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Wall Street Finds China Door Remains Ajar After Trade Spat

(Bloomberg) -- For global investment banks, the long wait for a more level playing field in China is finally drawing to a close.

China on Wednesday detailed a timeline to further open parts of its financial sector by June 30, easing concern that the historic move would be derailed by escalating trade tensions amid U.S. President Donald Trump’s threat to impose more tariffs. Additional easing, like giving foreign securities firms freer rein to enter new businesses, will follow by year-end.

Global investment banks have long been sidelined in one of the world’s fastest-growing financial markets, where caps on ownership of local joint ventures have stymied their expansion. For firms such as Morgan Stanley and Citigroup Inc., which have securities JVs in China, the relaxed restrictions mean they may soon be able to operate on equal footing with domestic competitors.

“They’d definitely benefit just by being able to get in there and provide the services they do across the rest of the financial markets,” said Marty Mosby, a bank analyst at Vining Sparks. It’s also positive for the financial industry as a signal about China’s broader stance toward foreign companies. “You don’t want that stalemate. You don’t want to unravel what’s happened.”

Among changes to be implemented by June 30 is allowing foreign firms to take majority stakes in local JVs, People’s Bank of China Governor Yi Gang said on Wednesday at the Boao Forum on the southern island of Hainan. His comments came a day after Chinese President Xi Jinping used a speech at the event to stick to the promise of financial-market opening even in the face of a more hostile trade posture by the Trump administration.

Widening Access

“While the opening up widens foreign capital access and reduces business restrictions, prudent regulation will be applied to businesses with all kinds of ownership,” Yi said. “I’m confident that China’s financial market will be a more competitive market, better regulated and also serve the real economy much better, with fair competition and a level playing field.”

Among changes most welcomed by foreign securities firms, they’ll no longer be required to operate their ventures with a local brokerage. That would allow foreign institutions to partner with companies outside the industry and remove persistent conflict-of-interest concerns, according to senior bank officials who asked not to be identified discussing a sensitive matter.

Paul Schulte, chairman of Hong Kong-based Schulte Research, said global investment banks would prefer a wholly-owned subsidiary since they have expressed “dissatisfaction and unhappiness” with their joint venture partners in the past. The easing would allow global banks to operate as “full-service” financial entities, akin to the model in the West, he said.

JPMorgan Chase & Co. and Citigroup said in separate statements that they welcome China’s moves to further liberalize the financial sector and will continue to evaluate options to strengthen their positions in China. The new rules would enable them to apply for broader licenses and get into businesses such as nationwide securities trading, an area only Goldman Sachs Group Inc. and UBS Group AG JVs are currently involved in.

What the biggest foreign firms operate in China

  • HSBC: Became the only foreign firm to win a majority-owned securities joint venture last year, based in the financial free-trade zone of Qianhai in the southern province of Guangdong. 
  • Credit Suisse: Won approval to offer securities brokerage services in late 2015 in Qianhai.
  • Goldman Sachs and UBS: They have the longest-established securities joint ventures in China, and got their licences before a moratorium imposed in 2006. They offer brokerage services across the country through their local partners. 
  • JPMorgan: Pulled out of its previous securities joint venture in China in 2016, selling its stake in JPMorgan First Capital Securities after being a minority shareholder for six years.

The potential for expansion is huge. Foreign securities firms together had less than a 1 percent market share of China’s brokerage business at the end of 2016, and generated less than 2 percent of total securities revenue, according to a report from UBS published this month.

China’s plan for the financial sector came into sharper focus as the nation’s top central banker elaborated on pledges from Xi. PBOC Governor Yi reiterated some key measures first announced in November, saying that foreign ownership caps on securities companies, fund managers and life insurers will be fully scrapped in three years. He added that banking regulation will need to be strengthened during the opening-up.

He also said that the daily Shanghai-Hong Kong stock connect quota will quadruple to 52 billion yuan ($8.3 billion) from May 1.

The fresh details from the new central bank chief may help further ease trade tensions after Xi’s renewed pledges to open sectors from banking to auto manufacturing drew praise from Trump.

When asked by Bloomberg News whether the financial reforms represented a “big bang,” Yi characterized them as gradual.

“I think that the Chinese philosophy is gradualism,” Yi said. “I’ll be very cautious. I even don’t want to use the word ‘bang,’ no matter if it’s big or small. I think this is a prudent, cautious, gradualist move.”

©2018 Bloomberg L.P.