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, will give global financial companies unprecedented access to the world’s second-largest economy. The announcement 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. It also coincided with Donald Trump’s visit to Beijing, though the US president didn’t know it was coming.
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. 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.
“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.”
The relaxation of ownership rules follow a period in which most overseas lenders lost interest in direct stakes in their Chinese counterparts. After sales by Citigroup Inc., Goldman Sachs Group Inc. and others, HSBC Holdings Plc is the only international bank with a major holding — a 19 percent stake in Bank of Communications Co. HSBC has been building its business on the mainland as part of a “pivot to Asia” under outgoing Chief Executive Officer Stuart Gulliver.
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:
Foreign firms will be allowed to own stakes of up to 51 percent in securities ventures; China will scrap foreign ownership limits for securities companies three years after the new rules are effective. The country will lift the foreign ownership cap to 51 percent for life insurance companies after three years and remove the limit after five years. Limits on ownership of fund management companies will be raised to 51 percent, then completely removed in three years Banks and so-called asset-management companies will have their ownership limits scrapped. 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.
Policy makers had hinted at an opening in recent months. 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.
The announcement’s timing, on the day Trump ended his first visit to China as US president, offered the chance for him to claim some credit for the opening and for warmer ties between the two world powers. But Trump didn’t even ask for it in specific terms on the trip, according to people familiar with the situation, and it wasn’t mentioned in the White House’s 1,392-word statement on what happened during the president’s trip to China.