Caixin Insight: Foreign Firms Move In on China’s Financial Sector

BlackRock and JPMorgan benefit from financial opening

Last week, regulators gave a joint venture formed by BlackRock and a Singaporean sovereign wealth fund approval to hold majority stake in a newly established business based in Shanghai. It is the latest step that China has taken to open up its financial sector to foreign firms since late 2019, when regulators announced they would scrap the cap on foreign ownership in the financial industry. BlackRock will become one of the first finance heavyweights to get their hands on the country’s $13 trillion wealth management industry.

The move came a few days before JPMorgan Chase became the first company to have a fully foreign-owned futures business in China after winning approval from the securities regulator in June. On Tuesday, Shanghai International Trust Co., JPMorgan’s Chinese partner, announced the sale of its 49% stake in China International Fund Management for $1 billion. JPMorgan also increased its stake in China International Fund Management from 49% to 51% in early August.

News from the central bank

China’s central bank will not expand credit support measures for small businesses to cushion the impact of the coronavirus pandemic, according to a top People’s Bank of China official at a Aug. 20 press conference, but did emphasize the importance of maintaining support despite the fact that the bad loan ratio is approaching a “tolerance limit” set by the China Banking and Insurance Regulatory Commission (CBIRC).

In June, the central bank and Ministry of Finance set up a special purpose vehicle (SPV) to channel $63.6 billion in funds to regional banks so they could provide new loans to small businesses. On Thursday, regulators announced that they had no plans to enlarge the scale of the SPV because the tool had already provided enough support and the economy was returning to normal. This is generally in line with the PBOC’s recent monetary policy stance, which was described by Sun Guofeng, head of the monetary policy department, as “normal,” “steady” and “flexible.” As the Covid-19 crisis gradually comes under control and the economy starts to bounce back, the PBOC is tapering down its “emergency support” measures. The SPV is one of these emergency measures.

Meanwhile, the outstanding value of inclusive nonperforming loans (NPL) to small and micro businesses reached 400 billion yuan at the end of June, up by 9.25% from the start of the year. The surge in bad loans was anticipated by regulators, who have instructed banks and other financial institutions since the start of the year to extend repayment periods for small businesses and individuals in financial difficulties. The CBIRC has warned several times this year about an upcoming rise in bad loans, and it addressed in a Saturday statement the necessity of maintaining the current credit support for small businesses as credit risks are “generally under control.”

Ant Group’s IPO

Ant Group, the Chinese financial-technology giant controlled by billionaire Jack Ma, filed for its long-expected initial public offerings Tuesday in Hong Kong and Shanghai, though the filing did not make public its share price range or the amount the company intends to raise.

It’s worth noting that Hangzhou-based Ant Group said it will issue new shares accounting for at least 10% of the total following the concurrent IPOs. But multiple sources told Caixin the company would like to sell about 10% of its shares in the Shanghai listing and another 5% in the Hong Kong listing. At a current estimated value of approximately $200 billion, that combined 15% stake could raise about $30 billion for the company.

Information published by the Shanghai Stock Exchange also shows that Ant plans to sell 48 billion yuan in shares on the STAR Market, suggesting the Hong Kong offering would take the major proportion at 92 billion yuan. The disclosure indicates that Ant focused on international investors as the published size of the offering is preliminary estimate, which would be subject to change.

Besides, according to the financial details Alipay disclosed for the first time, in the six months through June, Ant had revenue of 72.5 billion yuan ($10.5 billion), and its net profit surged more than tenfold to 21.2 billion yuan. The digital finance technology platform, which covers a wide range of services from online wealth management to credit to insurance, contributed more than 63% of Ant’s first-half revenue. The prospectus also reveals Ant’s exposure to risky lending. The ratio of loans overdue for more than 30 days was 1.56% of total outstanding loans in 2019, rising from 1.43% in 2018.

Xi’s political economy symposium

Xi Jinping hosted a symposium (link in Chinese) this Monday, bringing top officials and prominent economists and sociologists together in Beijing to discuss the upcoming 14th five-year plan. While the meeting was closed-door and individual comments have not been made public, the meeting has been prominently featured in state media. Xi gave a speech discussing six key takeaways:

- New opportunities and challenges should be viewed dialectically

- particularly challenges including rural-urban inequality and social issues, and navigating an increasingly complex international environment

- Building a new pattern of development requires smoothing circulation of the national economy

- i.e. the domestic half of dual circulation (see below)

- China must rely on indigenous innovation to achieve high-quality development

- i.e. taking control of key core technologies, and strengthening domestic R&D capacity

- Deepen reform to stimulate new development vitality

- i.e. continuing existing reform agenda including strengthening IPR, market competition, etc.

- Build new advantages in international cooperation & competition through high-level opening up

- especially in terms of

- increasing international cooperation, including at the state, local and enterprise levels in the U.S.

- balancing cooperation and security, and strengthening ability to regulate and control risks

- social development via “joint efforts and shared governance”

- this point was not made particularly clearly, but Xi called to improve social security and public health, address “social contradictions” and maintain social stability

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