China opens finance sector wider to foreign capital, but will it come?
Analysts question appetite for investment in the sector
JOYCE HO, Nikkei staff writer
HONG KONG - China took a bold step on Friday to allow foreign players to have greater ownership in its financial institutions, with the eventual goal of eliminating all investment restrictions for insurers, brokerages, fund managers and futures companies.
For its 247 trillion yuan ($37.3 trillion) banking sector and financial-asset managers, the new rules will lift the current caps on foreign holdings -- up to 20% for single investors and 25% in aggregate -- indefinitely, according to the announcement made in Beijing by Vice Finance Minister Zhu Guangyao.
Relaxation for foreign ownership in securities, fund management and futures trading joint ventures will first start with raising the ceiling to 51% from 49%, followed by a similar loosening for life insurers three years later.
In spite of the lack of details and a program timeline, market participants and observers generally applauded the initiative, which came a day after U.S. President Donald Trump visited China, partly to lobby for better market access.
Becky Liu, head of China macro strategy at Standard Chartered Bank, suggested that the move represents China's answer to America's request for "fairer" trade dynamics. "Both parties should well understood that it is nearly impossible to bring down China's goods' trade surplus to the U.S. to zero," said Liu. "Opening up China's domestic market to allow greater services trade deficit would be the solution to a more balanced current account."
But beyond trade, the move is welcomed for its potential to improve China's financial services industry and capital market. "It will more rapidly bring best practices to the Chinese market," said Josh Crabb, head of Asian equities at Old Mutual Global Investors, noting that the participation of foreign players will no doubt spur competition.
Although small players will most likely be under pressure to perform, they are also well-positioned to benefit from foreign direct investments, according to Jack Chan, who leads Ernst & Young's greater China financial services. With a huge need to replenish their capital base, city commercial banks or rural lenders will open themselves to foreign players, which will bring the experience and technical know-how much needed by local players, he said.
But the success of the program might be more easily idealized than realized.
"In any case, there doesn't appear to be a great deal of appetite among foreign investors for increased exposure to Chinese banks," said Julian Evans-Pritchard, China economist for London-based research firm Capital Economics, noting that foreign ownership of commercial bank bonds has been on a downward trend despite improved access in recent years.
Apart from the massive debt buildup among China's financial sector, fierce competition -- especially from state-owned players -- might be a key reason holding foreign players back. "Foreign banks' share of banking sector assets peaked at less than 2.5% in early 2008 and has since been trending down," said Evans-Pritchard. "Foreign banks have long been able to establish wholly owned subsidiaries in China, but have failed to make inroads"
Onerous regulatory requirements may be another hindrance, according to Raymond Yeung, chief economist for greater China at ANZ Bank. "Raising the limit on ownership stake is only one of the many elements for market access," he said. "As in other jurisdictions, having full operation in China's financial markets will still be subject to numerous approvals for licenses and capital requirements."
While many align this move with other market-liberalization measures China had pushed through recently, including the mainland-Hong Kong mutual stock access and its sister bond-connect program, Yeung believes flows from China's financial sector to the rest of the world will continue to be more dominant.
"At the macro level, China is now entering a 'new era' and expects to see an expansion in the global operations of local Chinese banks," said Yeung, adding that the Belt and Road initiative and Beijing's push to internationalize the yuan will prompt local financial institutions to become more active overseas.
"The reverse flows are actually more promising," said Yeung.