Is China set to fully open its financial borders to foreign institutions?
Reports suggest the Central Bank is locked in talks with domestic regulators and key domestic institutions over allowing foreign players not only more influence, but even allowing them to take majority stakes in JVs
China’s top bankers are believed to have been holding internal discussions for months on granting a bigger say in the running of the domestic financial industry to foreign institutions, ahead of the Party Congress next month, and the expected visit here of US president Donald Trump.
But just whether any such further opening up could manage to address the key concerns facing the sector, and reverse the slowdown of inward investment to China remains in question, according to industry insiders and market commentators.
No further details were disclosed on Tuesday, after Bloomberg reported the People’s Bank of China was locked in talks with domestic regulators and key domestic institutions over allowing foreign players not only more influence, but even allowing them to take majority stakes in joint ventures, as well as raising the current 25 per cent ceiling on foreign ownership of Chinese banks.
Overseas financial institutions are currently restricted to minority shareholders in joint ventures with banks, securities firms, and insurers in China, while major players in the US and Europe have been pushing China hard to open up its borders to more foreign players, with added influence.
HSBC became the first foreign bank to win permission for a majority-owned securities joint venture in China in June, after winning approval to invest 918 million yuan (US$135 million) for a 51 per cent stake in a venture in China’s pilot free trade zone Qianhai, just over the border from Hong Kong.
Guo Tianyong, a professor at the Central University of Finance and Economics in Beijing, said: “The discussions on raising the stakes of foreign investors in mainland banks have become more urgent, as a way of retaining and attracting foreign capital, as FDI in China has been contracting.
“The consensus is, that China has to do something to counter the decline, at a time when the US is also attracting capital to flow back home, from US-backed businesses here.”
FDI, or foreign direct investment, in China reached US$72 billion in the first seven months of this year, a 6.5 per cent slide on the same period last year.
Foreign firms have been ramping up their rhetoric in recent months to urge the Chinese government for fairer market access and conditions.
“There have been calls, for instance, that the cap (for bank JVs) should be raised to 30 per cent from the current 20 per cent allowed for a single foreign investor, giving foreign investors the same treatment as domestic private investors,” Guo said.
However, it now looks like Beijing could be set to go even further, in an effort to lure more foreign investment and involvement.
Tan Yueheng, chairman and executive director of Bocom International, the investment bank arm of China’s fifth largest bank Bank of Communications, thinks it will make a huge difference for foreign players, if they are allowed to own a bigger, or majority stake in the mainland joint ventures of securities companies.
“We (Chinese securities firms) are mature, competitive and well prepared. Some existing foreign players have already managed to effectively win control of JVs, even though they are minority shareholders. They need to do more, however, to adapt to this market, learn about the rules and laws, and dealing with local governments,” he added.
Mats Harborn, president of the European Union Chamber of Commerce in China, said news of the discussions came as no surprise, given China has gained more control of its financial sector in recent years, following a series of drastic measures to clean up its act in the eyes of the international financial community.
“The yuan is stabilised, industrial leverage is reduced, shadow banking has been brought under some sort of control. Some officials have even been jailed,” he said.
“For our domestic companies, it is now important to open up financial services, such as the bond market, the asset management and insurance sectors, and other areas.
“We are waiting eagerly to see the outcome of the discussions. But the opening is far from enough. ”
Chen Shujin, an analyst with Huatai Financial in Hong Kong, said raising the 25 per cent ceiling on foreign ownership in Chinese banks to 30-49 per cent would have limited impact on levels of bank governance in China, and the current industry competition landscape.
“We have not seen much difference between local banks and banks with foreign strategic investors in terms of competitiveness, profitability, or corporate governance,” she said, adding foreign banks only account for less than 1 per cent of market share in China, for instance, after foreign firms were allowed to provide yuan-denominated bank card clearing services.
“Allowing foreign firms to become majority shareholders of securities companies provides a real chance for them to establish JV brokers with global wealth management and capital market financing ability,” she added.
“Localisation, however, remains a key issue for most securities JVs, and most foreign investment banks have been reducing their Asia business over the past few years.”
China announced in mid May it would open its market to US credit rating agencies, in addition to credit card companies, and imports of US beef, with no specific time table.
That was described by some as an “early harvest”, from the 100-day plan made by China and the US to reset their trade relationship when president Xi Jinping and US president Donald Trump met in April.
But just whether a full Autumn banking festival results from the current closed-door talks by China’s top financial minds, remains to be seen.