China has further opened its financial markets to foreign firms, still market access remains an issue

Since April, foreign-owned firms have been allowed to seek permission to engage in securities and fund management as well as investment banking in mainland China. The accelerated roll-out of the legislative change (originally slated for the end of this year) was announced in January in conjunction with the signing of phase one of the US-China trade agreement. China has sought to move trade negotiations along in recent years with promises of China’s financial market opening. At the beginning of January, limits were removed on foreign ownership of firms involved in futures trading and life insurance.

Operations of foreign firms in China’s financial markets were earlier only possible through joint ventures. In March, Goldman Sachs and Morgan Stanley were authorised by the China Securities Regulatory Commission (CSRC) to increase their stakes in their securities trading joint venture with their Chinese partners to 51 %. Credit Suisse was granted similar permission in April. Prior to March, UBS, JPMorgan Chase and Nomura held dominant positions thanks to their joint ventures. At the end of last year, the French asset management company Amundi received approval of plans to set up a wealth management company with a Chinese partner in which Amundi would retain the controlling interest.

After buying out their Chinese joint venture partners, the CSRC last month approved JPMorgan Chase's application to operate on China’s futures markets. JPMorgan is the first fully foreign-owned firm to operate in Chinese futures business. With the April changes in the law, JPMorgan Chase further announced its intention to acquire all shares in its China-based asset management company. In addition, the American investment managers Blackrock and Neuberger Berman Group have applied for permission to establish fully-controlled mutual funds in China.

To increase competition and stimulate business in the banking sector, China is considering giving the green light to domestic commercial banks to engage in investment banking and securities trading, according to media reports. Official are considering a pilot programme that initially would only apply to the giant state-owned banks. Although domestic commercial banks are not allowed to provide securities services, many already do so through their Hong Kong subsidiaries.

China has made reforms to open its financial sector in recent years, but it often takes a considerable amount of time before the announced reforms are put into practice. The Chinese business environment is perceived to be plagued by bureaucracy, strict regulation of foreign companies and an entirely distinct set of market mechanisms. An example is the processing and clearing of yuan payments by foreign credit card companies. While the opening of such operations to foreign companies was announced already in 2014, guidelines on how to apply for permission to engage in such activities were not published until 2017. In 2018, American Express was given permission as the first foreign card company to operate in China by establishing a joint venture with a Chinese partner. However, it was only in June this year that the joint venture obtained its licence from the central bank to initiate card-clearing services. In February, the People’s Bank of China approved a joint venture of Mastercard and a Chinese partner to start preparing for operations in China. Permits were granted last year to the credit ratings agency S&P Global, while its competitor Fitch was given authorisation in May this year to offer credit ratings of issuers and products in China’s interbank markets. The opening of China’s credit rating industry to foreign firms was announced in 2017.

In June, China updated its foreign investment negative list, lowering from 40 to 33 the number of branches in which the operations of foreign firms is restricted or altogether banned. The latest of the negative list takes into consideration financial market reforms implemented this year. Other updates are relatively minor. The list is updated annually, with the latest version of the list taking effect on July 23. China’s new foreign investment law entered into force at the beginning of this year (BOFIT Weekly 02/2020).