China opens banks to for­eign con­trol

The Jakarta Post - - BUSINESS -

The new rules will give global fi­nan­cial com­pa­nies un­prece­dented ac­cess to China Bar­ri­ers to bank­ing, in­sur­ance, se­cu­ri­ties, funds would be “sub­stan­tially” eased

China took a ma­jor step to­ward the long-awaited open­ing of its fi­nan­cial sys­tem, say­ing it will re­move for­eign own­er­ship lim­its on banks and as­set-man­age­ment com­pa­nies while al­low­ing over­seas firms to take ma­jor­ity stakes in lo­cal se­cu­ri­ties ven­tures and in­sur­ers.

The new rules, un­veiled at a gov­ern­ment brief­ing on Fri­day, will give global fi­nan­cial com­pa­nies un­prece­dented ac­cess to the world’s sec­ond-largest econ­omy. The an­nounce­ment co­in­cides with Don­ald Trump’s visit to Bei­jing and bol­sters 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 do­mes­tic 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.”

Reg­u­la­tors are draft­ing de­tailed rules, which will be re­leased soon, 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

Chi­nese mar­kets took the news in their stride, with the na­tion’s bench­mark Shang­hai Com­pos­ite In­dex trad­ing lit­tle changed af­ter the an­nounce­ment. Shares of Chi­nese fi­nan­cial com­pa­nies were mixed in Hong Kong.

For­eign fi­nan­cial com­pa­nies 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.

Pol­icy mak­ers 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, who has spent much of this year am­pli­fy­ing calls for fi­nan­cial re­form, ad­vo­cated greater com­pe­ti­tion in the fi­nan­cial sec­tor in June.

The an­nounce­ment’s tim­ing, on the day Trump ended his first visit to China as United States 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 CEO 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.

The re­laxed own­er­ship rules fol­low a pe­riod in which most over­seas lenders have 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 CEO Stu­art Gul­liver.

For­eign banks held 2.9 tril­lion yuan ($436 bil­lion) of as­sets in China at the end of 2016, ac­count­ing for 1.26 per­cent of the na­tion’s to­tal bank­ing as­sets, the low­est share since 2003, ac­cord­ing to the China Bank­ing Reg­u­la­tory Com­mis­sion. They earned 12.8 bil­lion yuan in the na­tion last year, less than 1 per­cent of the prof­its at Chi­nese coun­ter­parts.

Even if they take full con­trol of their China ven­tures, in­ter­na­tional fi­nan­cial com­pa­nies will face mul­ti­ple chal­lenges. One of the big­gest is com­pe­ti­tion from gov­ern­ment-con­trolled ri­vals, who cur­rently dom­i­nate the na­tion’s fi­nan­cial sys­tem and have long­stand­ing re­la­tion­ships with gi­ant state-owned com­pa­nies that drive much of China’s eco­nomic ac­tiv­ity.

Then there’s the coun­try’s record debt bur­den, which amounts to an es­ti­mated 260 per­cent of gross do­mes­tic prod­uct af­ter gov­ern­ment-run lenders juiced the econ­omy with easy money in re­cent years to avoid a deep eco­nomic slow­down. The coun­try suf­fered its first on­shore cor­po­rate bond de­fault in 2014 and has seen at least 20 de­faults so far this year. Prom­i­nent in­vestors in­clud­ing Hay­man Cap­i­tal Man­age­ment’s Kyle Bass and bil­lion­aire Ge­orge Soros have warned that the coun­try could be headed for a fi­nan­cial cri­sis.

Still, there’s lit­tle sign of an im­mi­nent blowup. Bank earn­ings in China swelled to 2.1 tril­lion yuan last year, up four-fold since 2008, and earn­ings in the se­cu­ri­ties in­dus­try have more than dou­bled over the same pe­riod to 123 bil­lion yuan, ac­cord­ing to reg­u­la­tory data.

Chi­nese au­thor­i­ties have also taken steps to curb ex­cesses in the bank­ing sys­tem, em­bark­ing on a cam­paign this year to clean up some of the na­tion’s riski­est fi­nan­cial prod­ucts.

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