By Bloomberg News/ Beijing/Mumbai
While the trade war was tangling the flow of goods between the US and China, the Chinese government was opening doors in another arena: Inviting more foreign banks, insurance providers and other financial services companies to set up shop. China has also been making it easier for foreigners to buy stocks and bonds — something many fund managers are required to do now that major index compilers are including Chinese assets in their gauges. The top financial regulators in Beijing say the liberalisation will press ahead. The take-up by foreign companies and investors is gathering pace but the going is tough.
1. What’s the change?
China has cleared the way in 2019 for full-blown takeovers of local banks by foreigners, a year after it eased ownership caps. It also allowed foreign companies to hold controlling stakes in life insurers, securities and mutual fund management ventures, and said full foreign ownership will be allowed by 2020 — well ahead of schedule. Foreign companies can now also be lead underwriters for all types of bonds, and can control wealth management firms, pension fund managers and inter-dealer brokers. The Shanghai-London Stock Connect officially kicked off in June, allowing companies listed on one bourse to trade shares on the other. Another Stock Connect program launched in 2014 allows anyone with a brokerage account in Hong Kong to trade shares listed in Shanghai or Shenzhen.
2. Who’s diving in?
UBS Group AG, JPMorgan Chase & Co and Nomura Holdings Inc have all won approval from regulators for majority control of their local securities joint ventures, and Goldman Sachs Group Inc, Morgan Stanley, and DBS Group Holdings Ltd have applications pending. Credit Suisse Group AG has agreed to acquire shares from its local securities joint venture partner for a majority stake, and Citigroup Inc is said to seek a majority-controlled venture. German insurer Allianz SE got the green light in 2018 to set up the first entirely foreign-owned insurance holding company in China, while Standard Life Aberdeen Plc will provide pension insurance through its local joint venture. American Express Co was the first outsider to win approval to build a bank-card network in China, partnering with LianLian Group. Mastercard has applied for a joint-venture licence with Beijing-based NetsUnion Clearing Corp. S&P Global Ratings won approval to do business on the mainland through a local unit in January 2019 and published its first onshore rating six months later.
3. What’s the lure?
China’s $43tn financial services industry. Even a sliver can be lucrative. Bloomberg Intelligence estimates that - barring a major economic slowdown or change of course – foreign banks and securities companies could be raking in profits of more than $9bn a year in China by 2030. Guo Shuqing, China’s chief banking regulator, sees significant room for foreign investors: As of May 25, he said, foreigners held just 1.6% of the nation’s banking assets and 5.8% of the insurance market. The percentages have fluctuated over the years; in 2007, for example, the foreign share of banking assets was 2.3%. According to the central bank, foreigners held about 3.1% of China’s stocks and 2.2% of its bonds in mid-2019. That compares with 2.1% of equities and 1.6% of the bond market at the end of 2017.
4. What barriers remain?
The threat of financial decoupling looms with the Trump administration looking at potential restrictions on US investments in Chinese companies and financial markets – which would open a new front in the US-China trade war. (China declared it would continue to open markets and encourage foreign investment.) The announcement to allow full foreign ownership of insurers and other firms by 2020 came with no framework for how it would happen. There also are plenty of hidden barriers to entry, including the challenge of cracking a market dominated by government-controlled rivals that have longstanding relationships with clients. The lengthy and often opaque application process also can deter foreign investors. Visa Inc and Mastercard Inc, for example, have been waiting for years to gain entry after Beijing opened the bank-card clearing sector in 2015.
5. What about stocks and bonds?
They are being included (in phases) in widely followed global benchmarks for the first time. Those include stock indexes by MSCI Inc and FTSE Russell and, for bonds, the Bloomberg Barclays Global Aggregate Index and JPMorgan Chase & Co’s GBI-EM indexes. That’s expected to draw tens of billions of dollars in purchases from funds that track those gauges. But not every opening is met with unrestrained enthusiasm. In September, regulators scrapped a quota system for foreign investment in China’s stock and bond markets, allowing global funds to simply register before purchasing assets. However foreign investors had taken up only a third of the quota that had been available previously. The quota system, known as QFII, was set up in the early 2000s. But turbulence in Chinese markets in recent years, including major stock selloffs, has dampened interest. Some investors also worry about being unable to repatriate their money due to China’s capital controls. (The government has long kept a tight grip on money flowing in and out of the country so as to preserve the value of its currency, the yuan.)
6. What’s in it for China?
The benefits may be twofold: US President Donald Trump accuses China of being a one-sided beneficiary of global commerce, so opening up makes the trade seem more balanced. And Chinese leaders have long described the moves as a useful way to improve the competitiveness of the domestic industry – without challenging its dominance – as well as to allocate capital more efficiently and attract foreign investment. Central bank governor Yi Gang has described the moves as “prudent, cautious, gradualist.”
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