China-US Dialogue Renews Foreign Interest In PRC Financial Sector.

 

23 November, 2017

 

 

Government Official Outlines Unprecedented Relaxation of Foreign Investment Limits 

 

Relaxation of Foreign Investment Limits in Banking, Securities, Insurance and Fund Management Sectors Anticipated 

 

Introduction 

 

Immediately after the three-day meeting between U.S. President Donald Trump, President Xi Jinping and their respective officials in Beijing, China’s Vice Finance Minister Zhu Guangyao is reported to have announced, in a press conference held on 10 November 2017, sweeping relaxation of foreign investment limits to be introduced across the major financial services sectors in the PRC. The changes, if fully implemented, would liberalise the financial service markets in the PRC to an extent not seen since China’s commitments made upon its accession to the World Trade Organisation at the turn of the new millennium. 

 

Unpacking the reform statements 

 

The intended reforms mentioned at the interview (all of which will need to be reflected in the form of specific regulations) comprise: 

 

Securities, fund management and futures 

 

• The aggregate foreign ownership limit in direct and indirect investments in securities, fund management and futures companies will increase from 49 per cent. to 51 per cent. 
• All caps on investment in these companies will be removed within three years from the (yet to be specified) implementation date of the reforms. 
• Comment: the prospect of majority ownership is likely to spark renewed commitment and interest in these joint ventures, especially among those investors who have pre-negotiated options to increase their stakes. More importantly, investors will be keen to see if (i) the implementing rules will include any further liberalisation of the business scope, with a view to allowing securities firms to undertake the “full range” of securities businesses at establishment, and (ii) (following the current position under Supplement X of the Closer Economic Partnership Arrangement between Mainland China and Hong Kong) the range of potential Chinese partners in such joint ventures not being restricted to securities companies. 

 

Commercial banking and financial asset management 

 

• The single foreign ownership limit of 20 per cent. and the aggregate foreign ownership limit of 25 per cent. in (i) Chinese-funded commercial banks and (ii) financial asset management companies (primarily engaging in non-performing loans related business) are to be removed. 
• There will be uniform regulation of foreign and domestic holdings in the banking sector. 
• Comment: it will be interesting to see if the new opportunities presented by this change will lead to a new wave of foreign interest in the Chinese banking sector, following several high-profile divestments by international banks of their minority stakes in Chinese domestic banks. On this, it remains to be seen whether the relaxations will apply from day one to investments made by foreign banks, or only their locally incorporated subsidiaries at the first instance (the latter would be a continuation of the process already initiated by the banking regulator – see our earlier alert). In relation to the removal of ownership caps in financial asset management companies, investor interest will partly depend on whether the scope of the reforms covers all such companies nationwide, or only certain pilot areas at the first instance. 

 

Insurance 

 

• The single and aggregate foreign ownership limits in the investment and establishment of companies operating life insurance, health and personal accident insurance businesses will be increased to 51 per cent. from the current 50 per cent. within three years. 
• The limits will be removed completely within five years. 
• Comment: the prospect of majority ownership is likely to increase foreign investor interest in these joint ventures, especially among those investors who have pre-negotiated options to increase their stakes. It is unclear whether the reforms will apply to investments in existing insurance companies to the same extent – for example, whether the aggregate foreign ownership cap of 25 per cent. in Chinese-funded insurance companies will continue to apply. 

 

A new approach to financial regulation? 

 

It is perhaps no accident that the first meeting of the newly-established Commission for Stable Development of Finance under the State Council was called days before the announcement of the reforms. One of the aims of the new Commission is harmonisation of reform, treasury and sectoral policies in the financial services sectors, indicating a shift from financial product-based, market entry regulation to a pan-financial sector focus. This may in turn drive a new emphasis on key financial regulatory issues such as risk management and online services. 

 

In line with the new approach, it will be interesting to see if the reforms will include a widespread relaxation of the different qualification requirements that currently apply to foreign investors in China’s financial services sectors, and a harmonisation of these requirements to make them apply in the same manner to Chinese and foreign investors. If so, we can look forward to the removal of such requirements as the minimum total assets of US$10 billion for a foreign bank setting up a banking subsidiary in China. 

 

Next steps 

 

The new direction of reform is consistent with the government’s recent initiatives to revive international interest in Chinese foreign direct investment and inject additional stability into its financial sector. Implementation will require a series of new rules to be passed at varying levels of detail through the different levels of the PRC government, from the State Council down to the specific sub-sectors. It is currently unclear whether the reforms will be introduced on a nationwide basis in one go, or on a phased basis first targeting certain regions or introducing quotas for specific investors. The government’s past record of implementing certain similar statements of intent has been reasonable (for example, the increase in the foreign ownership limit for securities companies increased from 33 per cent. to 49 per cent. six months after it was first announced), but the breadth and depth of this round of reform suggests a gradual and cautious approach will be adopted. 

 

For some, the real opening of the Chinese financial market does not just hinge upon the relaxation or removal of foreign ownership limits. The commercial banking sector, where foreigners have long been able to set up wholly foreign owned commercial banks but market share of foreign banks has remained at low single digit level, is a good example. Many would like to see policies that truly allow a level playing field for domestic and foreign players alike, and the enrichment of the PRC financial ecosystem with a more diverse range of products. It remains to be seen whether other changes will be implemented to complement the relaxation of foreign ownership. 
 

 

For further information, please contact:

 

Jian Fang, Partner, Linklaters

jian.fang@linklaters.com