By Zhang Chenghui Research

Report Vol.20 No.5, 2018

I. Analysis of New Measures for Further Opening up the Financial Industry

On April 11, Yi Gang, President of the People’s Bank of China (PBC), announced twelve measures for further opening-up the financial industry and their timetable, focused on widening the market access and scope of operation for foreign-funded financial institutions.

1. Six measures to be implemented soon

First, “the equity ratio cap for foreign investors in banks and financial assets management companies will be lifted. Domestic and foreign investors are subject to the same rules. Foreign banks are allowed to set up branches and sub-branches in China”.

According to the Administrative Regulations on Foreign-Funded Banks (revised in November 2014, hereinafter referred to as Regulations), foreign investors in Chinese banks and financial assets management companies shall have no more than 20% shares each and 25% in total. This provision largely restricts the operating capability of foreign-funded financial institutions and isn’t good for establishing more market-oriented corporate governance structure. Giving national treatment to foreign investors in Chinese banks and financial assets management companies will give them more space to exert their advantages in corporate governance, development strategy and risk management. In the meantime, China still places an equity ratio cap[]① in private banks, rural commercial banks and village/township banks, which foreign investors should observe unless the rules are revised.

On the other hand, the Regulations stated that “if a foreign bank’s branch is reformed to be a bank solely funded by its Headquarters, the foreign bank, with the approval of the banking regulator of the State Council, can keep a branch engaged in foreign exchange wholesale business within a specified period of time”. This means if a foreign bank’s branch is transformed into a sub-branch, no branch can be set up anymore. As this restriction is lifted, foreign banks will have more operating space.

Second, “the equity ratio cap on foreign investors in securities companies, fund management companies, futures companies and life insurance companies is raised to 51%, and no cap will be placed three years later”.

This means foreign investors, who could only be minority shareholders in Chinese financial institutions in the past, can be majority shareholders from now on. Take life insurance companies for example. China, when acceding to the WTO, promised to allow foreign investors to hold no more than 50% equity in Chinese life insurance companies. As a result, all life insurance joint ventures adopted the 50:50 equity structure, which proved in practice the least efficient governance structure. Since neither the foreign nor the Chinese shareholder had the final say, it was hard to reach a decision on major issues concerning corporate strategy, operating policies, performance assessment and major appointments and dismissals, which largely undermined the company’s operation and efficiency and caused some foreign investors to quit. Except for AIA that came to China when the reform and opening-up policy was just introduced, China doesn’t have a foreign-funded life insurance company in the real sense. For many years, the equity ratio has been an all-time focus in China-foreign economic and trade negotiations. Now this years-long equity ratio cap is lifted, not only showing China’s determination for opening-up, but also indicating that after so many years of reform and opening-up, the Chinese financial industry has the conditions and strength for further opening-up.

Third, “securities joint ventures don’t have to have at least one domestic shareholder that’s also a securities company”.

China only has a small number of securities companies (131 by the end of 2017, basically on a par with Taiwan of China and only half as many as in Japan). Lifting that restriction is good for foreign securities traders to look for Chinese partners and will facilitate their entry into the Chinese securities industry.

Fourth, “the daily quota of stock connect programs will be expanded four times from May 1. In other words, the daily quota of Hu Gu Tong (investors buy or sell stocks at Shanghai Stock Exchange within the Shanghai-Hong Kong Stock Connect quota through the securities trade service company set up by HKEX in Shanghai) and Shen Gu Tong (investors buy or sell stocks at Shenzhen Stock Exchange within the Shenzhen-Hong Kong Stock Connect quota through the securities trade service company set up by HKEX in Shenzhen) is increased from RMB13 billion to RMB52 billion, and the daily quota of Gang Gu Tong (investors buy or sell stocks at HKEX within the Shenzhen-Hong Kong Stock Connect quota through the securities trade service company set up by Shenzhen Stock Exchange in Hong Kong) is increased from RMB10.5 billion to RMB42 billion”.

Expanding the daily quota of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs aims to further perfect the connectivity mechanisms between the mainland and Hong Kong stock markets, expand the two-way opening-up, and enhance the A-share market’s liquidity and international influence. In June 2017, MSCI announced to include China’s A-share in its emerging market index. From June 2018, 234 A-share stocks will be officially included in the MSCI index system, which is estimated to be able to bring USD11-15 billion to the A-share market. Increasing the quota of the two Stock Connect programs will efficiently ease the pressure arising from the outburst of trading volume, fortify investors’ confidence and increase the turnover.

Fifth, “eligible foreign investors are allowed to operate as insurance agents and insurance assessors in China”.

This measure expands the business scope for foreign companies in the field of insurance agency service. It will help solve a series of problems in the current insurance agency and assessment industry, such as the low competence of practitioners, lack of professionals, lack of public trust, small scale, weak strength and imbalanced regional distribution, and consequently improve the service quality and efficiency of the industry.

Sixth, “foreign-funded insurance agencies will have the same business scope as Chinese-funded ones”.

In the past, foreign-funded insurance agencies were restricted in foreign re-insurance business, leading to the lack of motivation and impeding the improvement of insurance agency services . Now that the business scope is fully opened, foreign insurance agencies can fully exert their professional advantages and provide Chinese customers with a wide range of services, including insurance plans and risk management plans, selecting the insurer, and handling the insurance formalities and claim settlement. It will also help bring the entire Chinese insurance agency industry to a new high.

2. Measures to be launched before the end of this year

In addition to the six measures mentioned above, another six measures will come out by the end of this year: encouraging the introduction of foreign investment to such banking financial fields as trust, financial leasing, auto finance, money broking and consumption finance; setting no cap on foreign equity ratio in financial assets investment companies and wealth management companies newly founded by commercial banks; significantly expanding the business scope of foreign banks; unifying the business scope for securities joint ventures and Chinese securities companies; cancelling the requirement that foreign insurance companies can only be established after they have a representative office in China for two years; and launching the Shanghai-London Stock Connect program. These measures will further open up the Chinese financial sector, lower the threshold for foreign investors, make it more convenient for foreign institutions to do business in the Chinese market, and promote market competition in Chinese financial service industry. They will also activate the Chinese financial market and improve finance services.

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