It is almost 11 years since the first meeting of the China-US Strategic Economic Dialogue in Beijing. The brainchild of the then US Treasury Secretary Hank Paulson, it covered a wide range of issues but one in particular was consistently pushed by the former boss of Goldman Sachs: opening up China’s financial services sector.
Last week Paulson saw that wish get a major step closer as China announced plans to phase out ownership limits on its financial firms.
The announcement was the final sweetener during President Trump’s trip to Beijing (see WiC387). Among all the $253 billion of deals to emerge from the visit, the news about the financial services sector may prove to be the most significant in the medium to long term.
In a research note HSBC described it as a “big bang in financial sector liberalisation” (the ‘big bang’ term is a reference to London’s deregulation in the 1980s).
WiC has discussed the disappointment of some foreign analysts about the lack of major economic reforms in President Xi Jinping’s first term (on the contrary, some elements of state capitalism seemed to be strengthened). Against that view were those who argued that Xi’s first five years were about consolidating power, before using his second term to unleash more dramatic reforms.
The proposed financial sector reform qualifies as more dramatic, and comes just weeks after Xi’s second term commenced.
So what has been suggested? Last Friday vice-minister of finance Zhu Guangyao revealed that foreign entities would be allowed to buy controlling stakes in brokerages, fund management firms and futures companies (currently equity ownership is capped at 49%). No timeline was given for when this would take effect, but it was stated that three years after the new rules were enacted, 100% foreign ownership would be permitted.
The cap on bank stakes will also be lifted from 20%, while ownership of life insurance companies will rise to 51% within three years and then to 100% in five (insurance being the only sector where a definitive timeline was announced).
Of course, change will happen at a pace Beijing is comfortable with. That being said, the direction of travel looks to have been set.
Policymakers will also have a pilot case to study as they contemplate the timetable. In June HSBC became the first major foreign player to win approval to set up a majority-owned securities company, taking 51% in HSBC Qianhai Securities. Admittedly the approval process took 20 months (Euromoney speculates this might have been partly down to delays caused by the securities regulator changing its chairperson three times). Furthermore the JV still cannot start actual trading until it receives new licences, which are still pending.
However, once these are granted the launch looks likely to be fairly swift as all the key management roles have already been filled and dozens of staff are ready to occupy the new Qianhai site near Shenzhen. Gordon French, HSBC’s head of global banking and markets for Asia-Pacific, told Euromoney: “We handpicked people internally who would move into this from day one, and we went and sourced from the outside. We wanted people who had done those jobs in other firms so we could learn from their experience, both mistakes and successes.”
For instance, the CEO-designate for HSBC Qianhai Securities is Irene Ho, an HSBC alumnus who was rehired from Ping An Securities, where she was CFO, COO and eventually president.
The chances look good that the brokerage will begin business next year, which will give policymakers a view on how a foreign majority controlled securities firm works in practice. However, as HSBC’s experience shows, those that follow may also run into a thicket of licencing issues. Ergo HSBC should have a two-to-three year lead on foreign rivals looking to emulate its Qianhai structure and take 51% control.
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