•With commercial banks in China relying heavily on traditional loan business, future development has faced somewhat of a bottleneck. Looking ahead to alleviate that pressure on developmental progress in China, the People's Bank of China recently promulgated the "Provisional Regulation on Commercial Banks' Intermediary Business" (the "Regulation").

The Regulation, issued and effective on July 4,2001, defines in detail the concept of intermediary business, business scope, qualifications and approval procedure. It also stipulates that commercial banks may engage in investment bank business lines, such as derivative tools, securities agency business, custody of mutual funds, financial counseling, etc. This has been viewed in many circles as a hint toward the future blending of the banking and securities industries, The engagement by commercial banks in the investment banking business will increase their income and strengthen their capacity to resist business risks.

The Regulation also establishes a more solid base with respect to commercial banks' intermediary businesses. PRC Commercial Banking Law allows commercial banks to engage in various de facto intermediary businesses, such as settlement services, issuance of government bonds, and letter of credit services. However, a precise definition of intermediary business has never been given. The newly issued Regulation comes a step closer, defining intermediary business as that business which does not constitute assets or liability on the balance sheet, and produces income other than interest. This is categorized into the following six classes:

1) Settlement, such as remittance, collections, etc.;
2) agency for securities, insurance etc.;
3) guarantees, such as standing L/Cs or acceptance;
4) commitment, in loan businesses;
5) foreign exchange trading agency services, as in forward transactions, foreign exchange option dealing, and foreign exchange swaps, etc.;
6) other types of intermediary businesses, such as financial counseling and custody of mutual funds.

As stated above, Commercial PRC Banking Law has only come a step closer to clearly defining intermediary banking business. Among the categories above, business lines related to securities work still do not have clear definitions. Nevertheless, it is believed that the implementation of the Regulation will, to some extent, lead to the permission for commercial banks to act as securities brokers, although the Chinese version of Glass-Steagall Act, contained in commercial Banking Law, remains unchanged.

──Frederick Luo