Hong Kong: China took a major step toward the long-awaited opening of its financial system, saying it will remove foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers.
The new rules, unveiled at a government briefing on last week, will give global financial companies unprecedented access to the world’s second-largest economy. The announcement coincided with Donald Trump’s visit to Beijing and bolstered the reform credentials of Chinese President Xi Jinping less than a month after he cemented his status as the nation’s most powerful leader in decades.
While China has already made big strides in opening its equity and bond markets to foreign investors, international banks and securities firms have long been frustrated by ownership caps that made them marginal players in one of the fastest-expanding financial systems on Earth. Those who enter China will face plenty of risks — including competition from state-owned players and the threat of rising defaults — but optimists say the opening will create new opportunities for foreign firms and make the country’s financial system more efficient.
“It’s a key message that China continues to open up and make its financial markets more international and market-oriented,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd in Hong Kong. “How important a role foreign financial firms can play remains to be seen.”
Overseas companies will probably focus on increasing their presence in China’s insurance, securities and fund-management industries, which have “significant room for development,” said Oliver Rui, professor of finance at the China Europe International Business School in Shanghai. The lending business, which is dominated by government-run behemoths like Industrial & Commercial Bank of China Ltd., will attract less interest because it’s a “saturated” industry and foreigners lack a competitive edge, he said.
Regulators are still drafting detailed rules, which will be released soon, China’s Vice Finance Minister Zhu Guangyao said at the briefing in Beijing.
Here’s what we know so far:
Chinese markets took the news in their stride, with the nation’s benchmark Shanghai Composite Index fluctuating in a narrow range after the announcement. Shares of Chinese financial companies were mixed in Hong Kong.
Foreign financial firms applauded the move, with JPMorgan Chase & Co and Morgan Stanley saying in statements that they’re committed to China. UBS Group AG said it will continue to push for an increased stake in its Chinese joint venture.
Policymakers had hinted at an opening in recent months. Just yesterday, China’s Foreign Ministry said entry barriers to sectors such as banking, insurance, securities and funds would be “substantially” eased “in accordance to China’s own timetable and road map.” People’s Bank of China Governor Zhou Xiaochuan advocated for greater competition in the financial industry in June, while one of his colleagues penned an article last month arguing that increased foreign participation would help the sector adopt better corporate governance and risk management practices.
Behind-the-scenes planning
The announcement’s timing, on the day Trump ended his first visit to China as US president, may help him claim some credit for the opening and for warmer ties between the two world powers, but the decision was almost certainly the result of long behind-the-scenes planning by Chinese authorities, according to Iris Pang, a China economist at ING Groep NV in Hong Kong.
Bloomberg News reported in September that the PBOC was drafting a package of reforms that would give foreign investors greater access to the financial services industry, citing people familiar with the matter. JPMorgan Chief Executive Officer Jamie Dimon said earlier this year that the bank was patiently negotiating with Chinese regulators for structures that would eventually give it full control.
“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’s Pang said. China is likely to push for improved access to US markets for its financial firms, she added.
