Is Heightened Financial Regulation Paving the Way for Foreign Investment?

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Analysts say efforts by Chinese authorities to implement stricter and more comprehensive regulation of the financial sector are intended to set the conditions for its further opening up to foreign investment.

President Xi Jinping reiterated China’s commitment to opening of the economy and of the financial sector in particular during his speech at the 2018 Boao Forum Asia, highlighting plans unveiled last year to permit majority foreign ownership of Chinese financial institutions.

In November 2017 just following US President Donald Trump’s official visit to Beijing, the Chinese finance ministry announced that it would allow up to 51% foreign ownership of certain financial institutions, including securities ventures and life-insurance companies, with caps to be gradually eased further in future.

Analysts say that in order to facilitate future easing of restriction on foreign investment, China’s financial regulators are stepping up their monitoring and scrutiny of the sector.

“This year’s financial opening will primarily be in the area of financial institution equity holdings,” said Wang Jun (王君), chief analyst with Huachuang Celve (华创策略) to Yicai.

“At present the financial regulatory framework is displaying a trend of transition from divided operation to mixed operation, and under this increasing trend towards mixed operation regulation a unified framework and unified data collection is even more necessary.

“This is both for the process of establishing a regulatory framework, as well as a part of financial deleveraging.”

Since the start of the year China’s financial authorities have introduced a slew of new measures to step up monitoring of the sector, while also undergoing their biggest shake-up in more than fifteen years with the merger of the banking and insurance sectors.

The new measures have focused in particular upon regulation and scrutiny of the ownership and equity structures of banking, insurance and securities institutions.

The State Council also recently indicated that China will establish a comprehensive statistical system for the financial sector covering institutions, infrastructure and transactions, with the release of its “Opinions Concerning Comprehensively Advancing Financial Sector Integrated Statistical Work” (关于全面推进金融业综合统计工作的意) on 9 April.

With regard to heightened scrutiny of the ownership of financial institutions, the China Banking Regulatory Commission (CBRC) issued its “Commercial Bank Equity Provisional Administrative Measures” (商业银行股权管理暂行办法) in January, clarifying requirements for the equity structures and shareholder qualifications of commercial banks, trust companies, consumer finance companies and other entities approved for establishment by the authority.

CBRC has subsequently issued two supplementary documents concerning handling of regulatory breaches with respect to equity holdings and credit extension.

On 7 March the China Insurance Regulatory Commission issued its “Insurance Company Equity Administrative Measures” (保险公司股权管理办法), and on 30 March the China Securities Regulatory Commission released its “Securities Company Administrative Regulations (Draft for Solicitation of Opinions)” (证券公司股权管理规定(征求意见稿)), both of which concern the equity structures of companies falling under their purview and set standards for the qualifications of investors.

Lu Zhengwei (鲁政委), chief economist for Industrial Bank Co., said to Yicai that these measures all introduce far stricter requirements for the qualifications of controlling shareholders in financial institutions, as well as provide clear stipulations with regard to affiliate transactions, proxy equity holdings and leveraged buy-outs.

The requirement for the net assets of controlling shareholders in securities companies is expected to increase from 200 million yuan at present, as stipulated by China’s “Securities Law” (证券法), 100 billion yuan.

Key shareholders in securities firms will be required to post profits for three successive years, while for controlling shareholders the requirement will be five successive years.

Adjustments have also been made to shareholder equity percentages, with individual non-financial enterprises prohibited from controlling more than 1/3 of equity in securities firms.

CSRC also plans to prohibit affiliate transactions, and the shareholders or actual controllers of securities company requiring that such security company provide either it or its affiliates with financing and guarantees.

 

 

 

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