China's Big Bang Bombshell: Beijing Opens Financial Sector To Foreign Ownership, But Why Now?

On the surface, this is the most significant move to deregulate China’s financial system for a decade when foreign banks were allowed to set up minority-owned operations in 2007. Furthermore, the new regulations will remove the 51% cap in securities brokerages after three years. In the life insurance sector, foreign firms will be allowed to own 51% after three years with the cap being removed after 5 years.

Prior to this announcement, foreign banks had diverging China strategies. In a high-profile announcement last year, JP Morgan announced that it would sell its stake in the JPMorgan First Capital Joint Venture – a securities trader – due to poor profitability. In contrast, likes of UBS and Morgan Stanley have stated their intention to raise ownership in their joint ventures.

The South China Morning Post reported on the response to the news.

International banks doing business in China welcomed the news. “The Chinese government’s decision to allow foreign companies to take up to 51 per cent in securities joint venture represents an important step in further opening up China’s financial sector. China is a key market for UBS and...we continue to work towards increasing our stake in [joint venture] UBS Securities,” Eugene Qian, chairman of UBS’ China Strategy Board, said in a statement. Securities trading in China has been dominated by large domestic players, with the foreign banks’ joint ventures struggling to gain market share. In 2015, UBS Securities was ranked the best performing foreign joint venture among securities firms in terms of net profits, but was still 95th overall in the country, according to data from the Securities Association of China.

However, the ongoing internationalisation of China’s capital markets will provide an opportunity for the foreign players to help them overcome domestic competition. “Domestic players are already strong in areas like securities brokerages. However, with China’s capital markets opening up to foreign investors through the connect schemes, China’s securities brokerages might need more foreign strategic partners to help them better serve these new investors,” said Wang Cong, professor of finance and co-director of the centre for globalisation of Chinese companies at the China European International Business School.

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