Backtracking on reforms not an option for China

Foreign ownership reform in the Chinese financial sector is not only a landmark in the country’s opening up, but also a strategic move to rebalance US-China trade. But recent guidelines curtailing banking sector liberalisation appear to be a case of one step forward, two steps back for China. Now more than ever, Beijing must not let its caution around financial risk take over and undo its strategy.

  • By Noah Sin
  • 28 Nov 2017
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After years of waiting, Wall Street finally bagged a significant victory in China recently — the ability to own a majority stake in local financial sector players, from local banks to securities joint ventures.

The timing of the November 10 announcement — right after Donald Trump’s first visit to China as US president — was conspicuous. For the White House, this was perhaps the biggest win of the trip, dwarfing the $250bn of deals signed in Beijing.

China may have had ulterior motives. Alongside being a nice gift to the US administration, the removal of ownership caps could also be seen as a strategic manoeuvre by Beijing to bring US-China trade back into balance, as some analysts have pointed out.

Foreign participation in the Chinese financial sector will help widen the US services surplus with China — $37.4bn in 2016 according to the office of the US Trade Representative — which will in turn offset the deficit in goods, which stood at a much larger $347bn last year.

China’s decision came at a particularly opportune time given that foreign politicians, in Washington and Europe, are growing increasingly hostile to Chinese dealmakers.

According to a September report by the Committee on Foreign Investment in the United States, some 29 of the 143 transactions under review for national security concern in 2015 were acquisitions involving companies from China — more than any other country on the list.

Step backwards

But China has since followed up its liberalisation measures with an odd step.

On November 16, just six days after the reform was first announced, China Banking Regulatory Commission (CBRC) published draft rules that will require shareholders planning to own more than 5% of a Chinese bank to register with it for approval. Furthermore, the rules will forbid any entity from holding more than a 15% stake in any bank through investment pools such as funds and insurance plans.

These rules certainly make sense in the domestic context. CBRC’s rules are skewed towards rural banks which are in the process of transforming into commercial banks. The proposed changes could help diversify the investor base in these banks and improve the quality of capital, and are therefore credit positive for Chinese financial institutions overall, according to Moody’s.

But from the perspective of prospective investors in those institutions, the announcement tells a different story — of China opening up the financial sector on the one hand, while simultaneously demanding final say over who gets to own a Chinese bank. Perhaps the touted ‘big bang’ is not so revolutionary after all.

Not that the CBRC’s new veto power has taken foreign banks by surprise. Initial responses to the liberalisation were lukewarm at best, and China has a long history of slipping caveats (explicitly or otherwise) in its reform moves.

So while caution can be justified in a domestic context — where policymakers have expressed the desire to contain financial risks at all costs — they should also be aware that steps like the CBRC draft rules do little to bolster the confidence of foreign financial institutions in China’s intention to actually liberalise its market.

A more desirable approach would be for China’s leadership to swing the door wide open and champion globalisation in an increasingly closed world — a vision president Xi Jinping himself outlined in his Davos speech in January. If China really wanted to show its commitment to globalisation at a time of rising protectionist pressures, one way would be, for example, by exempting foreign financial institutions from the CBRC draft rules.

Xi’s new era begs for a new approach. The financial sector could be a good place to start.

  • By Noah Sin
  • 28 Nov 2017

All International Bonds

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1 Citi 239,928.76 921 8.16%
2 JPMorgan 222,471.63 995 7.57%
3 Bank of America Merrill Lynch 215,931.77 721 7.34%
4 Barclays 184,694.55 670 6.28%
5 Goldman Sachs 158,679.40 515 5.40%

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1 JPMorgan 32,522.19 61 6.59%
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3 UniCredit 26,992.47 123 5.47%
4 SG Corporate & Investment Banking 26,569.73 97 5.38%
5 Credit Agricole CIB 23,807.36 111 4.82%

Bookrunners of all EMEA ECM Issuance

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1 Goldman Sachs 10,167.68 46 8.82%
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3 Citi 8,202.25 45 7.11%
4 UBS 6,098.17 23 5.29%
5 Credit Suisse 5,236.02 28 4.54%