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China To Ease Ownership Limits On Foreign Joint Ventures In Finance Sector

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Sunday, November 12, 2017    11.16AM / South China Morning Post 

Limits on foreign ownership of joint ventures in China’s financial services sector will be relaxed over the next five years, China’s deputy finance minister Zhu Guangyao said on Friday. 

Foreign firms will be allowed to hold a majority stake in joint ventures with mainland Chinese securities companies and life insurance joint ventures, and caps on foreign banks’ stakes in Chinese banks and asset managers would be removed, Zhu was quoted saying in a press release issued by China’s State Council on Friday. 

Zhu said the decision was made during meetings between Chinese President Xi Jinping and US President Donald Trump during the latter’s state visit to China this week. 

The reforms will see the largest liberalisation in China’s financial services industry since 2007 when foreign banks were allowed to set up locally incorporated operations in China. 

Foreign players in the insurance and investment banking businesses are obliged to operate through joint ventures with domestic companies, and until Friday’s announcement, international banks not based in Hong Kong were forbidden from holding controlling stakes. 

Now, all foreign banks will be allowed to hold a 51 per cent stake in securities brokerage joint ventures, and after three years this cap will be removed. 

Foreign investors will be allowed to take a 51 per cent stake in life insurance companies after three years, and the cap will be removed after five years. 

While the statement did not give the full details, it appears to indicate that foreign players will be allowed to wholly own mainland securities brokerages and insurers. 

On the mainland investment banking is separate from commercial banking, and investment banks are referred to as securities brokerages. 

Tan Yueheng, chairman of Bocom International, the Hong Kong listed state-backed securities company, said the move was not a surprise as there had been talk about opening-up the financial services sector. 

“Mainland securities companies are better prepared after market consolidation, and are stronger when handling risks. As for foreign securities firms, it makes a fundamental difference if they are allowed to become a major shareholder,” he said. 

Hong Kong Investment Funds Association chief executive Sally Wong said the easing and eventual removal of ownership caps on joint ventures was an important step in attracting more foreign players to the mainland market. “This would allow foreign firms to have better planning for their strategy to develop into the mainland market,” she said. 

Analysts said while the reforms were good news for foreign players, the impact on China’s overall financial system would be limited. 

Foreign investors have long complained that the lack of control over a financial company makes their business difficult. Last year, JP Morgan said it would sell its stake in its joint venture JPMorgan First Capital after the venture had not performed as well as it had hoped. 

However, before Friday’s announcement, other banks had been looking to expand their holdings in China. Earlier this year, UBS and Morgan Stanley said they would both increase their shareholding in their Chinese joint ventures. 

International banks doing business in China welcomed the news. 

“The Chinese government’s decision to allow foreign companies to take up to 51 per cent in securities joint venture represents an important step in further opening up China’s financial sector.

China is a key market for UBS and...we continue to work towards increasing our stake in [joint venture] UBS Securities,” Eugene Qian, chairman of UBS’ China Strategy Board, said in a statement. 

Securities trading in China has been dominated by large domestic players, with the foreign banks’ joint ventures struggling to gain market share. In 2015, UBS Securities was ranked the best performing foreign joint venture among securities firms in terms of net profits, but was still 95th overall in the country, according to data from the Securities Association of China. 

However, the ongoing internationalisation of China’s capital markets will provide an opportunity for the foreign players to help them overcome domestic competition. 

“Domestic players are already strong in areas like securities brokerages. However, with China’s capital markets opening up to foreign investors through the connect schemes, China’s securities brokerages might need more foreign strategic partners to help them better serve these new investors,” said Wang Cong, professor of finance and co-director of the centre for globalisation of Chinese companies at the China European International Business School. 

Chen Shujin, chief financial analyst with Huatai Securities in Hong Kong, said the opening up in the banking industry, which scrapped the limit in shareholding percentage formerly set at 25 per cent, was “above our expectations.” 

However, she noted that many foreign banks which had invested in Chinese banks as strategic investors during the period 2004-2008 sold their shares following the global financial crisis, which may limit the reform’s impact. 

In the insurance sector, Chan Kin-por, Hong Kong legislator representing the insurance sector, said the relaxation would encourage more foreign insurance firms to invest on the Chinese mainland. 

At present, foreign life insurers can only hold up to 50 per cent of a joint venture – except AIA which has some wholly owned subsidiaries that were established before the cap was introduced. 

“When foreign investors and domestic investors both hold 50 per cent of a joint venture, they have equal voting rights. This is not a good situation as neither one can take control or to make the final decision on the business direction of the joint venture. This has discouraged foreign investors from investing in the mainland insurance sector,” Chan said. 


The removal of the cap should improve this situation. 

Analysts also warned that the reforms would not lead to greater opening up in and of themselves. 

“I think the reforms were already in Xi’s plan-book and would be rolled out irrespective of external pressure [from the US or elsewhere],” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers. 

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