China to Give Foreigners Greater Access to Its Financial Sector -- 2nd Update
China took a major step in opening up its financial sector, announcing a relaxation of restrictions on foreign ownership in the securities and banking sectors just hours after U.S. President Donald Trump concluded his visit to Beijing.
Vice Finance Minister Zhu Guangyao announced the moves at a briefing Friday, saying they will allow foreign companies to hold majority stakes in Chinese securities, fund-management and futures firms as well as commercial banks. Foreigners will also eventually be able to take over Chinese insurance firms.
The relaxation in the securities industry potentially paves the way for Wall Street investment banks such as Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. to increase their presence in China's hard-to-crack domestic market. Currently, such firms have to pair with local brokerages in joint ventures and have been largely excluded from lucrative businesses such as trading in Chinese stocks and bonds and managing money for wealthy clients.
However, Mr. Zhu indicated the securities-industry changes would be limited, at least initially. He said detailed regulations still have to be formulated and declined to provide details on specific firms that are expected to participate, saying the securities opening would be for "single or multiple foreign investors" and would take effect "very quickly."
China will allow foreign companies to hold 51% of domestic-securities firms, up from 49% previously, and with a plan for the 51% cap to be removed three years after the new limit takes effect. The country will also remove caps for foreign stakes in Chinese banks. Under regulatory thresholds, a single foreign investor can hold as much as a 20% stake in a Chinese bank and a group of foreign investors can own up to 25% in a single bank. The government also will allow 51% foreign ownership in Chinese life-insurance companies in three years and lift that restriction entirely in five years.
So far, HSBC Holdings PLC has been the only foreign bank to win regulatory approval for a majority-owned securities joint venture in China. HSBC received approval in June under special rules for Hong Kong-funded banks.
In recent years, foreign investment banks have been considering what to do about their China operations. In September, Morgan Stanley increased its stake in its Chinese joint venture to 49%, according to a filing, while UBS Group AG is in deliberations to do the same, people familiar with the matter have said.
"China is a key market for UBS and, as indicated previously, we continue to work toward increasing our stake," said Eugene Qian, head of UBS's China business.
China also announced Thursday it would lift ownership restrictions by June for new-energy vehicles in pilot free-trade zones "on a trial basis." Taken together, the moves reflect an effort to project openness, with limited impact for Chinese companies.
Chinese officials have been floating possible market openings to foreign firms for months. In June, People's Bank of China Gov. Zhou Xiaochuan indicated that Beijing was working on plans to allow foreign firms greater access to the country's financial sector. Last month, China's top banking regulator, Guo Shuqing, said a drop in foreign banks' market share in China was bad for competition. He also indicated that China would give overseas banks "more room" in equity ownership and business scope.
Despite those hints, members of the U.S. business community had played down the likelihood that Mr. Trump's summit with China's President Xi Jinping would lead to significant improvement in market access.
The Trump administration, which has threatened sanctions against China for its restrictions on foreign companies in key sectors, is expected to turn up the heat again on a trade investigation that it put on the back burner ahead of the president's visit to Beijing.
Analysts generally greeted the announcement as significant, saying it shows China's commitment to financial liberalization and that the country likely feels more comfortable with some opening now that its own financial institutions have firmly established their hold on the market. But they also say the moves announced Friday are unlikely to dramatically alter China's financial system.
Chinese banks, for example, have formed deep relationships with corporate Chinese clients, who might be wary of working with unfamiliar foreign brands.
"It's certainly a positive development but the reality is [foreign firms] cannot compete with the sheer size of the domestic institutions," says Andrew Polk, an economist at Trivium/China.
Top Wall Street investment banks could win over business by making the case to Beijing that they can help professionalize China's capital markets. They could get more cross-border business, for example, by deepening relationships with Chinese firms onshore.
"Allowing foreign fund managers to have greater access will help diversify investment products and elevate the overall competitiveness of China's asset-management industry," said Ivan Shi, director of research at consultancy Z-Ben Advisors.
Still, analysts say Chinese securities firms will likely retain their incumbent advantage and that Chinese banks have become sophisticated enough to see little need for foreign expertise.
In addition, interest from foreign investors in Chinese commercial banks has been lukewarm in recent years. Since the 2008 global financial crisis, many U.S. and European banks have sold their multiyear investments in Chinese banks to bolster their capital bases and focus on their main businesses. For instance, Bank of America Corp. sold its entire equity stake in China Construction Bank Corp. in 2013, and Goldman Sachs sold its investment in Industrial & Commercial Bank of China Ltd. earlier that year.
Last year, Citigroup Inc. sold its 20% stake in China Guangfa Bank, while Deutsche Bank sold its 20% stake in Hua Xia Bank Co. Only one Chinese bank, Bank of Communications Co., now has foreign ownership, by HSBC, that approaches the regulatory limit.
"If foreign banks look to enter China's banking industry again, they might be more interested in owning stakes in mid- and small-sized Chinese banks this time around," said Standard & Poor's analyst Liao Qiang. Holding stakes in small lenders would require less money set aside by foreign banks under tightened capital rules.
Julie Steinberg, Lingling Wei and Yifan Xie contributed to this article.
Write to Chao Deng at Chao.Deng@wsj.com and Eva Dou at eva.dou@wsj.com
(END) Dow Jones Newswires
November 10, 2017 06:18 ET (11:18 GMT)