Overseas Investment Banks Say China’s Financial Opening Still Uncertain

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As Beijing’s declaims its commitment to the opening and reform of China’s finance sector, overseas investment banks point to new barriers that will continue to prevent them from acquiring controlling stakes in domestic financial institutions.

Both President Xi Jinping and central bank governor Yi Gang stressed China’s commitment to further opening of the country’s financial system at the 2018 Boao Forum for Asia, highlighting the launch of new policies that will remove caps on the foreign ownership of key financial institutions.

These include the cancellation of foreign ownership restrictions for banks and financial asset management companies, as well as a lifting of 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.

According to outside observers, however, these much-vaunted measures may be disingenuous, as there are still major impediments in place that will prevent overseas parties from acquiring controlling stakes in Chinese joint-ventures.

The Asia Securities Industry & Financial Markets Association (Asifma) points to regulations introduced last  month that will continue to make it extremely difficult for international investment banks to become the controlling shareholders of Chinese financial institutions.

Chief amongst them is the requirement that holding companies planning to obtain controlling stakes in joint-ventures possess a net asset value of at least 100 billion yuan (approx. USD$15.9 billion), as outlined by a consultation paper launched by the China Securities Regulatory Commission in March.

“There are still many issues that remain including the lifting of foreign ownership limits, which remains a key concern for our members,” said Asifma chief executive Mark Austen to the Financial Times.

“Our consensus is that the Rmb100bn net asset requirement for controlling shareholders of securities firms is far too high to be practical and achievable for the vast majority of firms…we believe this needs to be urgently addressed.”

According to bankers this requirement will make it almost impossible for foreign firms to obtain majority ownership, and serve to favour domestic players.

While major international investment banks such as JP Morgan, Morgan Stanley and Goldman Sachs have already entered the Chinese market via joint-ventures, a cap on ownership of 49% remains in place, which only HSBC has managed to flout via special exemptions for Hong Kong-based institutions.

Morgan Stanley was the first to make a foray into China’s financial sector with the establishment of CICC in 1995, while Goldman Sachs followed suit nearly a decade later in 2004.

Restrictions on foreign control have been frustrating for the big overseas investment banks, with JPMorgan withdrawing from its Chinese securities company in 2016, citing difficulties with domestic partners.

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