financial reform

China ups foreign ownership in stockbrokers

China sends an invitation to offshore investors as it allows foreigners to hold as much as 49% in a domestic securities firm.

Foreign investors will be able to own up to 49% in Chinese securities firms under a new rule introduced by China’s regulators.

The rule, unveiled in a statement from the China Securities Regulatory Commission (CSRC), lifts the limit on foreign ownership of securities firms from 33%, but still prevents them from taking control.

China, which once saw foreign capital as a threat and banned it outright, is slowly reversing course.

The shift is partly a response to the improved performance of China’s brokers, which were once considered a sorry mess. But no longer. The move shows that Chinese policymakers now have more confidence in the domestic securities firms’ ability to compete with foreign players. Up to a point.

China still wants domestic firms to have ultimate control over the joint ventures (JVs) with their foreign partners. At least one domestic investor must own a stake of no less than 49% in a securities JV, according to the CSRC statement, though the restriction does not apply to listed securities firms.

“This [49%] is all that foreign investors can get — there won’t be more,” said Fanny Chen, an analyst at Haitong International Securities. “China is opening the door to foreign investors, but it still wants to have control.”

Although overseas brokers are strong competitors, domestic brokers will continue to enjoy advantages in the retail sector, where they benefit from long-term relationships with local customers, Chen added.

Moreover, overseas securities firms can apply for permission to expand their operation two years after entering into China, cutting the period from the previous five years, CSRC said in a separate statement.

China has taken other steps recently to bolster its capital markets, such as directing the country’s top investment vehicles to support demand. And, since early this year, officials have been busy courting foreign capital.

It has also taken steps to reduce the barriers to overseas capital to make it easier for foreign funds to come in and support the domestic capital market, which has been weakened by the slowing economy.

Previously, foreign asset managers needed a minimum of five years’ operating experience before they could enter the local market, but that has now been cut to just two years. The minimum fund size has been slashed to $500 million from $5 billion.

Such moves are welcome news for foreign investors, of course, but also a source of worry. Is China’s financial system facing a liquidity crunch?

Until recently, the CSRC had been doing all it could to protect home-grown firms from foreign competition. In 2006, the commission suspended approval of new brokerage JVs altogether. Shang Fulin, chairman of CSRC at the time, said the ban gave the industry a chance to clean its house before opening to foreign competition.

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