A few days ago, the Chinese government announced a series of measures to further open up China’s financial markets and financial services sector to foreign investment and participation. This article provides an overview of the announced measures and their key implications for foreign financial institutions and investors.
Overall, the announced measures continue the trend of the gradual opening up of China’s economy. They present significant business opportunities for: (1) foreign investors that wish to access China’s massive (and rapidly growing) financial markets; and (2) financial institutions that wish to enter or expand their presence in China’s financial services sector, which serves a growing list of multinational companies and a burgeoning, educated and tech-savvy middle class.
The announced measures will not only present new business opportunities for foreign entities, they will also allow Chinese financial institutions to partner with, and attract capital from, foreign investors in new and exciting ways.
Overview of the announced measures
On July 20, 2019, the Financial Stability Development Committee (FSDC) of China’s State Council announced the following 11 opening-up measures:
1. Credit rating agencies
According to the FSDC’s announcement, when granting approval to foreign-invested entities to engage in credit rating business in China, Chinese financial regulators may permit them to provide credit ratings on all types of bonds in the Chinese inter-bank bond market (CIBM) and exchange-traded bond market, including financial institution bonds, non-financial corporate bonds, structured products and bonds issued by foreign entities (i.e., panda bonds).
By way of background, China’s bond market is the third largest in the world. The CIBM is an over-the-counter wholesale market for institutional investors that is regulated by the National Association of Financial Market Institutional Investors (NAFMII), which falls under the supervision of China’s central bank, the People’s Bank of China (PBOC). The CIBM accounts for approximately 90% of outstanding value and 80% of trading settlement of the China’s overall bond market. The exchange-traded bond market (consisting of the Shanghai Stock Exchange and Shenzhen Stock Exchange) is retail-oriented, and accounts for around 10% of China’s overall bond market.
The announced measure represents the latest in a series of measures taken by Chinese financial regulators – including the PBOC and China Securities Regulatory Commission (CSRC) – to open up China’s credit rating industry to foreign participants.
2. Wealth management subsidiaries of Chinese commercial banks
The FSDC announced that China will encourage foreign financial institutions to participate in the establishment of, and make investments in, the wealth management subsidiaries of Chinese commercial banks.
As next steps, the China Banking and Insurance Regulatory Commission (CBIRC) stated that it will guide qualified and willing Chinese commercial banks to strengthen their contacts with relevant foreign financial institutions, and will continue to encourage and guide the wealth management subsidiaries of these commercial banks to attract foreign investment.
3. Foreign control of wealth management companies
According to the FSDC’s announcement, China will allow foreign asset management companies to form joint ventures with Chinese banks or subsidiaries of insurance companies in order to establish Chinese wealth management companies that are controlled by foreign entities.
In terms of implementation, the CBIRC stated that it will likely begin by establishing a pilot program that prioritizes participation by established wealth management companies which are well known in international markets. The foreign-controlled wealth management companies will be able to raise funds in RMB as well as long-term funds in foreign currencies. The CBIRC stated that it will actively supervise foreign-controlled wealth management companies and will explore expanding the scope of the pilot program based on the experience it has gained.
4. Pension fund management companies
The FSDC announced that China will permit foreign financial institutions to establish and invest in Chinese pension fund management companies.
Currently, China’s pension fund management sector is still operating under a pilot program and pension fund management companies are established one at a time. The CBIRC has indicated that it will continue to apply this incremental approach in relation to foreign financial institutions that establish and invest in Chinese pension fund management companies.
5. Currency brokerage companies
According to the FSDC’s announcement, China will support foreign entities to establish or wholly own Chinese currency brokerage companies.
Currently, five of the world’s largest currency brokerage companies have established joint ventures in China. The CBIRC stated that it will actively support Chinese and foreign joint venture partners to determine the appropriate percentage of foreign ownership. It will also steadily promote the establishment of new foreign-owned currency brokerage companies in China.
6. Removing foreign ownership limits on life insurers in 2020
In 2018, the CBIRC stated that it will increase the foreign ownership limit for life insurance companies to 51%, and remove this limit altogether after 3 years (i.e., full foreign ownership will be permitted in 2021). The FSDC announced that China will accelerate this transition timeline by allowing Chinese life insurance companies to be fully foreign-owned in 2020. This was originally announced by Chinese Premier Li Keqiang on July 2, 2019 at the opening ceremony of the World Economic Forum.
In terms of next steps, the CBIRC stated that it will give effect to the accelerated timeline through implementing regulations, including the Regulations on the Administration of Foreign-funded Insurance Companies.
7. Insurance asset management companies
The FSDC announced that China will remove the requirement that Chinese insurance companies must own at least 75% of an insurance asset management company. Removing this requirement will allow foreign investors to own more than 25% of an insurance asset management company.
As next steps, the CBIRC will revise the Interim Administrative Regulations on Insurance Asset Management Companies to implement the announced measure, and will continue to improve regulatory and compliance requirements that apply to insurance asset management companies.
8. Foreign-invested insurance companies
According to the FSDC’s announcement, China will relax access rules by removing the requirement that foreign insurance companies must have at least 30 years of operating experience before they can establish a foreign-invested insurance company in China.
The CBIRC stated that it will revise relevant regulations to implement this announced measure.
9. Removing foreign ownership limits on securities companies, futures companies and fund management companies in 2020
In 2018, China stated that the foreign ownership limit for securities companies, futures companies and fund management companies will be increased to 51%, and this limit will be removed altogether after 3 years (i.e., full foreign ownership will be permitted in 2021). The FSDC announced that China will accelerate this transition timeline by allowing these types of Chinese financial institutions to be fully foreign-owned in 2020.
So far, the CSRC has already increased the foreign ownership limit for these types of Chinese financial institutions to 51%. In terms of next steps, the CSRC stated that it will give effect to the accelerated timeline through implementing regulations.
10. Class A lead underwriters in the CIBM
The FSDC announced that China will permit eligible foreign-invested entities to become class A lead underwriters in the CIBM, which would allow them to act as lead underwriters of all types of bonds.
Over the past several years, China has gradually opened up its bond markets to foreign underwriters, issuers, investors and other market participants. Currently, certain foreign-invested banks are licensed to act as lead underwriters of panda bonds. Obtaining a class A lead underwriter license would allow them to act as the lead underwriter of all types of bonds.
11. Foreign institutional investors
According to the FSDC’s announcement, China will make it more convenient for foreign institutional investors to access China’s bond markets.
Currently, foreign institutional investors can access China’s bond markets through various channels such as the Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) regimes, the CIBM Direct Access Scheme and Bond Connect.
While there are advantages to having multiple channels that cater to different types of investors, it is often the case that the same institutional investor will be using these multiple channels at the same time. To minimize inconvenience for these types of investors, the PBOC and the State Administration of Foreign Exchange (SAFE) recently proposed rules that would streamline regulatory filings and facilitate greater fluidity between securities and cash accounts opened by the same foreign institutional investor for purposes of the QFII and RQFII regimes, on the one hand, and for purposes of the CIBM Direct Access Scheme, on the other. In early 2019, the CSRC proposed to combine the QFII and RQFII regimes.
Once fully implemented, the announced measures will present significant new business opportunities for foreign investors and financial institutions. Overtime, the announced measures should result in greater foreign participation in China’s financial markets and financial services sector, which can lead to greater competition, more innovation and better quality of service.
While Chinese regulators have taken significant steps to further open up the country’s financial markets and financial sector, ensuring financial stability will continue to be the paramount policy consideration. Accordingly, we can expect China to continue to adopt a gradual and incremental approach to reforming and opening up its financial system and emphasize strict compliance with regulatory requirements in order to prevent systemic risks. The flip-side of national treatment of foreign investors and financial institutions in China is that they (and the Chinese financial institutions in which they invest) are expected to fully adhere to Chinese laws, regulations and policies in the same manner as domestic firms.