China’s financial institutions overcome foreign competition

China’s financial institutions are facing severe competition from foreign companies. The institutions are completely capable of coping with foreign competition as the $40 trillion financial sector is freed up, the central bank said on Thursday.

The central bank’s statement came after China and the United States signed an initial deal on trade. The bank will strengthen financial supervision and prevent risks in the process of the sector’s opening, the People’s Bank of China said.

Under the initial deal, China has promised improved access to its banking, insurance, asset management, payment and fund management services, and agreed to expedite by nine months a previous December 2020 deadline for removing foreign ownership caps on securities firms.

Chinese financial regulators will build up “various firewalls” to improve its supervision in corporate governance and market construction amid the financial opening up, and maintain a stable financial system, the central bank said.

Based on the deal, the United States will also consider the application from Citic Group, China Reinsurance Group and China International Capital Corp (CICC) for the licensing of operations, the central bank said.

The world’s biggest investment banks will be able to wholly own their China securities businesses from April 1 as the US- China Phase 1 trade deal accelerates a previous deadline for removing foreign ownership caps by nine months.

International bankers believe a full ownership, or at least a majority control, would allow them to make better use of their global network to win market share in China.

China raised the cap on foreign ownership to 51% in 2018, before which international banks were allowed to hold only minority stakes in their Chinese joint ventures, which typically offer a combination of securities underwriting, broking, research and trading services.

Below is a list of major foreign banks and their stakes in Chinese joint ventures:

UBS became the first foreign bank to own 51% of its China joint venture under the 2018 rules. Three government-affiliated investment vehicles also hold minority stakes in the company, UBS Securities, in which UBS first invested in 2006.

HSBC launched its own 51% joint venture in late 2017 under a different set of rules that allow Hong Kong-based companies special access to the mainland. It has partnered with Qianhai Financial Holdings, a local government investment vehicle.

JPMorgan received final approval from Chinese regulators in December to set up a new majority owned securities joint venture. JP Morgan Securities (China) has six shareholders, including the Shanghai Waigaoqiao Free Trade Zone Group, which owns 20%.

Nomura received a final regulatory approval in November for its new majority owned joint venture, Nomura Orient International Securities. It has two partners, including manufacturing and services firm Orient International.

Goldman Sachs applied for a majority ownership of its existing joint venture, Goldman Sachs Gau Hua Securities, in August 2018, though, unlike most others, it already has operational control of the company. It plans to fold some of the operations of partner Beijing Gao Hua Securities into the JV.

Morgan Stanley purchased the 2% stake it needed to reach 51% ownership of Morgan Stanley Huaxin Securities in August. The deal still needs regulatory approval.

Credit Suisse plans to boost its stake in Credit Suisse Founder Securities Ltd to 51% from 33.3% through capital injection, it said in April 2019. The plan is subject to regulatory approval. Citigroup plans to set up a wholly owned securities business in China after completing its exit from an existing joint venture in which it has a minority stake.

Societe Generale intends to create a wholly owned subsidiary after ditching earlier plans for a joint venture.

China’s yuan firmed a little while stocks fell on Thursday after Beijing and Washington sealed a Phase 1 trade deal, with financial markets taking on a cautious tone as many thorny issues remained unresolved.

The partial trade agreement signed on Wednesday still retained tariffs imposed by the two sides over the last 18 months and structural differences that led to the conflict were not addressed.

The yuan inched up 0.1% to 6.8848 per dollar around midday in China, on relief that the deal had finally been signed, and by a stronger central bank guidance rate.

The People’s Bank of China (PBOC) set the midpoint fixing for its daily trading band at 6.8807 per dollar on Thursday, its firmest level since July 26, 2019, and slightly stronger than the previous day’s fixing of 6.8845.

Reuters