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2 August, 2019
Policy plan indicates quickening and broadening of financial reform.
“Further Measures to Open Up the Financial Sector”, Financial Stability Development Commission
Introduction
On 20 July 2019, China unveiled eleven liberalising measures (the “Measures”) in a wide range of finance sectors. Issued by the State Council’s Financial Stability Development Commission on the website of the People’s Bank of China (the “PBOC”), the Measures require broad cross-departmental coordination among China’s regulators in the continued opening up of China’s financial markets to foreign investors, as regards timing, ease of entry and greater scope of international investor participation.
A brief overview of the Measures is set out below. Detailed rules to implement the broad statements contained in the Measures are expected in short order.
Accelerated timing
The Measures build on the commitment made by Premier Li Keqiang at the 2019 World Economic Forum to bring forward the timetable for liberalisation of the financial services sectors by one year to 2020. Thus, 100% foreign ownership will be permitted in the sectors of life insurance, securities, futures and fund management come 2020, abolishing the current foreign ownership limit of 51 per cent. in these sectors.
100% foreign ownership in these sectors has been on foreign investors’ radars since late 2017 when the government first announced plans to abolish the relevant ownership restrictions, to take place over a three-year timeframe. This latest development improves upon the existing rules by bringing the timetable forward to 2020 from 2021 and stating clearly that 100% foreign ownership will be achieved in one single liberalisation and not in stages. It will thus accelerate the planning process for foreign financial institutions in expanding their footprint in China and give them the certainty needed to adopt a more integrated approach for a portfolio of multiple wholly-owned China operations, so they can
effectively resolve common challenges such as staffing, compliance and branding. For some, the faster liberalisation timetable also requires consideration of whether and how to buy the Chinese partner out from an existing venture.
Ease of entry
Under the Measures, licensing and qualification restrictions for foreign investors continue to be rolled back, following an announcement in May 2019 by Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission of twelve new measures aimed at maximising the range of possible foreign investment structures, relaxing eligibility criteria and simplifying administrative processes for foreign-invested entities to obtain licences in the banking and insurance sectors.
New initiatives in the Measures include:
- Insurance: A foreign insurance company seeking to invest in an insurance company in the People’s Republic of China (“PRC”) will no longer need to demonstrate a 30-year track record.
- Asset management: Foreign financial institutions will be permitted to invest in pension funds management companies in the PRC either by new establishment or acquisition. The cap of 25% foreign ownership in the equity of insurance asset management companies in the PRC will be removed, making it more attractive for foreign investors to invest in such companies.
- Wealth management: Foreign investment in special purpose wealth management subsidiaries (“WM Subsidiaries”) of PRC financial institutions will be encouraged, either through (i) a foreign financial institution investing in or acquiring a WM Subsidiary of a commercial bank; or (ii) a foreign asset management institution taking control of a joint venture WM Subsidiary in partnership with a subsidiary of a Chinese-funded commercial bank or Chinese-funded insurance company.
- Money brokerage: Policy support will be available for the establishment of wholly foreign-owned money brokerage companies (either by new establishment or acquisition of an existing entity).
Scope of international investor participation
Three initiatives in the Measures are focused on the bond market and show the authorities’ resolve to increase international investor participation in and add sophistication to China’s domestic bond market, at a time when the Chinese economy is expected to become more reliant on bond financing to generate economic growth through municipal and infrastructure investment.
> Facilitating foreign investment: The Measures point to further action being taken to facilitate investment by offshore institutional investors in the interbank bond market. They are expected to provide renewed
impetus for the launch of the draft rules published by the PBOC in May 2019, providing for transferability between multiple channels of bond investment available to foreign investors under the existing regimes (such as direct access for foreign institutional investors, Qualified Foreign Institutional Investor (QFII) and RMB QFII). This should enable foreign investors to better manage their portfolios in the Chinese onshore bond market in a more streamlined manner, especially with future relaxation of investment quotas being anticipated.
- Increased foreign underwriting: The Measures state that foreign banks will be permitted to obtain Type A underwriting licences in the interbank bond market. This is expected to inject confidence among international investors and represents a new line of business for locally incorporated foreign banks in China, 6 of which currently possess lead underwriter’s or underwriter’s qualifications for non-financial enterprise bonds. The PBOC is expected to publish qualifications and requirements to enable applications for the new licences to be made. As part of this process, we can also expect greater scrutiny of banks’ overseas holding entities by PBOC in reviewing these applications.
- More extensive coverage by foreign rating agencies: The Measures state that foreign rating agencies will be permitted to rate all types of interbank bonds and exchange traded bonds. This may draw more international investment into China’s onshore bond markets, with more rating agencies expected to follow the footsteps of S&P Global which obtained approval in January 2019 to rate issuers and issuances from financial institutions and corporates, structured finance bonds and Renminbi denominated bonds from foreign issuers (Panda bonds) in the interbank market and just issued its first rating of a domestic issuer on 11 July. Following publication of the Measures, the range of permitted activities of foreign rating agencies in China is expected to continue to expand, serving to place more segments of China’s bond market on international investors’ radars.
For further information, please contact:
John Xu, Partner, Linklaters
john.xu@linklaters.com
Reference
Further Measures to Open Up the Financial Sector (关于进一步扩大金融业对外开放的有关举措), Financial Stability Development Commission of the State Council, 20 July 2019
