Saturday 17 August 2019

China gives foreign financiers a second swing at cash piñata

Xi Jinping, China's president, speaks during the Asia-Pacific Economic Co-operation (Apec) CEO Summit in Da Nang, Vietnam, at the weekend Photo: SeongJoon Cho/Bloomberg
Xi Jinping, China's president, speaks during the Asia-Pacific Economic Co-operation (Apec) CEO Summit in Da Nang, Vietnam, at the weekend Photo: SeongJoon Cho/Bloomberg

Pete Sweeney

China is letting outside investors join the front line in its war on debt.

The government will let foreigners control financial-sector joint ventures, and says it will eliminate ownership caps completely in a few years.

Western financiers have been burned by such promises before. But the $10tn (€8.5tn) in uninvested savings languishing in local banks, plus a burgeoning wealth management industry, should encourage experienced players to take a second swing.

Foreign interest in securities joint ventures involving Chinese partners has steadily waned over the past decade, due to lacklustre performance and differences over strategy - the latter aggravated by the lack of control. At the same time, overseas interest in mainland stocks and bonds has faded in the face of volatility, policy opacity, and the difficulty of repatriating profits.

China has gone without foreign money that would have helped it meet its own goal of cutting overall indebtedness.

The relaxation of the rules marks a diplomatic solemnification of a process already under way.

In June, UK-based HSBC was allowed to set up a majority-owned securities joint venture.

Foreign asset managers have been launching wholly owned entities in anticipation of the full opening of China's mutual fund industry, which experts estimates to have $1.7tn under management.

It's the second-largest market of its kind in the region, growing at a rollicking compound growth rate of 29pc.

It's true, local competitors look intimidating. Domestic giants like CITIC and Haitong Securities have moved up league tables, and the fund management industry is cut-throat.

Distortions in Chinese stock, bond and derivatives markets are unresolved. But as execution and efficiency become more important than plain old access to cheap capital, the Western players ought to have an advantage.

Foreign institutions have another selling point: they have big businesses outside of the People's Republic.

There's a massive pile of cash held uninvested by the Chinese middle class that could be put to more productive use. As Chinese warm to overseas stocks and bonds, foreign firms who jump in now will be well-positioned to sell into the trend. That's worth the effort.

The Chinese government on Saturday said it will raise foreign ownership limits in domestic financial firms, a long-anticipated step allowing foreign partners to take more control.

The changes include raising the limit on foreign ownership in joint-venture firms in the futures, securities and funds markets to 51pc from 49pc.

Full foreign ownership of local firms involved in the futures, securities and funds markets will be permitted after three years, while full overseas ownership of insurance firms will be allowed after five years.

The foreign ownership limit of 20pc on a single entity basis and 25pc on an aggregate basis of any Chinese owned bank and financial asset management company will be removed.


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