China’s financial opening: Will it be different this time?

President Xi Jinping, in his speech at the 17th Boao Forum, announced plans to further open China’s economy. One of the key highlights of these new measures is the opening of the financial sector to foreign competition, which was confirmed by the recently-nominated governor of the People’s Bank of China (PBoC), Yi Gang. Although the official list of reforms is quite long, covering 11 different items ranging from relaxing foreign ownership in financial institutions to substantially expanding the business scope of foreign banks, most of the reforms had already been announced during President Trump’s visit to China last November or were scheduled to have been fulfilled after China’s entry to the World Trade Organization (WTO) in 2001.

It is obviously hard to judge whether China will indeed carry out a substantial opening of its financial sector, despite the significant external pressure it faces from countries such as the United States to liberalise its economy. The reaction of potentially interested investors to President Xi’s announced reforms has been muted. The only significant announcement came from UBS, which has secured a private-funds license, allowing it to start managing money for mainland institutional and high-net-worth investors in China for the first time. This licence allows foreign banks to set up a wholly owned onshore enterprise to offer fixed income, equity, and multi-asset private funds in China. However, UBS’ stand-alone securities investment had actually been in place months before the announcement of the opening up process in November 2017.

Governor Yi Gang offered more detail on the Chinese government’s plans for financial opening during a panel discussion at the Boao Forum, specifically regarding the banking, insurance, and securities and asset management sectors. He described the measures as “a prudent, cautious, gradualist move” towards reform. Firstly, China has provided a timeline for the elimination of foreign shareholder restrictions on banks and asset management companies, which will occur by June 2018. Compared to the announcement during Trump’s visit to China last year, President Xi’s speech came with an additional phrase that mentioned the Chinese government’s plans to substantially expand the business scope of foreign banks. However, it is still uncertain which type of business regulations will be relaxed. The market has speculated that the opening could include the credit card business, which is largely dominated by U.S. corporations globally.

Secondly, the opening of the insurance sector has been confirmed. The Chinese government plans to fast-track the progress of opening up by raising the foreign shareholder limit to 51% by June 2018, and eventually removing the ceiling after three years. This plan was originally announced during President Trump’s visit to China last year, including the provision to fully liberalise the sector within five years. In addition, foreign insurance companies will no longer need to have a representative office in China for two consecutive years prior to establishing a fully-owned institution.

Thirdly, the caps on foreign ownership in security, fund and future companies will be increased to 51%, without further limits after three years. This, also, had been previously announced. This time, however, Yi Gang provided further details on the removal of restrictions on the business scope of jointly-funded securities companies. This also includes the removal of any cap on foreign ownership of financial asset investment companies and wealth management companies newly-established by commercial banks. However, even though this looks like an immediate move towards opening up, a company that wishes to take a controlling stake in joint ventures is required to have a large net asset value of at least ¥100 billion, which is not practical for many corporations.

Of course, China clearly has a lot to gain in opening up the markets above. After the massive growth of bank balance sheets and the piling up of non-performing loans, Chinese regulators hope that the market (with Chinese characteristics) will do the cleaning up. This includes sharing the loss with different financial institutions, corporations and households. The massive securitisation that has occurred in China over the last couple of years would clearly benefit from foreign participation— even better if foreign players bring along foreign investors to share in the potential losses. Within this context, one should not be too surprised at the general lack of interest in the opening up of China’s financial sector.

If China’s moves towards financial opening did not soften the U.S. administration’s stance toward China after Trump’s visit last year, why would this year’s Boao Forum speech, containing mostly old ideas, be any different? The U.S. has officially declared its opposition to China obtaining market economy statusfrom the World Trade Organization. Now the stance of the U.S. on trade with China is increasingly strict, due to what the U.S. government perceives as significant issues, such as intellectual property theft and the “Made in China 2025” program, which threatens the U.S.’ comparative advantage in technology. Obtaining a couple of licenses to operate in China’s financial market will not palm off the United States government or the U.S. business community. The delegation of American trade and economic officials set to visit China in early May will likely demand negotiations over whether China’s opening up process can be sped up or extended to cover other sectors. Even though the speed of China’s financial opening has somewhat increased, it would be hard to expect an auspicious 2018 for the Trump-Xi relationship— probably the most important one on earth.