Red Tape Cut for Foreign Financial Firms, but Is It too Late?

Chinese authorities have proposed measures that aim to level the playing field for foreign banks, but some wonder if they have come late to the game.

The China Banking Regulatory Commission (CBRC) said Thursday it plans to simplify the processes and requirements for foreign banks when they open branches, raise funds and invest in domestic counterparts. Also, foreign banks will no longer need pre-approval from the regulator to provide financial services such as wealth and asset management.

Thursday’s proposal contained details awaited by investors since Nov. 10, when Vice Finance Minister Zhu Guangyao announced the government’s intention to give foreign financial institutions greater access to China. The proposal follows a string of easing measures, including promises to lift foreign ownership restrictions on local banks and asset management companies, giving foreign banks more access to the yuan-denominated retail banking and bond business and allowing foreign companies to own a majority stake of joint venture firm in the securities, funds and futures industries.

The steps to further open China’s financial sector aim to not only bring in foreign investors’ expertise, but to allocate resources more efficiently and improve the market’s ability to fund the development of the so-called real economy — the part that produces actual goods and services. But industry executives say “implicit barriers” for foreign investors will continue to exist despite the new policies. Some say the change isn’t enough to make much of a dent.

China began opening up its financial sector 16 years ago as part of its entry into the World Trade Organization. Yet foreign banks account for just 1.3% of China’s 239 trillion yuan ($36.56 trillion) banking industry, down from 2.38% in 2007.

Foreign banks have struggled to gain a foothold in China partly due to lower-than-expected market access and increasingly aggressive competition from domestic rivals.

After the global financial crisis in 2008, foreign investors started to withdraw from their Chinese joint ventures. For example, New York-based Citigroup Inc. in February 2016 sold its 20% stake in China Guangfa Bank to China Life Insurance Co.

Regulators hope new rules will enhance competitiveness and internationalization of the domestic banking industry. But the amended administrative measures have been met with a lukewarm response from market participants.

There is a degree of wishful thinking in the new regulations, as foreign banks are not interested in expanding right now, the president of the Chinese operations of a large European bank told Caixin.

“It would have been better if the restrictions were lifted three to five years ago, but it is not too late,” he said, adding that he was hopeful the measures would help promote mixed ownership reform at some financial institutions.

Branch expansion is important to banks’ retail businesses, but the majority of foreign banks are focused on serving corporate clients, a veteran industry participant told Caixin. There are many foreign banks that have completely withdrawn from the retail banking market, which means the simplified process for creating new branches is of little significance, he added.

There are barely any banks on the list of top-10 shareholders of other banks, the industry veteran told Caixin, adding that regulators should open up investment in banks to other foreign institutions, and not just foreign-owned banks.

An employee at an American-owned bank told Caixin that the main role of foreign banks is in cross-border services. The president of a European bank agreed that “compared to the other revisions, perhaps lifting the approval process for overseas services has the most impact.”

Specifically, the measures call for foreign banks to submit reports rather than seek pre-approval for services such as overseas wealth management.

The measures also call for simplifying the process for opening new branches by no longer requiring an application for conducting preparatory work.

Fan Wenzhong, head of CBRC’s international department, said on Dec. 13 that the regulator will support more extensive and deeper foreign participation in the Chinese financial market’s development, to enhance competitiveness and internationalization of the banking industry. He emphasized three key tasks: more convenient and faster access, broadening the business scope and pushing for deeper participation of foreign firms.

By the end of November, foreign banks had set up 210 business entities in China, including 39 locally incorporated subsidiaries, according to the CBRC.

Contact reporter Liu Xiao (liuxiao@caixin.com)