On 20 July 2019, the Office of Financial Stability and Development Committee (the Office) under the State Council published the Relevant Measures for Further Opening Up the Financial Sector (the 11 Measures).
In announcing the 11 Measures, the Office said “it is better to launch them earlier and quicker instead of later and slower”. The adoption of the 11 Measures represented China’s latest efforts to bring in more foreign investment to boost its economy, amid the challenges posed by global economic and business environment. It is part of a broader scheme to open up the financial sector, and comes after the relaxation of restrictions on foreign investment in the financial sector announced in 2018 and the adoption of China's Foreign Investment Law in March of 2019. Under the earlier 2018 reforms, China Banking and Insurance Regulatory Commission (the CBIRC) raised the foreign ownership cap in life insurance companies from 50% to 51%, removed foreign ownership caps in Chinese banks, and allowed foreign owned insurance brokerages to expand their business scope to the same as that of domestic insurance brokerages.
In recent years, China has gradually deregulated foreign direct investment in most sectors. In 2016, the country abolished the old approval system, which requires governmental approval for all kinds of foreign direct investments, replacing it with a filing regime under which all sectors are opened for foreign direct investment except for specific industry sectors included on a "negative list". Subsequently, the Chinese government has shortened the negative list every year. The 11 Measures signals China’s move to open up one of the few sectors that had traditionally been carefully guarded by the Chinese government, the financial services sector.
The initiatives, on top of bringing in more foreign capital, will also help enhance competition and make domestic financial services providers more efficient by making them compete on a more level playing field with their foreign counterparts.
A broad spectrum of China’s financial services sector is covered under the 11 Measures, which makes the financial services sector more open and easier to access for foreign investors. Below is a summary of the highlights.
Insurance: Foreign insurers are no longer required to meet the criteria of 30-year’s operational experience in the insurance business. Foreign investors can now own more than a 25% equity stake in insurance asset management companies.
Pension Fund: Foreign pension funds are allowed to establish or participate in Chinese pension fund management companies.
Removing Foreign Equity Cap Earlier: The foreign equity ownership cap (currently 51%) in securities, fund management, futures, and life insurance business will be abolished altogether in 2020, one year earlier than the timeframe announced by the Chinese government in 2018.
Asset Management Companies: Foreign asset management companies are encouraged to invest in asset management subsidiaries established by commercial banks. Foreign asset management companies are allowed to set up foreign-controlled asset management companies with subsidiaries of Chinese banks or insurers.
Credit Rating: Foreign rating firms can now rate all bonds traded on China's interbank market and exchanges.
Bond Market: Foreign invested banks can now apply for type-A lead underwriting licenses in the interbank bond market. The 11 Measures also pledges to further facilitate foreign institutional investors’ investments in the interbank bond market.
Currency brokerage: The 11 Measures pledges to support foreign investors to establish wholly foreign-owned currency brokerage companies in China. Wholly foreign-owned currency brokerage firms have been theoretically possible under an existing pilot program, but no such firm has been approved since the pilot program was launched in 2005.
Additionally, on 1 May 2019 the CBIRC abolished the old requirement that foreign insurance brokerages to have operated for at least 30 years and have total assets worth USD200 million before they can conduct business in China. According to the CBIRC, the purposes of relaxing these requirements was to encourage comparatively young but high-quality and competitive foreign insurance brokerages to enter the Chinese market and enhance mutual understanding and cooperation between them and their Chinese counterparts.
The publication of the 11 Measures represents a welcome development for foreign financial services providers. However, they are not self-executing and relevant Chinese regulators will need to draft and implement new rules to make the 11 Measures workable on a practical level.
Foreign firms can also expect Chinese regulators to treat all foreign firms more equally compared to their Chinese counterparts, and become more efficient in processing their applications.
Some foreign firms have already benefited from previously announced polices as highlighted below. More multinationals will likely benefit from the new 11 Measures.
- UBS AG has received Chinese government approval to increase its stake in its UBS Securities Co Ltd joint venture to 51%, making the joint venture the first Chinese securities company controlled by a foreign investor.
- J.P. Morgan and Nomura both received Chinese government permission to establish joint venture securities firms with a controlling foreign stake of 51%.
- American Express has received Chinese government approval to establish the first RMB bank card clearance joint venture with a 50% stake.
- Allianz has received approval to establish the first wholly foreign owned insurance holding company.
- Standard & Poor has established the first wholly foreign owned credit rating firm in China. Moody's is in the process of setting one up.
More recently, Goldman Sachs has applied to have its ownership stake in its China joint venture Goldman Sachs Gao Hua Securities raised to majority control.
There is no doubt that the 11 Measures will generate further inflows of foreign capital into China’s financial services sector, and we expect to see a surge, both in acquisition activities involving existing Sino-foreign joint ventures in which the foreign partner owns a controlling stake and in greenfield investments.
Appendix - Outline of the 11 Measures
- Foreign-invested credit rating agencies can rate all kinds of bonds that are traded on China's interbank market and exchanges.
- Foreign financial institutions are encouraged to participate in the establishment of or investment in asset management subsidiaries established by Chinese commercial banks.
- Foreign asset managers are permitted to partner with the subsidiaries of Chinese banks or insurers to establish foreign-controlled asset management companies.
- Foreign financial firms are allowed to set up or invest in pension fund management companies.
- Foreign investors will receive support to establish or invest in currency brokerage firms.
- The transition period to lift the cap on foreign ownership in life insurance companies from 51% to 100% will end in 2020, instead of 2021 as previously announced.
- The restriction that domestic insurers must hold in aggregate not less than 75% equity stake in an insurance asset management company will be removed and foreign investors can hold more than 25% in insurance asset management companies.
- The requirement that a foreign insurer investing in China must have at least 30 years of experience of operating an insurance business is abolished.
- The cap on foreign ownership in securities firms, fund management firms and futures firms (currently 51%) will end in 2020, one year earlier than originally indicated.
- Foreign-invested financial firms are allowed to obtain type-A underwriting licenses in the interbank bond market.
- The Chinese government pledges to further facilitate foreign institutional investors’ investment in the interbank bond market.
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