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How China Is Opening Up to Foreign Finance Firms

Bloomberg 2017-11-10 14:18:44

China is thrusting open the door to its financial industry. Limits on foreign ownership for banks, asset managers, securities firms and insurance companies are all going, at least eventually. It’s all part of China’s move to gradually open up its $40 trillion financial sector as well as counter criticism that it’s been a one-sided player in global commerce. Symbolically, the announcement came the day U.S. President Donald Trump, a staunch critic of China’s trade and business practices, wrapped up his first visit to the country.

1. When will the changes happen?

We don’t know. China will set the timetable and road map, according to Zhu Guangyao, China’s vice finance minister. Detailed regulations are being drafted.

2. What exactly is China proposing?

Here’s the gist of changes to foreign ownership limits:

  • Banks -- The current limit is 20 percent for a single institution, with no more than 25 percent held in aggregate by non-Chinese investors. Those limits will be removed and foreign investors will face the same requirements as Chinese. Domestic restrictions include a 30 percent cap for shareholders in private banks.
  • Financial asset management companies -- the same will apply to these firms, originally set up to manage bad loans, as to banks.
  • Securities and futures firms -- The cap will be lifted to 51 percent from 49 percent; three years after the new rules are effective, there will be no limit.
  • Fund managers -- The limit will be raised to 51 percent from 49 percent; three years after the new rules come in, the limit will be scrapped.
  • Life insurance companies -- The cap will be raised to 51 percent from 50 percent after three years and then removed after five years.

3. Time for overseas companies to celebrate?

Perhaps. While China has already made big strides in opening its equity and bond markets, foreign banks, asset managers and insurers have long been kept on the margins by various barriers. JPMorgan Chase & Co. recently moved to exit its China venture. Global banks have been largely excluded from lucrative businesses such as secondary-market trading in Chinese debt and equities, as well as from managing money for wealthy clients; they’ll await those all-important details to see how the situation might change.

4. Which foreign banks have stakes in Chinese counterparts?

Many have already sold up, including Citigroup Inc. and Goldman Sachs Group Inc. The only remaining one with a major holding is HSBC Holdings Plc: it has a 19 percent stake in Bank of Communications Co. Analysts say banks gave up stakes as a result of requirements by their home regulators that they hold substantial amounts of extra capital against such minority holdings. Among overseas insurers, Prudential Plc and Manulife Financial Corp. already operate in China, while foreign firms with stakes in local mutual fund managers include UBS Group AG, ING Groep NV and Schroder Investment Management.

5. So the moves came a bit late for some?

Exactly. With foreign firms already having wound back their ambitions or exited Chinese ventures, some analysts are skeptical about how much will change and how quickly. They see this as a symbolic step, announced at a strategic moment to smooth ties with the U.S. Also, taking so much time to throw the doors open has allowed domestic firms to entrench their businesses.

6. But a win for Trump?

Trump had pushed his Chinese counterpart Xi Jinping to improve market access during a visit to Beijing this week, and bolster Xi’s reform credentials after last month’s Communist Party congress cemented his status as China’s most powerful leader in decades. Also, China has been buying up foreign companies at a record pace, raising objections from other countries about the lack of reciprocal access to its markets. Still, these plans had been under preparation for many months. “I believe China has planned for this for a very long time, and now is the right time to announce it because Trump is visiting," ING China economist Iris Pang said.

7. Another important step for China?

It might not quite rank for China with joining the World Trade Organization in 2001, but Xi can say he’s holding with a pledge to keep opening up access to markets. "This is a milestone in China’s progress of opening up its economy," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "China’s opening up started in trade, and now it’s moving to investment and business operations."

The Reference Shelf

  • It’s a symbolic step.
  • Bloomberg Intelligence sees room for a grand bargain.
  • What happened to that China-Trump trade war?
  • A QuickTake on Xi Jinping.
  • Economists and analysts galore react to the news.

— With assistance by Alfred Liu, Dingmin Zhang, and Jun Luo