Trade deal promises to improve access to China financial sector

January 16, 2020 14:35
The deal aims to address a number of long-standing US complaints regarding investment barriers to China’s financial sector. Photo: AFP

The long-awaited US-China trade deal touted new wins for US companies looking to access China’s US$40 trillion financial sector, but many of the changes were already in the works with Beijing stepping up the pace of opening up in the past year.

Under the deal, China has agreed to expedite by nine months a previous December 2020 deadline for removing foreign ownership caps on securities firms, which includes investment banking, underwriting and brokerage operations.

The deal, which was signed by US President Donald Trump and Chinese Vice Premier Liu He at a White House ceremony on Wednesday, promises improved access to China’s financial services for banking, insurance, asset management, payment and fund management.

It aims to address a number of long-standing US complaints regarding investment barriers to China’s financial sector, including foreign equity ownership restrictions, discriminatory regulatory requirements, and opaque licensing processes.

“China is very eager to get more private funds to invest in the economy” to help fuel economic growth, said Andrew Collier, managing director of Hong Kong-based Orient Capital Research.

Foreign financial companies, however, will struggle to corner a bigger share of the market from the dominant state-owned and private Chinese rivals in the near future, he said.

The deal text said that by no later than April 1, China will remove foreign equity limits and allow US investment banks to participate in local securities businesses.

PBoC: China can cope with competition

In Beijing, the People's Bank of China said Chinese financial institutions are completely capable of coping with foreign competition as the country's financial sector is freed up.

The central bank said in a statement it will strengthen financial supervision and prevent risks in the process of the sector’s opening.

Chinese financial regulators will build up “various firewalls” to improve its supervision in corporate governance and market construction amid the financial opening up, and maintain a stable financial system, the statement said.

Based on the deal, the US will also consider the application from Citic Group, China Reinsurance Group (01508.HK) and China International Capital Corp. (03908.HK) for the licensing of operations, the PBoC said.

Foreign investment banks’ ownership cap in China securities joint ventures was lifted to 51 percent in 2018 from 49 percent. A lack of control and limited contribution to revenue have long been a source of frustration for global investment banks.

While Goldman Sachs and Morgan Stanley are awaiting regulatory nod to raise their holdings to 51 percent in their China securities ventures, Citigroup plans to set up a wholly-owned securities business after agreeing last year to sell its stake in its previous joint venture.

JPMorgan got a final approval from regulators on Dec. 18 to set up a majority-owned securities venture.

China, which has pledged for years to open up its financial services sector to more foreign competition, previously said the deal would boost imports of US financial services.

The real test

But to China watchers, a key pledge made in the slim financial services section of the deal to scrap foreign equity limits on firms operating in China’s fund management, futures and insurance sectors will feel familiar.

“China has already been opening up its markets,” said a Beijing-based lawyer, who works with Chinese regulators.

“The real test will be how quickly the applications and regulatory processes are handled.”

Last July, Chinese Premier Li Keqiang announced China would expedite by a full year its plans to allow 100 percent foreign ownership in a raft of financial sectors.

This month, foreign ownership limits in futures companies were scrapped, while China said last year that it would do the same for mutual funds by April 2020. A 51 percent cap on ownership in life insurance ventures was also removed this month.

Likewise, China’s pledge on Wednesday to open up its payments system to US firms comes after its central bank said it had accepted an application from an American Express unit regarding starting onshore operations.

Ken Bentsen, chief executive of the Securities Industry and Financial Markets Association, which has criticized China in the past for failing to make good on previous promises to level the playing field, struck a cautious note on Wednesday’s deal.

“We will examine this agreement closely, including what it specifically means for our members in terms of its implementation and enforcement,” he said in a statement. Reuters

– Contact us at [email protected]

CG