On 20 July 2019, the Office of Financial Stability and Development Committee of the State Council, China’s Central Government, announced Relevant Measures for Further Opening Up Financial Sector (“11 Measures”).
The Chinese financial sector has long been a sensitive area and foreign investment has been restricted. However recent years have witnessed a series of relaxations. For example, the 2018 Edition of the Negative List (a list specifying industries in which foreign investment is prohibited or restricted), removed the 20% foreign shareholding (or 25% aggregate where there are multiple foreign shareholders) in domestic banks, and permitted a 51% controlling stake in joint ventures engaged in securities, fund management, futures, and life insurance business with a commitment that all such caps will be removed completely by 2021.
There have in recent months been various indications that the Central Government has intended to further relax restrictions on foreign investment, but the publication of these measures were delayed possibly partly due to the escalating trade tensions between China and the US.
Regardless of the trade war, the Chinese Government has for some time recognised the need to further relax existing restrictions. Before the most recent measures were announced, it was apparent that some investors in the financial sector were being given favourable treatment consistent with the new changes. For example, a leading global credit rating agency became the first in the market to obtain a licence in early 2019 and issued the first domestic credit rating for a Chinese issuer on 11 July 2019.
The measures target at almost all financial sub-sectors and the highlights are summarised below:
Shortened transitional periods. The deadline for removing foreign investment cap in securities, fund management, futures, and life insurance business has been brought forward to 2020, a year earlier than the deadline as noted before.
Bond market. The restrictions with respect to rating agencies and underwriting licences have been lifted. Foreign rating agencies can give rating to all kinds of bonds that are traded on China's interbank market and exchanges. Foreign invested banks are eligible to apply for type-A principal underwriting licenses in the interbank bond market and act as the principal underwriters for domestic bonds. The announcement also mentions facilitating foreign institutional investors’ investment in the interbank bond market. Detailed measures are expected.
Insurance and insurance assets management. Entry to insurance and insurance assets management industries are further widened. The qualification requirement for foreign investors in insurance companies (i.e. having been operating in an insurance business for at least 30 years) is abolished. Foreign shareholding cap in insurance asset management companies (i.e. 25%) is removed. Furthermore, the 11 new measures clarifies that foreign investment is now permitted in the pension fund management sector.
Assets management companies. Foreign financial institutions are encouraged to invest in asset management subsidiaries of commercial banks. Foreign assets management companies are allowed to establish foreign controlled assets management companies with the subsidiaries of Chinese banks or insurers.
Currency brokerage. Foreign investors will be given support to establish wholly foreign owned currency brokerage companies (WFOEs). Although WFOEs are theoretically feasible under the Measures for the Administration of Pilot Currency Brokerage Companies, no such WFOE has been approved since the commencement of such pilot programme in 2005. The 11 Measures appear to be a positive signal in this regard.
The publication of these 11 Measures will require relevant regulators to “normalise” the application and approval processes, and more detailed implementation rules (such as investor qualifications and application procedures), are expected to be issued to give better guidance on the application process. That said, Chinese financial regulators enjoy significant discretionary power in granting approvals and well-established foreign financial institutions that are well-known to the authorities are perhaps more likely be granted with new licences and approvals initially although broader opportunities should become available as additional detailed regulations emerge.
We have included the breakdown of all 11 Measures covered by the new announcement.