financial services reform

Open to the world

Foreign bankers and insurers welcome China’s major decision to widen access to its financial services market

P1 reform

November 20-26, 2017
By XIN ZHIMING in Beijing,
WU YIYAO in Shanghai
and EVELYN YU in Hong Kong

The hopes of foreign securities and futures brokers and insurance investors for a fully open financial market in the Chinese mainland are being realized following the latest reform policies released by central authorities in Beijing.

A road map for measures to ease and then lift investment restrictions on foreign companies in the financial services market of the world’s second-largest economy was announced by Vice-Minister of Finance Zhu Guangyao on Nov 10.

This will pave the way for foreign investors to gain 100 percent ownership of securities brokerage and insurance companies. And foreign bankers will be treated the same as domestic operators in shareholding.

China has been stepping up its efforts to open its $40 trillion financial sector, including allowing foreign investors greater access to its equities and debt markets through trading links with the Hong Kong Special Administrative Region.

Fan Yifei, deputy governor of the People’s Bank of China (PBOC), was quoted by Xinhua News Agency as saying at the Sixth China Payment and Clearing Forum on Nov 16 that China will open up its payment industry in a balanced and orderly way.

The country would give overseas-funded financial institutions “pre-establishment national treatment”, which means giving equal treatment to overseas and domestic companies even before they make investments, coupled with the negative list approach, said Fan.

“The government will significantly ease market access and push forward opening in the e-payment sector,” Fan said.

Being an important part of the financial service, all payment businesses from public, private and foreign-funded institutions should ask for permission and be subject to supervision.

Pedestrians walk past a branch of HSBC in Shanghai on Aug 28. China’s announcement to ease foreign ownership in the financial services sector has been well received by the industry. Credit: Chen Jialiang / ImagineChina

Vice-Minister Zhu said China will also lift the cap on foreign ownership in joint-venture firms in the futures, securities and funds sectors from the current 49 percent to 51 percent.

The cap will be eventually phased out after three years of application of the “maximum 51 percent”, according to Zhu. In the past 15 years, the cap for foreign capital ownership in a joint venture in the financial sector was between 33 and 49 percent.

That cap was reportedly behind JPMorgan Chase & Co’s exit from its China venture last year. The US-based banking and financial services firm sold its 33.3 percent stake in JP Morgan First Capital, a joint venture with Shenzhen-listed securities broker First Capital Securities, as it sought a new structure that would give it more say in decision making.

Moreover, after three years, foreign investors will be allowed to own up to 51 percent of shares in joint ventures in life insurance and with the cap removed in five years.

The move to lift the limit on foreign ownership in joint-venture financial services firms is one of the biggest decisions for market opening-up, said analysts.

The removal of restrictions on investment in Chinese banks, financial asset management companies and insurers stemmed from China’s pledge to further open up, Zhu said, elaborating on the consensus reached by China and the United States on Nov 9 during the visit of US President Donald Trump.

Zhu said a plan will be set for the reform and opening-up of the financial industry “according to guidance by the central Party leadership and the State Council in light of the spirit of the 19th CPC National Congress”.

The Foreign Ministry, amid a slew of Sino-US deals during Trump’s China visit, also said entry barriers to sectors like banking, insurance, securities and funds will be “substantially” eased. That will happen “in accordance to China’s own timetable and road map”, the ministry said, following a formal meeting between President Xi Jinping and Trump on Nov 9.

Specific regulations on the detailed operations of the opening-up will be drafted and adopted by related financial supervisory agencies according to law. “The timing for such drafting will be rather fast,” Zhu said.


The positive news has raised the expectations of financiers and brokers. Major banks have released announcements praising Beijing’s move, with some planning to quickly take majority stakes in Chinese mainland firms, while the rest are waiting for more details to be announced.

The measures are against the background of emerging protectionism in some advanced economies, Zhu noted at a Beijing forum, held from Nov 15 to 17.

The US, in particular, seems to be eager to use its interest and taxation leverages to encourage capital flows to the US from other economies, possibly at the expense of free trade and globalization trends.

The most fundamental guarantee for Beijing’s move is the message delivered by top leader Xi in his report to the 19th National Congress of the Communist Party of China (CPC) in October. He pledged a widening of market access in big steps and a further opening-up of the services sector to the outside world.

Xi made China’s opening-up message clear in Vietnam’s coastal city of Da Nang on Nov 11. “History has taught us that closed-door development will get nowhere, while open development is the only right choice,” Xi told the 25th Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting.

Xi said APEC members must stay true to the group’s founding purpose: Advance trade and investment liberalization and facilitation, build an open economy, uphold and strengthen the multilateral trading regime, and help rebalance economic globalization.

A stable financial market in China enables further liberalization and opening-up to foreign capital, which will in turn help the market to become more diversified, meeting various demands, said analysts.

Peter Wong, deputy chairman and chief executive of HSBC, said: “HSBC welcomes the changes announced today (Nov 10) regarding foreign ownership in the financial services sector.

“The relaxations in ownership regulations are another step in the opening and reform of China’s economy, which next year reaches its 40th anniversary. Further foreign participation will help China’s financial markets become more global, supporting greater internationalization of the renminbi,” Wong told China Daily Asia Weekly.

The move to enable more foreign capital ownership in Chinese financial firms also benefits those global asset management companies that plan to expand in the China market.

Darren Tan, chief financial officer at OCBC Bank, said “the continued liberalization of China’s financial services sector is directionally positive”.

With their expertise in a range of products and services in various markets, global and regional financial institutions will be able to offer their support to their Chinese counterparts, Tan said. They can also provide differentiated services and products to businesses and individuals in China, he added.

“OCBC has a longstanding and well-represented presence in China and the Greater China region. We are excited about these developments and will evaluate the possibilities when more details are announced,” said Tan, from OCBC Bank’s headquarters in Singapore.

Almost all leading foreign investment banks have joint ventures with Chinese firms, and foreign players have long complained of lackluster business performance in China brought by a lack of control.

US bank Morgan Stanley has openly stated its intention to acquire a controlling stake in its joint venture in the Chinese market. “A global corporation of the size and stature of Morgan Stanley should control its destiny,” James Gorman, chief executive of Morgan Stanley, told media following the policy announcement.

Lian Ping, Shanghai-based chief economist with Bank of Communications, said: “Currently, China’s financial sectors are overall operating in a stable manner, which provides good conditions for further opening-up.

“The existing financial system in China is able to accept more foreign capital ownership. Market liberalization will help to meet foreign capital demands in investing in China’s financial sector, and will help to attract more foreign capital to China markets in the long term,” he said.

Liberalization will also encourage Chinese financial firms to sharpen their competitive edges in terms of management, operation and product offerings, he added.

The move was “unprecedented”, and was “far beyond market expectations”, said Wang Jun, chief economist with Zhong Yuan Bank, an urban commercial bank based in Zhengzhou, capital of Central China’s Henan province.

“After years of opening-up and reforms, competence of China’s financial market has been significantly improved and is able to face more competition from the global market,” said Wang.

Smaller banks, particularly urban commercial banks and rural commercial banks, such as Zhong Yuan Bank, Bank of Wuxi and Zhangjiagang Rural Commercial Bank, are among the financial services providers that are most likely to cater to more foreign capital ownership.

The new policy is “credit positive” for China’s overall financial sectors, as it will encourage foreign capital to flow to financial firms and help them to improve capital sufficiency and strengthen their risk management capabilities. This aligns with the regulators’ target to enhance overall risk management in the financial sector, said a research note from Moody’s Investors Service.

To become a controlling shareholder in any of the large State-owned banks would represent an enormous challenge for foreign investors. Combined assets of China’s top five State-owned banks were 92.1 trillion yuan ($13.9 trillion) by the end of September.

The move to enable more foreign capital ownership in Chinese financial firms also benefits those global asset management companies that plan to expand in the China market.

“We welcome the announcement and look forward to playing a greater role in the China capital markets,” said a spokesperson in Hong Kong for Goldman Sachs.

The New York-based investment bank owns 33 percent of Beijingbased Goldman Sachs Gao Hua Securities. Bloomberg reported that Goldman Sachs is negotiating a structure with its Chinese business partner at the moment and “it will have equity control”, citing people familiar with the talks.

In the long run, brokerages, insurers, fund companies and banks are all going to benefit from market opening-up and liberalization, said Shenwan Hongyuan Securities.

JPMorgan said it “welcomes any decision made by the Chinese government that looks to liberalize its financial sector further”.

The firm replied cautiously, however, when asked about plans to re-enter Chinese capital markets, saying it had nothing to announce regarding new joint ventures.

The new policy will have more obvious influence on smaller financial firms in China, said analysts. “It is not very likely for foreign capital to take major ownership in State-owned, big-size banks in China as they are often included in State-owned, strategic capital,” said a note from Minsheng Securities.

Besides more ownership in joint ventures, China has launched other policies to enable more foreign capital participation in the China market in recent years, including the Wholly Foreign-Owned Enterprises (WFOEs) policy that allows access to various Chinese investment segments to foreign businesses.

More than 10 WFOEs have applied to establish private fund management firms in China since late 2016, and a handful were already operating by the third quarter of 2017.

In November, three more WFOEs have been approved by regulators to operate in China, namely Invesco Finance, Neuberger Berman and Value Partners Group.

More foreign companies are expected to join the market and launch funds in China, according to a research note from Sinolink Securities.

“A higher number of WFOEs would mean that China’s capital market will have more options and a wider range of products, creating more opportunities for investors to hold assets in a diversified manner,” said China Merchants Securities.

In the long run, brokerages, insurers, fund companies and banks are all going to benefit from market opening-up and liberalization, said a research note from Shenwan Hongyuan Securities.

“The opening-up will take its own pace and momentum with risk management and control as bottom line. Both foreign capital and Chinese financial services providers are going to be patient during the cause. The trend is irreversible,” said the note.

AIA is the only foreign life insurer that has a wholly owned subsidiary on the Chinese mainland that was established before the cap was introduced.

A spokesperson said AIA welcomes the easing of restrictions but would not comment further on plans as “the statements did not give full details and time frame”.

Bolstered by the Chinese government’s promise to ease foreign ownership rules, the stock price of Hong Kong-listed AIA jumped 6.5 percent on Nov 13 and remained strong for the whole week.

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