Sunday, November 12, 2017 11.16AM / South
China Morning Post
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
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
“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
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
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,”
The removal of the cap should improve
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
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