China scraps almost all foreign ownership limits for financial sector

Move opens doors wider for foreign players but further obstacles remain

China has scrapped foreign ownership limits in almost all areas of its $45 trillion financial sector, taking the country a step closer to its long-promised “big bang” reforms, but experts warn that steep obstacles still remain for foreign players hoping to crack the world’s No. 2 economy.

As of Thursday, foreign investors can fully own business in everything from insurance to brokerages.

Despite rising tensions with the U.S., analysts expect the move will help China woo big-name international players its capital markets. This, they say, would take some pressure off of local banks as they expand lending to cushion the economy against a slowdown. Companies such as Goldman Sachs and Fidelity are expected to continue ramp up investment in the country in hopes of grabbing a larger slice of the fast-growing advisory and wealth management markets.

But the change will not remove all obstacles, analysts and others warn, even if full ownership does make it easier for banks, insurers and fund managers to integrate their China operations with their global networks. There is also concern that the reform is coming at a late stage in China’s economic cycle, diminishing its significance.

“China has continued to make progress in opening up and encouraging foreign investment,” Michelle Lam, greater China economist at Societe Generale in Hong Kong, said. “Overall, despite rising geopolitical tensions, attracting foreign investment is still important because the technology knowhow can help China to move up the value chain. Foreign companies are also likely to invest in China given its large domestic market.”

Foreign financial firms could invest as much as 8 trillion yuan ($1.1 trillion) worth of assets onshore in the next few years, Huang Qifan, vice president of the China Center for International Economic Exchanges and former mayor of Chongqing, said late last year.

The scrapping of foreign ownership limits is part of the latest round of reforms announced last month by China’s National Development and Reform Commission and the Ministry of Commerce. Other sectors that saw changes in foreign ownershp restrictions include infrastructure, commercial vehicle making, smelting and some parts of agriculture.

The changes for financial businesses are part of policy measures fist unveiled in 2017 to phase out foreign ownership limits in the sector. Since then China has fast-tracked the opening up that full ownership of life insurance, securities, fund management and futures sectors is possible from 2020, a year earlier than initially announced. Opening up most of the nation’s financial sector also meets a promise in China’s phase one trade deal with the U.S.

“Foreign entrants can expect to deal with various obstacles, sometime invisible ones, during their China build out,” KPMG said in a note last year on China reforms. Foreign players “still face various obstacles including inter-provincial expansion, product approval, and distribution through banking channels.”

Global players, it added, should focus on the long-term opportunity.

Jake Parker, senior vice president of the U.S.-China Business Council, said several companies are already moving in that direction.

“We have heard from a number of financial service companies in newly liberalized sectors that their license applications for wholly or majority ownership are moving forward with China’s regulators.”

Other companies looking at full ownership include Credit Suisse, which gained 51% ownership of its securities joint venture Founder Securities in June. The company wants to increase its stake to 100%, the head of its Asia business, Helman Sitohang, told Reuters earlier this month.

UBS became the first foreign bank to hold a majority stake in a China securities business under the new rules. Since then Nomura Holdings, JPMorgan, Goldman Sachs and Morgan Stanley have all followed suit.

In April, JPMorgan Asset Management spent about $1 billion to buy up the remaining stakes in China International Fund Management, while Fidelity International recently applied for regulatory permission to establish a public mutual fund business in the country.

Red tape and logistical problems are not the only potential hurdles. The European Union Chamber of Commerce in China said that while the rule changes are a small step in China’s ongoing reforms, domestic companies already dominate certain sectors, leaving a smaller opportunity for European players.

For Alicia Garcia Herrero, chief economist for Asia Pacific at French bank Natixis, this means foreign players may have to be selective in their China ambitions.

“For foreign players, areas such as distressed debt, advisory and wealth management offer a bigger opportunity than, say, traditional banking,” she said. “They are less regulated, less crowded and offer an avenue to introduce sophisticated products. Thus the profitability can also be higher.”