China is easing foreign investment restrictions in its financial market. Will foreign investors take the bait?
Foreign investors can now hold higher percentage in Chinese financial services firm. The government also promised to treat both domestic and foreign investors equally.
Through this announcement, China is signalling a change to create a more open market.
China is fostering a fair environment for foreign investors
Foreign investors can now own up to 51% of joint ventures (JVs) in selected financial services. After three years, this cap of 51% will be lifted. China will also remove the 20% cap on single foreign investor holding of a Chinese bank and asset manager. After three years of ownership, foreign investors can also own up to 51% of insurance JVs. The government aims to create an equal playing field for international investors.
These steps are in line with directions during the 19th National Party Congress. Chinese President Xi Jinping highlighted foreign investments as a way to enhance competition.
Will the open-door policy work well?
China has the track record of regressing its open economic directions. Some question if this policy will eventually be effective, and for how long the door will be open. China joined World Trade Organisation (WTO) in 2001. Since then, China made little progress in opening up its doors to international businesses.
Investors will need more than a promise. They also need certainty that China’s open-door policy will last more than a few years.
Assuming international investors do invest in China, many will question the existence of China’s unregulated shadow banking sector. Will China insist on creating a fair regulatory environment that applies even to the existing shadow banking companies? Notably, Basel IV will be more punitive than ever.
International investors should not be too optimistic about President Xi’s plans
China’s local fund managers is preparing for the coming foreign competition. They are changing the way of doing business.
“I don’t think the local fund managers are asleep,” said Daniel Celeghin, head of Asia-Pacific wealth management strategy at Casey Quirk.
He predicted that China’s asset management sector will grow fivefold to US$17 trillion by 2030.
Mr Celeghin also pointed out that international investors should not get their hopes up too high even after China removes capital controls. Domestic assets are likely to dominate business. In the US, 80% of investments are in equities and fixed income, despite an absence of restrictions on cross-border investments.
Many investors will view China’s announcement with cynicism. It is not possible for China to operate an open economy as well as a well-controlled state. For instance, how will China mitigate capital flight risks in an orderly manner within an open economy?