On 10 November 2017, the Chinese Government announced that the 49% cap on foreign ownership on companies involved in securities, futures and funds would rise to 51%. In three years' time it will be scrapped. Insurance firms will see the cap rise from 50% to 51% in three years. The cap will be removed in five years.
Enoch Yiu writes in the
South China Morning Post about the reaction in Hong Kong. The news is unlikely to be a “big boon” for Hong Kong because the physical size and reach of smaller firms in the city means they may not be able to take advantage.
Keith Pogson, a senior partner at EY, is quoted as saying that the “big players” – HSBC, Standard Chartered Bank and UBS, for example – may be the main beneficiaries of the deal.
Yiu says that the Hong Kong Government believes that the changes will benefit the city.
But Christopher Cheung Wah-fung, “a Hong Kong lawmaker who represents the financial services sector”, notes that previous policies of this ilk “have been tailor-made for international giants and are not for the small and medium-sized Hong Kong brokers”.
He suggested that firms which operate in Hong Kong should be allowed to do business in the southern Chinese province Guangdong. “[This] would bring huge business opportunities,” Wah-fung said.
Morton Securities’ chairman, Joseph Tong Tang, adds that it’s still unknown how long the approval process for foreign firms looking for increased ownership will be. Under the previous rules, approval took a long time and few companies were successfully approved.
“Past experience has shown we cannot expect too much,” Tang said.
South China Morning Post article
Wall Street ready to pounce
Citigroup, Goldman Sachs and Morgan Stanley have an advantage over their Wall Street counterparts, according to a
Bloomberg report by Hugh Son and Dakin Campbell.
Earlier this year, Morgan Stanley’s stake in Huaxin Securities was raised from 33% to 49%. Citigroup and Goldman Sachs both hold 33% in their ventures.
Comparatively, JPMorgan Chase and the Bank of America do not have a foothold in China.
Analysts – including Felix Luo from Guangfa Securities’ Hong Kong arm – are of the opinion that few firms have “found ways to differentiate themselves” in the Chinese market.
Jordi Visser, Weiss Multi-Strategy Advisers’ chief investment officer, says that more expertise and product development is needed within China’s financial services sector.
"At the end of the day, China favours Chinese entities"Those who aren’t already in the market are planning to enter. In Europe, UBS Group AG said it plans to increase its stake in UBS Securities.
JPMorgan Chase, which pulled out of a joint investment banking venture as a minority partner last year, wants to re-enter the region under one condition: full control. A quote from their chief executive officer, Jamie Dimon, from an interview in June is referenced: “My longer-term dream is that we have, we own, 100% of something [in China].”
Foreign-backed joint ventures aren’t among the big players in China’s financial services sector, though. UBS Securities’ ¥296m profit in 2015, for example, was “the biggest [profit] among foreign-backed joint ventures”. However, it ranked 95th out of China’s 125 brokerages.
In an interview with Bloomberg TV, Willet Advisors’ chairman, Steve Rattner, is cited as describing the situation as follows: “At the end of the day, China favours Chinese entities.
“So yes, you can own 51% of a bank now, but how much business are you going to do? [And] who are you going to do it with?”
Bloomberg article
Acquisition of smaller banks likely
A report by Fitch Ratings says that the move by the Chinese Government is likely to generate acquisition interest in smaller banks, according to Ryan Woo, writing for
Reuters.
China’s life insurance sector could also be of interest, because of its “low penetration rate and growth potential”.
According to Woo, the report explains that “smaller city commercial banks or rural banks”, are more likely targets because the benefit to cost ratio of acquiring larger banks is not clear and the scale of larger banks “could be a constraint”.
Smaller banks do not come without their own risks though. This is partly because of “their narrower geographical presence”.
The report also highlights the importance of business relationships for winning institutional business, “which could be a hurdle for potential foreign entrants”.
The opening-up of China’s markets comes with a whole host of possibilities. Woo points to a 10% surge in shares in New China Life Insurance since the announcement on Friday 10 November. While it is still uncertain how the next three to five years will play out, one thing appears certain: there will be a scramble to enter.
Reuters article
Seen a blog, news story or discussion online that you think might interest CISI members? Email jake.matthews@wardour.co.uk.