China pledged in late 2017 to allow overseas financial firms greater access to the world’s second-largest economy. Then came the trade war with the U.S., raising concerns that President Xi Jinping could retaliate by going back on his vow. Xi says the opening is steadily widening. The take-up by foreign companies is gathering pace but concerns linger.
1. How far has China gone?
China’s regulator in April 2018 began allowing overseas firms to apply for majority stakes in securities and mutual-fund management ventures and promised to permit full control in three years. Draft rules to allow foreign companies to hold controlling stakes in insurance firms were published in May. Foreign-ownership caps on banks and bad-debt managers -- 20 percent for a single institution and 25 percent for a group -- were lifted in August.
2. What’s the lure?
Access to China’s more than $40 trillion financial sector. Even a sliver can be lucrative. Bloomberg Economics estimates that -- barring a major economic slowdown or change of course -- foreign banks and securities companies could be raking in profits of more than $32 billion a year in China by 2030.
3. Which firms are interested?
UBS Group, JPMorgan Chase and Nomura Holdings have all won approval from regulators for majority control of their local securities joint ventures, and DBS Group Holdings Ltd. has an application pending. Credit Suisse has announced plans to take a majority stake in its onshore joint venture. German insurer Allianz SE got the green light in November to set up the first wholly 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 foreigner to win approval to build a bank-card network in China, partnering with LianLian Group. Mastercard Inc. also has applied for a joint-venture license with Beijing-based NetsUnion Clearing Corp. S&P Global Ratings was approved to do business on the mainland through a local unit in January, while Moody’s Corp. is said to be seeking control of China’s largest credit-ratings firm, Chengxin International Credit Ratings Co.
4. What are the concerns?
The trade war continues to stoke fears that market access may be revoked. Previous joint ventures involving minority stakes that didn’t work out are still fresh in many memories, such as JPMorgan’s exit from its deal with First Capital Securities Co. in 2016. Citigroup, Goldman Sachs, Bank of America and Deutsche Bank all sold their minority stakes in Chinese banks between 2013 and 2016. Regulators have also set net asset value thresholds for foreign firms to become majority shareholders. That could be an issue for Goldman Sachs, Morgan Stanley and others that hold their existing stakes in Chinese JVs through entities incorporated in Asia, not the global company.
5. What’s in it for China?
The benefits may be two-fold. U.S. President Donald Trump accuses China of being a one-sided beneficiary of global commerce, so opening up makes the game seem fairer. Chinese leaders have long said opening is necessary to improve the quality and sophistication of the domestic industry, make allocation of capital more efficient and attract foreign investment. Foreign players also can help improve competitiveness in the sector without challenging the dominance of state-backed firms. Yet China is setting its own pace. Central bank governor Yi Gang has described the moves as “prudent, cautious, gradualist.”
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