“No takers?” A trader wearing a red trading jacket on the trading floor of the Hong Kong Stock Exchange, operated by Hong Kong Exchanges & Clearing Ltd. (HKEX), in Hong Kong, China. (Photographer: Anthony Kwan/Bloomberg)

China Keeps Promises to Wall Street Even as Trade War Drags On

(Bloomberg) -- China removed limits on foreign ownership of its banks and bad-debt managers, pushing ahead with a previously announced plan to open its financial system despite rising trade tensions with the U.S.

Overseas financial institutions will now be treated the same as local companies, the China Banking and Insurance Regulatory Commission said in a statement late Thursday, following through on a pledge announced last year. Stakes were previously capped at 20 percent for a single foreign institution and 25 percent for a group.

The move is part of China’s longstanding effort to increase its integration with the global financial system, but it may also help President Xi Jinping counter criticism from U.S. President Donald Trump that China has been a one-sided beneficiary of global commerce. Xi’s government announced a number of financial opening initiatives in November, before the tit-for-tat trade conflict that saw the world’s biggest economies raise tariffs on $50 billion of each other’s exports. Most of the Chinese opening measures are expected to take effect by the end of this year.

“China is showing they are keeping their promise and that regulators are interested in opening up, rather than closing down,” said Chen Long, a Beijing-based economist at research firm Gavekal Dragonomics. “Given the ongoing trade dispute, from a reputation perspective, this is helpful.”

Foreign banks held 2.9 trillion yuan ($420 billion) of assets in China at the end of 2016, some 1.3 percent of the total and the lowest share since 2003, CBIRC data show. They earned 12.8 billion yuan in the nation last year, less than 1 percent of the profits at Chinese counterparts.

Yet even if they take full control of their China ventures, international companies will face multiple challenges. One of the biggest is competition from government-controlled rivals, who currently dominate the nation’s financial system and have longstanding relationships with state-owned companies that drive much of China’s economic activity. A recent government clampdown on financial leverage has also made the country’s regulatory environment trickier to navigate.

“Banks are allowed to enter an increasingly constricting space,” said Andrew Polk, the founding partner of Beijing-based research firm Trivium China.

The size and complexity of the market will make foreign firms cautious, according to Bloomberg Economics Chief Economist Tom Orlik. Analysts have also said that China’s capital-account opening will need to resume so investors feel comfortable they can get their cash out, not just in.

Timeline:

  • NOVEMBER: China unveils plan to remove foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers
  • APRIL: Xi vows to push ahead with the opening and central bank sets deadlines
  • MAY: UBS becomes first global bank to apply for a majority stake in its China securities venture 
  • JUNE: China announces formal rules to ease foreign investment limits on a range of industries from banking to agriculture, updating its so-called negative list of industries where overseas investors are restricted or banned

Still, several major foreign players have been moving to increase their China exposure. UBS Group AG was the first global bank to apply for a majority stake in its China securities venture in May, while Nomura Holdings Inc. and JPMorgan Chase & Co. have sought to take advantage of reduced investment barriers, including by setting up Chinese joint ventures.

Earnings at international banks in China are set to grow more than 10-fold by 2030, according to Bloomberg Intelligence.

The rule changes aren’t just appealing to foreign financial companies. Shanghai-based Bank of Communications Co. would be open to HSBC Holdings Plc raising its stake in the company, Bocom’s board secretary Gu Sheng said on Thursday. Shares of banks and other financial companies were the biggest gainers in China’s stock market on Friday.

To contact Bloomberg News staff for this story: Lucille Liu in Hong Kong at xliu621@bloomberg.net;Jun Luo in Shanghai at jluo6@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board