Will China’s Financial Opening Bring Back Foreign Capital?

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Industry observers say that new measures to further open China’s financial sector are likely to bring back the foreign capital that retreated at the end of the last decade, and help to improve the professionalism and competitiveness of domestic institutions.

Both President Xi Jinping and central bank governor Yi Gang have stressed China’s commitment to further opening of the financial sector at the 2018 Boao Forum for Asia.

Yi said that opening of China’s economy will make the country’s businesses more competitive, further raise the service capability of the financial sector, as well as be of benefit to enhancing the international competitiveness of Chinese banks.

The recently appointed governor of the People’s Bank of China also outlined a slew of new measures on track for implementation within the next several months.

Chief amongst them are the cancellation of restrictions on foreign invested equity percentages for banks and financial asset management companies, as well as an increase in the ceiling on foreign invested equity percentages for securities companies, fund management companies, futures companies and life insurance companies to 51%, followed by the removal of restrictions after three years.

The China Banking Regulatory Commission (CBRC) previously stipulated in its “Administrative Measures for Foreign Financial Institutions Investing in the Equity of Chinese Financial Institutions” (境外金融机构投资入股中资金融机构管理办法) that foreign investors were limited to a 20% equity stake in Chinese banks and financial asset management firms.

The China Securities Regulatory Commission (CSRC) also stipulated in its “Rules for Foreign Investment in the Establishment of Securities Companies” (外资参股证券公司设立规则) that foreign shareholders could hold no more than a 49% equity stake in Chinese securities companies.

These restrictions have constrained the ability of foreign investors to make significant inroads into the Chinese financial sector, despite first gaining access over a decade ago.

The assets of foreign-invested banks in China accounted for only 1.28% of the country’s total banking sector assets as of the end of 2017, while foreign investors hold significant stakes in just three out of 25 A-share banks.

Industry observers expect this situation to change considerably with the cancellation of ownership restrictions on key Chinese financial institutions.

“After first entering China in 2004, foreign-invested financial institutions began to gradually withdraw in 2009,” said one member of the Chinese finance sector to 21st Century Business Herald.

“A key reason was that foreign capital was unable to break through the 20% cap on equity holdings in banks, and could not obtain the influence they anticipated.

“China’s current round of opening cancels the restriction on equity holdings in banks, and will spur foreign invested institutions to once again return to China’s financial markets.”

Some observers have expressed concerns that the further opening of China’s financial sector could undermine its stability, making it susceptible to excessively rapid capital flows or exchange rate fluctuations.

Senior banking officials have sought to assuage these concerns, with Xu Zhong (徐忠), head of PBOC’s research wing, stating in a recent essay that the problem China’s financial sector confront is inadequate as opposed to excessive opening.

According to Xu the competitiveness of Chinese finance remains insufficient and financial restrictions are excessive, which is the crux of the many problems besetting reform and growth of the sector.

Yao Yang (姚洋), head of Peking University’s National School of Development, is also confident that China’s financial sector won’t be undermined by further opening, but instead stands to benefit.

According to Yao barriers to entry have created problems including poor administrative structures, and weakness when it comes to product development and service capability.

“Our financial sector has already opened a few doors, but has this shocked us?,” said Yao “China’s big four banks all rank amongst the world’s 10 ten largest banks…if we expand our opening to foreign-invested banks, they won’t be able to outdo local lenders domestically.”

Members of industry also expect that opening will serve to shore up the competitiveness of Chinese financial institutions.

“When foreign-invested financial institutions enter China, in addition to bringing funds, what’s even more important is that they enable Chinese financial institutions to learn from their more mature systems and standards, management experience and product technologies,”  said Kevin Qi, president of the Merger China Group, to 21st Century Business Herald.

“[They can] use this to raise a cohort of specialist financial personnel who are truly in synch with international practice, and understand the rules of the international marketplace.

“As financial sector opening further deepens, a group of financial institutions in China that possess true professional capability will emerge from the rest of the pack, and those financial institutions that solely depend upon licensing monopolies or even nepotistic relations to do business will walk to their deaths.”

In order to prevent the opening of the financial sector from going awry, Yi Gang has also outlined three key principles for the process: 1. equal treatment prior to market entry and negative list administration; 2. mutual coordination and joint progress of financial sector opening, exchange rate mechanism reforms and reforms for capital account convertibility; 3. a focus on the prevention of financial risk during the process of opening, to ensure that financial regulatory capability and the level of opening mutually correspond.

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