The Chinese government is encouraging foreign banks to incorporate locally and set up subsidiaries to minimize risks for Chinese customers, a senior official said.

China-registered subsidiaries will be corporate entities, said Song Dahan, deputy director of the Legislative Affairs Office of the State Council. If a foreign bank continued to run its Chinese operation as branches operated from overseas, the range of services it could offer customers would be limited, he said.

Song said linking the range of services a foreign bank can offer to its corporate status would help safeguard the interests of Chinese customers.

According to international practice, when liquidity risks occur, domestic customers are given priority in withdrawing funds. Chinese individuals who deposit money in branches operated from overseas could find their assets at risk if the parent bank experienced a crisis.

In a globalized world, financial risks can be passed from one country to another. But China-registered corporate entities, which are supervised by Chinese banking authorities, will take measures to minimize risk and ensure domestic financial stability, he said.

Song said the policy favoring Chinese corporate status complied with WTO rules, which allow its members to adopt measures of prudence when opening up the banking sector. Prudent measures include policies that protect customers' interests, prevent risks to the bank and safeguard the stability of financial markets.

As of December 11, China will accept applications from foreign banks who wish to convert their branches into a locally incorporated bank.