While the trade war was crimping the flow of goods between the U.S. and China, the Chinese government was opening doors in another arena: Inviting more foreign banks, insurance providers and other financial services companies in to set up shop.
China has also been making it easier for foreigners to buy its stocks and bonds — something many fund managers are required to do now that major index compilers are including Chinese assets in their gauges, to the dismay of some U.S. politicians. Financial regulators in Beijing say the liberalization drive will continue.
The take-up is gathering pace but the going has been tough, even before the economic disruption caused by the coronavirus pandemic.
1. What’s the change?
China is allowing full foreign ownership of life insurers, futures and mutual fund companies this year — in stages. Foreign ownership caps for securities firms come off April 1 as part of the trade agreement signed with the U.S. in January. China also pledged to take no longer than 90 days to decide on applications from electronic-payment service providers, including for wholly foreign-owned operations. Regulators cleared the way for full takeovers of local banks by foreigners in 2019, a year after it eased ownership caps. Foreign companies can now also be lead underwriters for all types of bonds, and can control wealth management firms, pension fund managers and inter-dealer brokers. The Shanghai-London Stock Connect officially kicked off in June 2019, allowing companies listed on one bourse to trade shares on the other. (Almost a year later, however, only a single company had taken advantage of it.) An earlier program linked Hong Kong with the Shanghai and Shenzhen exchanges.
2. Who’s diving in?
Quite a few companies:
Asset management industry
Vanguard, BlackRock, Fidelity, Van Eck Associates, Neuberger Berman and Schroders: Told regulators they intend to apply for licenses for 100%-owned companies
JPMorgan: Seeking full control of its mutual fund management joint venture
Amundi: Approved to hold controlling stake in venture with Bank of China unit
BlackRock, Temasek: Seeking majority stake in new company with unit of China Construction Bank
Securities industry
HSBC, UBS, Nomura and JPMorgan, Morgan Stanley, Goldman Sachs: Approved for majority stakes in local joint ventures
DBS, Credit Suisse and Daiwa Securities: Applied for majority stakesCitigroupPlanning a wholly-owned securities firm
Societe Generale: Considering a fully-owned brokerage
Other sectors
Allianz: Green-lighted for first entirely foreign-owned insurance holding company
Standard Life Aberdeen: Approved to provide pension insurance through local joint venture
American Express: Won approval to build a bank card network and a clearing business joint venture
Mastercard: Won approval to set up a bank card clearing business in China with a local partner
Visa: Seeking bank card clearing business license
Paypal Holdings: Acquired a 70% stake in a local company
JPMorgan: Seeking full control of local futures joint venture
S&P Global Ratings: Won approval to do business on the mainland through a local unit in January 2019 and published its first onshore rating six months later
Moody’s, Fitch Ratings: Applied to rate onshore bonds3.
What’s the lure?
China’s $45 trillion financial services industry. Even a sliver can be lucrative. Bloomberg Intelligence estimates that — barring a major economic slowdown or change of course — foreign banks and securities companies could be raking in profits of more than $9 billion a year in China by 2030. Wealth management firms are looking at a market poised to reach $30 trillion in assets by 2023, according to consultancy Oliver Wyman. Guo Shuqing, China’s chief banking regulator, sees significant room for foreign investors: They held just 1.6% of banking assets and 5.8% of the insurance market as of May 2019, he said. The percentages have fluctuated over the years. In 2007, for example, the foreign share of Chinese banking assets was 2.3%.
4. What barriers remain?
The threat of financial decoupling looms with the Trump administration looking at restrictions on U.S. investments in Chinese companies and financial markets, a possible new front in the trade war. (China declared it would continue to open markets and encourage foreign investment.) There are also plenty of hidden barriers, including the challenge of cracking a market dominated by government-controlled rivals that have longstanding relationships with clients. The lengthy and often opaque application process also can be a deterrence. Visa, for example, has been waiting since 2015. On top of all that, China is expected to see the slowest economic growth in more than 40 years in 2020 as the world struggles with the pandemic.
5. What about stocks and bonds?
They’re being slowly added to widely followed global benchmarks, including stock indexes by MSCI Inc. and FTSE Russell and, for bonds, the Bloomberg Barclays Global Aggregate Index and JPMorgan’s GBI-EM indexes. That’s expected to draw tens of billions of dollars in purchases initially from funds that track those gauges.
6. How’s that going?
Bumpy. In late 2019 MSCI said it wouldn’t add any more yuan-denominated shares until China fixed long-standing concerns over market access. And not every opening is met with enthusiasm: Foreign investors had bought only a third of the total allotment at the time regulators scrapped the quota system for Chinese stocks and bonds in September. Market turbulence in recent years, including major stock sell-offs, has dampened interest. Some investors also worry about being unable to repatriate their money due to China’s capital controls. (The government has long kept a tight grip on money flowing in and out so as to preserve the value of its currency, the yuan.)
7. What’s in it for China?
The benefits may be twofold: U.S. President Donald Trump accuses China of being a one-sided beneficiary of global commerce, so opening up makes the trade seem more balanced. And Chinese leaders have long described the moves as a useful way to improve the competitiveness of the domestic industry — without challenging its dominance — as well as to allocate capital more efficiently and attract foreign investment. Central bank governor Yi Gang has described the moves as “prudent, cautious, gradualist.”
— Bloomberg