Some grand gesture this is.
China leader Xi Jinping offered a hefty gift package to visiting US President Donald Trump: a lively tour of the Forbidden City, a series of trade contracts totalling $253 billion, and – not long after Trump left for Vietnam – a long-cherished move to offer wider foreign access to the world’s second largest economy.
China’s vice-finance minister Zhu Guangyao on Friday said foreign firms would soon be allowed to own up to 51% of brokerage and fund management ventures, in a move that would ease the long frustration of foreign investment banks over a limited or little control over their Chinese joint-venture business and is in line with Xi’s recent vow to further open China’s financial markets. What's more, the limits will be scrapped entirely after three years.
Beijing will also remove the 20% cap placed on foreign ownership in Chinese banks, according to Zhu, placing foreign investors on a level-playing field with their domestic counterparts. Now, a single foreign institution can own a maximum 20% stake in a Chinese bank, and no more than 25% in aggregate can be held by non-Chinese investors.
All the hurrahs from foreign financial institutions followed for apparent reasons, especially over the majority shareholding at Chinese JVs by foreign banks. JP Morgan, for example, which sold its Chinese JV stake last year and is trying to seek a new structure with which the US bank could eventually have 100% control in its China business, welcomed the decision in an emailed statement.
It’s not a surprising move at all, and one FinanceAsia has written about. But also as FinanceAsia earlier explored, will China really let outside investors get to the heart of its financial system?
Well, the second rule relaxation announced by Zhu seemingly offered some hope – after all, as the world’s largest by assets, China’s commercial banking system is undoubtedly the shiniest star in the country’s entire financial galaxy.
But to examine the practical significance of the move, we need to take a closer look at what banking assets are actually available for sale.
China’s state-owned commercial banks – namely the “big four” (Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank) and Bank of Communications – don’t need foreign money.
Credit rating agency Moody’s in July upgraded the outlook for China’s banking system from negative to stable, citing the fact “the Chinese government will remain a key shareholder of major banks and continue to be committed to providing strong support for the banks in times of stress”.
The largest banks are reasonably capitalised, to be fair. ICBC’s tier-1 capital ratio, for example, stood at 13.4% as of September, according to Capital IQ data.
|Tier 1 capital||13.40%||12.00%||11.20%||13.00%||11.80%|
“It is some joint-stock banks that are in need of cash,” said David Qu, China markets economist at ANZ and a former central bank official.
China Merchants Bank is fairly well capitalised among the joint-stock commercial banks in China, with a 12.7% tier 1 capital ratio for the third quarter. But Shenzhen-listed Ping An Bank, for example, only reported a 9.2% capital cushion for the quarter ending September 30.
And Postal Savings Bank of China (not one of the 12 joint-stock commercial banks), despite having the largest network and biggest retail client base in China, only reserved an 8.6% tier 1 capital cushion as of last December, Capital IQ data shows.
Moody’s last August pointed out a significantly faster pace of asset growth for Chinese banks outside the country’s big four, which suggested much of the asset growth was supported by wholesale funds rather than deposits.
“A rising credit risk among many mid-and small-sized Chinese banks is their deteriorating funding profile, a reflection of the fact that their usage of wholesale funds — in particular short-term funds — has been increasing in recent years,” the credit ratings agency noted.
The central bank also warned last year that should a mid-sized bank default, four or five other lenders would be wounded and more than 8% of the banking industry’s capital would be burned, Bloomberg reported.
China wants to recapitalise its poorly capitalised lenders, which is posing increasing systemic risks to the banking industry due to interbank financial products. And foreign investors could cater well to that need. The question is: do they have the kind of quality assets foreign investors pursue?
Due to home regulatory requirements on extra capital for minority shareholdings, many big foreign banks have sold off their Chinese bank stakes. HSBC is perhaps the only investor left standing – it still holds roughly 19% of BoCom, the British bank’s “flagship in China”, as outgoing chief executive Stuart Gulliver put it.
That aside, most foreign banks are not interested in commercial banking in China, Qu said, citing an already competitive market among banking peers as well as the increasing penetration by “non-bank” players such as tech giants Alibaba or Tencent. “It doesn’t make money” for foreign banks, said Qu.
“The scale of the leading local players is now so great that even with the financial sector thrown completely open to foreign ownership, home-grown institutions will continue to dominate the domestic market over the long term, much as they do in the US,” Gavekal Research said in a Monday report.
And finally, let’s not forget the fact that many Chinese financial institutions are already listed in Hong Kong. And foreign investors could simply buy the H-shares.
It's a grand gesture that foreign investors may not cherish...