China to scrap foreign ownership limits on securities, futures, fund management

SHANGHAI, CHINA – FEBRUARY 23: The Chinese flag floats before the skyscrapers of multinational corporations on February 23, 2018 in Shanghai, China.Vincent Isore/IP3 | Getty ImagesBEIJING — China is pressing ahead with opening up its financial industry to foreign ownership amid worries that the U.S. and China could grow further apart due to ongoing trade tensions.The China Securities Regulatory Commission on Friday released a time frame for removing limits to foreign stakes in futures, mutual fund and securities companies. The plan, set to roll out in January, would give foreign companies full ownership.Last year, the commission began to allow some foreign financial entities to increase their minority stake to a majority 51%.”Chinese regulators continue to move forward with constructive reforms to the domestic funds management landscape,” a spokesperson for Invesco said in a statement. “This latest announcement enhances competition and enables all market players to bring compelling offerings to the Chinese market.”One of the U.S. complaints in trade tensions with China is that many Chinese industries are closed to foreign firms or dominated by state-owned entities, making it difficult for American companies to compete on even ground with their Chinese counterparts.The dispute between the world’s two largest economies has increased pressure on cross-border business, with the application of tariffs on billions of dollars’ worth of goods from both countries.The U.S. also placed several major Chinese technology companies on a blacklist that effectively bars them from doing business with American suppliers.But China would like to attract more foreign capital to its markets and help the local financial industry mature.The opening of its financial markets “will help promote the internationalization of China’s futures market, increase its international influence, and help it become an international pricing center for commodities,” Yanghui Cao, deputy director of the Hangzhou-based Nanhua Futures Research Institute, said in a Chinese statement translated by CNBC.Cao also pointed out that international markets have relatively greater experience with derivative products, and the entrance of such foreign players to the Chinese market will increase local competition.Impact of trade tensionsThe time frame announced Friday will be rolled out over 2020.If companies can get needed approvals and business licenses, the move will come close to matching Chinese Premier Li Keqiang’s announcement in September last year, when he said he hoped that “in three years’ time, there will be a number of foreign ventures qualified for full-license, full-ownership operation in the financial sector.”Jan. 1, 2020 — Futures companiesApril 1, 2020 — Mutual fund management companiesDec. 1, 2020 — Securities companiesIn July this year, Li also said China would lift restrictions on foreign ownership of securities, futures and life insurance firms by 2020 — a year earlier than previously planned.”What’s noticeable is the fast implementation schedule of the timetable. This could imply that the trade war negotiation is having some pressure on Chinese policy making,” Tianjun Wu, deputy economist at The Economist Intelligence Unit, said in an email.This is the ultimate realization of China’s commitment of market opening to foreign players.Ray Choupartner at Oliver WymanChina has been slow to open its domestic market to foreign players, often waiting until local companies have had time to grow large enough. The foreign complaint is that while a homegrown Chinese payments processing company like UnionPay has been able to expand rapidly overseas, Visa and Mastercard still face challenges in accessing China.In late September, PayPal said it became the first foreign payment platform to be licensed to provide online payment services in China. Last November, American Express received approval for a joint-venture application for clearing bank card transactions.Other foreign companies are waiting to jump on next year’s opportunity to tap China’s financial markets.Fidelity International — the now independent overseas arm of the U.S. asset management giant — said in a statement it “looks forward to bringing our exceptional investment research capabilities to Chinese investors. Leveraging our strong presence of over 1,000 staff in China, we will be ready to make the foreign (asset management corporation) license application in due course.””This is the ultimate realization of China’s commitment of market opening to foreign players,” Ray Chou, partner at consulting firm Oliver Wyman, said of Friday’s announcement in an email.Chou noted that regulatory constraints and dominance by local incumbents present challenges, but such structural changes are creating opportunities for foreign players with demonstrated long-term commitment to China.In April, Z-Ben Advisors’ annual rankings of 25 best foreign money managers in China found the gap is growing between the top six firms and the rest of the 19 others. The Shanghai-based consultancy ranked UBS, Invesco and J.P. Morgan as market leaders.In November 2018, UBS said it became the first foreign bank to gain majority control of a securities joint venture in China, with a 51% stake.This summer, J.P. Morgan Asset Management became the first foreign firm to move closer to increasing its holding of a Chinese asset manager from 49% to 51%.”We are now working with our joint venture partner on the required documentation, before we proceed to regulatory approval,” a spokesperson for the J.P. Morgan division said in a statement.

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