great deal of attention not private transactions will still face burdens in establishing branches in only because a foreign investor with a minority China, including onerous representative office equity position was to be granted management 1995 Several Issues seasoning requirements; branch-level capital control, but also because Shenzhen municipal Concerning the Establishment reserve, liquidity, and deposit requirements; for- government-related shareholders were to trans- of Foreign-invested Companies eign exchange deposit/foreign exchange asset ratio fer their equity in the target bank. Reportedly, Limited by Shares limitations; and lengthy branch application pro- 16.46 percent of the rumored 18.02 percent to 2003 Interim Provisions on cedures. As a result, many foreign commercial be purchased by Newbridge was composed of Mergers and Acquisitions of banks realize that it will take a significant amount state-owned shares or legal person shares held Domestic Enterprises by of time and expense to establish real in-country by Shenzhen Investment Management Co., Foreign Investors branch networks and/or obtain the ability to Shenzhen International Trust & Investment Co., undertake RMB business. Because of these restric- Shenzhen Social Security Administration —Nicholas C. Howson tions, and the problems associated with pursuing Bureau, and Shenzhen City Construction and Lester Ross essentially greenfield joint venture projects, many Development Group Co. From a legal stand- foreign banks keen to enter the PRC market, and point, the 2002 Legal Person Shares Transfer participate in the creation and expansion of a true Notice provided a theoretical basis (and network and the RMB market, have turned part approval track) for such purchases—which had or all of their attention to minority investments in been banned since 1995, at least with respect to Chinese banks organized as CLSs. the purchase of state shares and legal person The advantages associated with minority shares in Chinese CLSs with listed shares. equity investment as compared with the branch- But foreign purchasers, whether foreign ing or FIE routes are clear given the above banks or private equity groups, must also care-

Table 1: Pros and Cons of Entry Routes

Item Foreign Branch and Foreign-Invested Bank Foreign Minority Investment Control Absolute control over branch or WFOE, potential majority Only minority shareholder rights control over EJV Price of Investment Capital contribution usually at par value Negotiable (IPO, for exit No PBOC approval precedent; would require restructuring as Domestic or overseas IPO possible or additional funding) company limited by shares Availability for Prospective Entries Onerous seasoning requirements Very low requirements Geographic Roll Out Restrictions until December 2006; separate working capital No restrictions; easy implementation requirements for each branch pose barriers to branch establishment Speed of Execution Up to 14 months for new branch or FIE Case by case NOTES: WFOE=wholly foreign-owned enterprise; EJV=equity joint venture; FIE=foreign-invested enterprise; PBOC=People’s Bank of China SOURCE: Nicholas C. Howson and Lester Ross

THE CHINA BUSINESS REVIEW July–August 2003 21 fully consider the difficulty of such transactions, Valuation and pricing given the high approval threshold, and sensitivi- ties concerning valuation, when state sharehold- The valuation of a small or medium-sized ers—acting on behalf of “the whole Chinese bank, and pricing of a minority equity people”—are permitted to sell their interests. investment in such a bank, can present signifi- Certainly, new investment in a Chinese bank cant challenges. Potential foreign purchasers (with a small dilution suffered by existing state must work to understand, to the greatest extent shareholders) will be easier to effect and get possible, the true situation regarding solvency approved and will provide new and much-need- and asset quality, organization of the bank and ed capital for the target institution. As a case in its actual network, management and shareholder point, the warring press releases that heralded (or state) interest in operations, CBRC’s view of the demise of the Newbridge/SDB deal indicate the bank in question and the bank’s ability to that disagreement over pricing between expand operations nationwide, and the web of Newbridge and the Shenzhen state shareholders laws, regulations, and pronouncements that will listed above may be the principal reason for the directly affect the operations of the target bank deal’s apparent collapse. or the proposed foreign purchaser’s investment

Table 2: Comparison of Entry Routes

Foreign-Invested Enterprises Domestic Banking Finance Finance Institutions with Company Company Foreign Minority Item Branch Bank WFOE Bank EJV WFOE EJV Investment Limitation of Foreign NA NA None NA None Individual 15% Equity Interest (exceptions may exist); total 24.9% Main Requirements for Foreign Investors

Capital Adequacy Minimum 8% Financial Financial Financial Financial NA capital institution institution institution institution adequacy ratio

Assets $2 billion $10 billion $10 billion $10 billion $10 billion NA

Seasoning/ Representative 2 years 2 years No time 2 years 2 years NA Office in China minimum Minimum Registered Capital ¥100 million ¥300 million ¥300 million ¥200 million ¥200 million ¥1 billion (for (for foreign exchange commercial banks) transactions with foreign customers) Prudential Requirements 30% of working Minimum 8% capital adequacy ratio Minimum 8% capital in PBOC- capital adequacy designated interest- Unutilized credit line not to exceed 25% of capital unless approved by PBOC ratio; ratio of bearing assets, balance of loans foreign exchange Ratio of balance of liquid assets to balance of liquid debts at least 25% to balance of and RMB assets deposits not to deposited separately Fixed assets not to exceed 40% of equity exceed 75%; ratio (from each other); of balance of minimum 8% ratio of Total absorbed foreign exchange deposits not to exceed 70% of total assets liquid assets to RMB working capital balance of liquid plus RMB reserves Ratio of RMB capital to RMB risk assets at least 8% debts at least 25% to RMB risk assets Customer Base May provide services only to foreign individuals and foreign enterprises upon accession (since December 11, 2001) May provide services to Chinese enterprises by December 11, 2003 May provide services to all Chinese clients by December 11, 2006 Geographic Scope Shanghai, Shenzhen, Tianjin, and Dalian upon accession (since December 11, 2001) NA , Zhuhai, Qingdao, Nanjing, and (since December 11, 2002) Ji’nan, Fuzhou, , and by December 11, 2003 Kunming, Beijing, and by December 11, 2004 Shantou, Ningbo, , and Xi’an by December 11, 2005 All geographic restrictions removed by December 11, 2006 Qualifications to Engage Three years PRC business operating experience NA in RMB Business Two consecutive years of profits NOTES: WFOE=wholly foreign-owned enterprise; EJV=equity joint venture; PBOC=People’s Bank of China; NA=not applicable SOURCES: Nicholas C. Howson and Lester Ross

22 July–August 2003 THE CHINA BUSINESS REVIEW in, and participation in management of, the immediately after SPDB and certain SPDB institution. Valuation is made even more com- shareholders had agreed to issue or sell shares in plex because of differences that arise from the a private transaction to Citigroup at only ¥3.32 specific transaction contemplated (buyout of a ($0.40) per share. One would expect Citigroup promoter or government shareholder, or invest- to use the same formula for calculating a dis- ment of new money into a future business) and counted price, reportedly 1.45 times SPDB’s net the artificially constrained market for such asset value during the preceding year, if it exer- transactions—which causes interested foreign cises an option to increase its equity investment banks and private equity investors to chase a to a maximum of 24.9 percent in coming years. small number of deals, possibly at higher prices Although the lack of liquidity in the Citigroup than might be justified. shareholdings (as “unlisted foreign capital These considerations are of course merely shares”) and other aspects might justify such a financial and structural and ignore the impor- discount, such awkward facts can bring unwant- tant political concerns involved, from the desire ed attention to the acquirer and affect the mar- to reward state shareholders “exiting” a small ket for an issuer’s stock and possibly its ability to bank at a high value to official nervousness raise capital from the public. about ceding any kind of control over the target institution to foreign investors. And, in China’s Governance, minority rights, relatively new capital markets, investment pric- and investment in A-shares ing may give rise to another kind of turbu- lence—from Chinese public shareholders It seems obvious that minority investment in comparing public issue or market prices. any Chinese corporate vehicle may give rise to Citigroup and Shanghai Pudong Development difficulties for a minority investor, foreign or Bank (SPDB) were the target of some significant Chinese. That is because China’s corporate law, grumbling from shareholders on the Shanghai even for companies that list some shares publicly, Stock Exchange and the dynamic Chinese finan- is somewhat adverse to the protection or exercise cial press, who were presented with an issue of minority rights, whether affirmative participa- price of ¥8.45 ($1.02) for A shares of SPDB tion rights or even veto power over significant

Due Diligence As in any acquisition, due diligence, or forced into making the same kinds of bad asset quality and solvency, if only to establish the full examination of the target asset, is loans, or at least not in the same high propor- fair pricing. critical in any proposed bank acquisition. tion as the largest state-owned banks. But as Organizational and subsidiary arrange- A minority or passive investment by foreign shareholders of many smaller banks are often ments The largest state-owned banks have investors in China’s smaller banks and finan- local-level state entities, and China’s credit grown based on a branch network essentially cial institutions gives rise to special issues, analysis and liquidity systems have a short donated to them upon the breakup of the which include: history, this hope has not been borne out. People’s Bank of China’s former commercial Other shareholders At present, most Perhaps more disappointing is the fact branch network and via the establishment of shareholders in China’s banks are state or that such banks have not always made com- legal person subsidiaries and divisions. The local government actors which, even after plete disclosures to the public, or to potential picture at certain smaller Chinese banks, the acquisition, will likely maintain almost investors. This is among the reasons men- especially when they have sought to expand absolute control over the bank. Investors tioned for the reported unraveling of the outside of their home jurisdiction, is less must understand the actual intentions of Newbridge/SDB transaction—Newbridge clear. The unified legal-person status of com- these shareholders, the ways in which they negotiated a deal based on about $20 billion mercial banks was not fixed in law until 1995 might prioritize non-shareholder value-related in SDB assets, and sufficient reserves to and is still imperfectly implemented. In some interests, their experience acting alongside cover potential NPLs of more than $3 billion. cases, bank branches are themselves joint foreign investors and institutions, and their Subsequent reports put SDB’s NPLs much ventures with, or at least in cooperation with, real interest in sitting alongside a foreign higher, at almost 50 percent of assets ($10 bil- other local actors. For instance, a Shenzhen banking institution or private equity investor lion), with reserves covering only about one- bank might have Beijing branches that are that is not a multilateral institution. third of NPLs. Though it is not certain, it established, or invested in, by local Beijing Asset quality: Nonperforming loans appears likely that the price to the SDB sell- institutions. An adequate due diligence inves- (NPLs) and reserves With the establishment ing shareholders was in some way tied to the tigation requires that any acquirer of a minor- of financial asset management companies in discovered asset quality of the bank, perhaps ity interest in a bank operation understand 1999, China acknowledged significant prob- by a formula based upon necessary NPL these anomalous relationships, any proposal lems with respect to asset quality in China’s reserves. Any pricing readjustment may have that they continue, or any suggestion that major commercial banks. Some observers caused exiting state shareholders to balk at these other participants be brought to the hoped that certain of the smaller and so- the significant resulting discount. Thus, parent level with resulting dilution to existing called “private” banks—all established rela- potential acquirers of such minority interests (and new) shareholders. tively recently, and many with public listings are well advised to make a serious and intru- and disclosure obligations—had not been sive evaluation of a potential target’s true —Nicholas C. Howson and Lester Ross

THE CHINA BUSINESS REVIEW July–August 2003 23 issues. For instance, China’s Company Law market. It seems certain that CBRC will impose requires two-thirds approval for so-called “special strict examination and approval requirements on resolutions” at Chinese CLSs, effectively stripping any kind of attempted disposition of shares, and away the veto power even of holders of 33 percent that the Chinese foreign exchange control author- of equity. Nor does Chinese corporate law permit ities will hinder the ability of potential PRC pur- such established mechanisms as different classes chasers to convert RMB into foreign currency to of shares or preferred share capital. make such purchases. In the wider world of for- Aside from the deficiencies of China’s corpo- eign investment in Chinese CLSs and disposition rate law, the unique capital structure of PRC cor- of holdings, foreign investors may be prohibited porate establishments, in particular financial from selling such shares for a period of three institutions, has an impact; the other sharehold- years and must overcome significant approval ers are often state-owned or -controlled (usually hurdles before effecting a trade sale. Any pro- local-level agencies), approaching governance and posed exit into the public markets is almost a operations from a unified standpoint. Acquirers non-starter, although in the last couple of years should not ignore a minority shareholder’s diffi- MOFTEC and CSRC have cooperated to allow culty in truly having a voice against such the conversion of unlisted foreign capital share- entrenched interests and their directly appointed holdings into B shares—an unappetizing management. The result may be a truly “passive” prospect given the moribund B-share markets. investment for the minority holder (absent a spe- Foreign investors hope that such new mecha- cial arrangement, such as the relatively unfettered nisms will allow foreign investors to gain spon- contractual management right that was to be sored listings of their private shareholdings in bestowed on Newbridge as part of its SDB acqui- Chinese CLSs on the Hong Kong and foreign sition). The problem becomes only more salient if markets, and eventually the far more dynamic A- the target already has, or succeeds in completing, share markets. At this point, however, real liquidi- an A- or B-share listing. In 1997, the China ty for the private holdings of foreign investors in Securities Regulatory Commission (CSRC) laid Chinese banks is a long way off. out a rigid template form of articles of associa- tion for A- or B-share issuers, which are disad- First steps vantageous to minority (private) shareholders. CSRC’s insistence on these forms of articles of As the growth of China’s economy continues, association, and pronounced dislike for share- as the burgeoning financial sector continues to be holders’ agreements (or management agree- underserved, and as both foreign strategic ments) for listed companies, are not good news investors and private equity value investors seek for minority shareholders in PRC banks. to participate in China’s financial services indus- try, minority equity investments in China’s small Liquidity and medium-sized commercial banking institu- tions will only accelerate. Foreign financial players Foreign investors in PRC banks do not hold will also continue to seek footholds in financial A or B shares, but instead “unlisted foreign capi- services sectors other than commercial banking— tal shares.” Because these shares are unlisted, corporate finance, insurance, asset management, they are not liquid. Of course, liquidity is a far and eventually domestic . greater concern for pure private equity investors, Given the entry barriers in each of these sec- who will be interested in some form of capital tors, and depending on their corporate strategy, appreciation, than for foreign commercial many large foreign groups may enter the retail banks, which are more likely to be content to banking area first, as minority equity partici- enter the PRC banking sector as long-term mar- pants, with some kind of added contractual ket participants. Accordingly, foreign acquirers (whether management or co-branding) mecha- entering the banking sector as equity partici- nism. In time, and with increasing liberalization, pants must be aware of the significant restric- such foreign groups may benefit from integra- tions on subsequent transfer or sale. tion among PRC financial service companies, Without a clear legal basis for minority invest- whether through mergers, broadened scopes of ment in PRC banking institutions, it is unclear business, or even cross-holdings. At that time, what approvals are needed to dispose of an equity minority participation in small-scale commer- interest in a PRC bank, either by private sale to cial banking operations with some element of other foreign or Chinese investors or by conver- control may prove to have been a good first step sion of the equity into listed shares on a public toward a full-service operation.

24 July-August 2003 THE CHINA BUSINESS REVIEW