China opens up financial sector to foreign entities

Last Friday (Nov. 10), China announced it was eliminating restrictions on foreign ownership in the financial sector. First, China will scrap the rules that foreign ownership in a Chinese bank is limited to 25 % while a single foreign investor can own no more than 20 %. Second, under the new rules foreign entities can now take a controlling 51 % stake in a Chinese fund or securities company and in three years' time the cap will be removed completely. Before the change, the cap on foreign ownership was 49 %. Moreover, the ownership cap on foreign owners of life insurance companies also rises to 51 % during the next three years and ownership restrictions will be abolished entirely after five years.

The measures were received positively as they signal that China continues to implement reforms aimed at opening its economy to the world. Greater opening of the financial sector has long been wished for, since the presence of foreign entities in China's financial sector remains marginal. Following the announcement, a number of international companies announced plans to increase their holdings in Chinese firms in the financial sector.

Many observers, however, stress that in spite of recent reforms swift changes in the role of foreign entities in Chinese financial markets are unlikely. Competition is fierce, China's domestic players are strong and state firms are tightly networked with each other. Moreover, other regulations and requirements imposed on foreign entities could make expansion problematic. It has, for example, been theoretically possible since 2006 for a bank founded in China by a foreign bank to operate freely. Today, such banks account for less than 1 % of China's banking sector ­– and that share has been falling in recent years. Another example involves restrictions on foreign credit card issuers. China announced in 2014 that it would permit foreign credit card companies to set up clearing firms in China to settle transactions. The People's Bank of China, however, only issued guidelines on such settlements this summer. At least two credit card companies have applied for licences to operate in China, but officials claim their applications are inadequate.