China Easing Limits on Foreign Ownership in Financial Firms
In November, the Chinese government announced plans to relax or eliminate caps on foreign ownership in Chinese financial institutions. China’s Vice Minister of Finance Zhu Guangyao said at a press briefing that China will lift the cap on foreign equity stakes in securities, fund management, and futures companies to 51 percent from the current cap of 49 percent, but did not provide a timeline. Restrictions will be completely lifted three years after the new limit takes effect.
China will also remove the 20-percent cap on ownership of Chinese commercial banks and asset management companies by a single foreign investor and the 25 percent cap on total foreign ownership of such companies, according to a report form the US-China Economic Security Commission.
The opening in insurance is the only one with a concrete timeline: foreign stakes in life insurance joint ventures will be raised to 51 percent in three years, from 50 percent currently for most foreign companies, and removed entirely in five years.
A White House spokesperson said the announcement, which came a day after President Trump concluded his visit to China, was “welcome but long overdue,” adding it is “one of a plethora of problems China needs to address in order to provide fair and reciprocal access to its market.”
According to the Wall Street Journal, China proposed to jointly unveil the announcement during President Trump’s visit, but the White House had declined; the article quoted a US official as saying, “The overall approach now is not to negotiate over crumbs, not celebrate small deals that will have limited impact.”
When China joined the WTO in 2001, it committed to rapidly open up its financial markets to foreign competition, but liberalization has been slow. US and other foreign financial institutions remain marginal players in China due to formal and informal market access barriers.
Industry analysts warn it will take time for Beijing’s commitments to be implemented by China’s central bank and banking, securities, and insurance regulators. “We’re cautioning clients that it will take time to go from rhetoric to action. Directionally speaking, it’s very clear where China is heading but it’s going to be a slow, methodical process rather than a Big Bang approach,” said Peter Alexander, managing director of Shanghai-based consultancy Z-Ben Advisors.
China stands to benefit from greater foreign participation in its financial markets. People’s Bank of China Governor Zhou Xiaochuan said in June that a lack of outside competition had made domestic financial institutions “lazy.”
Increased outside competition could push Chinese financial institutions to be more efficient and help the sector adopt better governance and risk management practices. For many foreign firms, however, this opening is too little, too late. The European Chamber of Commerce said in a statement, “This opening-up comes at a late stage in development. It is now difficult for foreign firms to capitalize on these changes as domestic Chinese firms have stronger positions in their respective industry.”
The combination of entrenched local players and an opaque regulatory regime means foreign financial companies may have limited appetites for taking advantage of widened access. Moreover, despite the size of China’s financial services market, it is no longer as profitable as it was a decade ago. According to Chinese financial data provider Wind Information, the average return on assets for Chinese listed financial firms was just 0.9 percent in the first half of 2017, compared to above four percent for Chinese listed firms in the telecommunications and healthcare sectors. Traditional financial intuitions in China are facing intense competition and disruption from domestic financial technology players such as Alibaba’s Ant Financial and Ping An Insurance Group’s Lufax. In addition, amid concerns over China’s rising debt levels, Beijing is cracking down on more profitable but risky financial products, like wealth management products. Finally, many US and European banks have shed their minority stakes in Chinese commercial banks in the years following the global financial crisis as regulators tightened capital standards and foreign banks discovered their investments had failed to help expand their China footprint. These conditions likely will continue to dampen foreign financial institutions’ interest.