26 April 2019
China has marked another milestone in the path to financial sector liberalization. Photo: Bloomberg
China has marked another milestone in the path to financial sector liberalization. Photo: Bloomberg

China accelerates financial market liberalization

China has accelerated the opening up of its financial sector, announcing last Friday that it will ease limits on foreign ownership of banks and securities firms. It marks a big milestone, and sends a signal that authorities are confident that domestic financial institutions are now strong enough to compete with foreign rivals directly.

China will lift the ceiling on foreign equity ownership in joint-venture firms involved in the banking, futures, securities and funds markets over next three to five years.

Direct or indirect foreign ownership of companies focused on investments, fund management and derivatives will be relaxed to 51 percent from the current 49 percent. After three years, the foreign ownership limit will be lifted.

In addition, there will be no limits on foreign ownership any Chinese-owned bank or financial asset management company.

China will also remove the 20 percent ceiling on ownership of a Chinese commercial bank or asset management company by a single foreign investor, and the 25 percent cap on total foreign ownership of such companies.

That means China will fully open up its financial sector to foreign investors. Chinese financial institutions have already marked their place in the global financial market. The latest liberalization moves will only boost their prospects further.

China’s financial sector is ready for further inroads by foreign investors, who will bring more advanced and diversified management and operation ideas.

It’s estimated that foreign investors were holding 1.3 percent of China’s total banking assets as of the end of last year. The introduction of foreign investment will further intensify competition, and smaller Chinese banks might be acquired or merged by foreign rivals. Accelerated consolidation of foreign shareholders may also take these smaller Chinese banks to the next level.

Foreign investors may need to replenish their capital given the scale of Chinese banks. Therefore, it’s unlikely that foreign investors will boost stakes in large Chinese banks dramatically. Instead, they might focus their attention on smaller banks, insurance firms, securities and futures firms.

China will proceed even faster in opening up the investments, fund management and derivatives businesses. The move may further beef up the competitiveness of the nation’s securities market and make it more transparent. That would eventually drive down the capital cost and benefit real economic growth.

Observers will keep a close eye on China’s regulatory moves, as they wait to see if foreign investors will get the same treatment as their domestic counterparts, on matters such as capital threshold. 

Insurance is one of the few sectors where foreign investors have more control in China. Chinese authorities plan to raise the ceiling on foreign insurers’ ownership of joint ventures to 51 percent in three years, from 50 percent now, and remove it entirely in five years.

As of now, foreign investors from 16 nations and regions had set up 57 foreign insurance firms in China. They now account for 5.19 percent of China’s insurance market, compared with less than 1 percent in the early 2000s.

In the future, foreigners will have more flexibility and control in tapping into China’s insurance sector. They can become controlling shareholders in joint ventures or even operate without a local partner. That will help drive insurance market reform and enhance competition.

This article appeared in the Hong Kong Economic Journal on Nov 13

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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