November 10, 2017 / 11:48 AM / a year ago

Breakingviews - China gives foreigners second swing at cash piñata

HONG KONG (Reuters Breakingviews) - 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 $10 trillion in uninvested savings languishing in local banks, plus a burgeoning wealth management industry, should encourage experienced players to take a second swing.

China's Vice Finance Minister Zhu Guangyao, attends a conference during the 2016 IIF G20 Conference at the financial district of Pudong in Shanghai, China, February 25, 2016. REUTERS/Aly Song

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, coming after U.S. President Donald Trump’s visit, marks a diplomatic solemnification of a process already underway. In June, UK-based HSBC (HSBA.L) 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 Z-Ben Advisors estimates to have $1.7 trillion under management. It’s the second-largest market of its kind in the region, growing at a rollicking compound growth rate of 29 percent.

It’s true, local competitors look intimidating. Domestic giants like CITIC (600030.SS) and Haitong Securities (600837.SS) have moved steadily up league tables, and the fund management industry is cutthroat. 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.

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- The Chinese government on Nov. 11 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 involved in the futures, securities and funds markets to 51 percent from the current 49 percent.

- 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 20 percent on a single entity basis and 25 percent on an aggregate basis of any Chinese owned bank and financial asset management company will be removed. 

- The announcement followed a visit by U.S. President Donald Trump to China, during which the two sides announced of bilateral deals and investments which the Chinese government said were worth a combined $250 billion.

- Vice Finance Minister Zhu Guangyao told a news conference that the change will come into effect following drafting of related rules.

- For previous columns by the author, Reuters customers can click on [SWEENEY/]



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