How’s China’s opening to the financial sector going?
China pledged in late 2017 to allow overseas financial firms greater access to the world’s second-largest economy. Then came the trade war with the US, raising concerns that President Xi Jinping could retaliate by going back on his vow. Xi says the opening is steadily widening. But the take-up by foreign companies has been slow.
1. How far has China gone?
China’s regulator in April 2018 began allowing overseas firms to apply for majority stakes in securities and mutual-fund management ventures and promised to permit full control in three years. Draft rules to allow foreign companies to hold controlling stakes in insurance firms were published in May. Foreign-ownership caps on banks and bad-debt managers – 20% for a single institution and 25% for a group – were lifted in August.
2. What’s the lure?
Access to China’s more than $40tn financial sector. Even a sliver can be lucrative. Bloomberg Economics estimates that – barring a major economic slowdown or change of course – foreign banks and securities companies could be raking in profits of more than $32bn a year in China by 2030.
3. Which firms are interested?
UBS Group AG won approval from regulators to gain control of its local securities joint venture on November 30. Five days earlier, German insurer Allianz SE got the green light to set up the first wholly foreign-owned insurance holding company in China. Nomura and JPMorgan have had their applications for majority stakes in securities joint ventures accepted, but are still working through the lengthy approval process. No known applications have been made in the banking, bad-debt management, or mutual fund industries.
4. Why so tepid?
Many companies are taking a wait-and-see approach. The trade war continues to stoke fears that market access may be revoked. Previous joint ventures involving minority stakes that didn’t work out are still fresh in many memories, such as JPMorgan’s exit from its deal with First Capital Securities Co in 2016. Citigroup, Goldman Sachs, Bank of America and Deutsche Bank all sold their minority stakes in Chinese banks between 2013 and 2016. Regulators have also set net asset value thresholds for foreign firms to become majority shareholders. That could be an issue for Goldman Sachs, Morgan Stanley and others that hold their existing stakes in Chinese JVs through entities incorporated in Asia, not the global company.
5. What’s in it for China?
The benefits may be two- fold. US President Donald Trump accuses China of being a one-sided beneficiary of global commerce, so opening up makes the game seem fairer. Chinese leaders have long said opening is necessary to improve the quality and sophistication of the domestic industry, make allocation of capital more efficient and attract foreign investment. Foreign players also can help improve competitiveness in the sector without challenging the dominance of state-backed firms. Yet China is setting its own pace. Central bank governor Yi Gang has described the moves as “prudent, cautious, gradualist.”