"Foreign investors will be allowed to own up to 51 percent of shares in joint ventures in securities, funds or futures, and this cap will be removed after three years; the 20-percent cap on a single foreign investor holding shares of a Chinese bank or financial asset manager will be eased; and the 25-percent cap on several foreign investors holding such stakes will also be relaxed. After three years, foreign investors will be allowed to own up to 51 percent of shares in joint ventures in life insurance, and this cap will be removed after five years."
As the meeting between the state leaders of China and the United States wrapped up on November 10, China's Vice Finance Minister Zhu Guangyao made these remarks on the much-awaited step to widen foreign investors' access to the Chinese mainland's financial markets at a news briefing in Beijing.
On the opening up of its financial markets, China has long been prudent. China stuck to orderly and conditional opening up policies when negotiating for World Trade Organization (WTO) membership. Influx of foreign investment bringing risks to the healthy development of the national economy was the major concern for China, whose modern financial industry on the mainland has not existed long. Since the founding of the People's Republic of China in 1949, securities, funds, futures, and insurance have only been created and developed on the Chinese mainland since 1978. Compared with those of developed nations and regions, the Chinese mainland's financial industry lagged behind due to its underdeveloped systems and weak risk management abilities.
But there was improvement in China's financial sector. After entering the WTO, China adopted modern company governance structures in its financial companies. Still, no one is clear about the Chinese mainland's ability to fend off financial risks, as it has never been tested in the modern era. No major financial crisis like those that have occurred in Western countries has ever happened in the Chinese mainland in modern times. China's financial sector remained resilient in the face of crises such as the Asian financial crisis in 1997 and the world financial crisis in 2008. But imagine if crisis came from the inside, especially when the nation is opening up its financial markets. How would China respond to that?
It is safe to draw the conclusion that risks in China's financial sector are controllable after a review of regulations and the recent history of the Chinese mainland's financial industry.
China reformed its state-owned banks by establishing modern company governance structures for them before the year 2000. In 2001, China joined the WTO. In 2003, China finished setting up shareholding structures in its four state-owned commercial banks, which marked the very beginning of the opening up of the Chinese mainland's banking industry, whose institutions have since enjoyed fast development. In global rankings, China's banks rank at the top by total assets and profit ratios. In the world's top 10 largest banks, China has five. In 2016, the total assets of foreign banks were 2.93 trillion yuan, only 1.29 percent of the total assets of China's banking industry.
The Chinese mainland's capital markets kicked off with the establishment of the Shenzhen Stock Exchange in 1990. Now the total value of these capital markets is over 33.7 trillion yuan, making them some of the most influential markets in the world. Through the Qualified Foreign Investment Institution (QFII), Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Connect schemes, foreign investors can access the Chinese mainland's capital markets. However, up to May 26, only 283 qualified foreign investment institutions had attained a combined investment quota of $92.74 billion.
The Chinese mainland's insurance sector was primarily state controlled. Major foreign insurers on the list of the world's top 500 companies set foot in the market beginning in 2001. But the proportion only grew from less than 1 percent that year to 5.19 percent at the end of 2016.
Judging from the scale of foreign capital in banking, stocks and insurance, we can say that it is impossible for toxic assets to upset the stability of the Chinese mainland's financial sector from the inside out. Minor turbulence might occur, but is unlikely to become a major threat.
As China completely opens up the its financial industry, the proportion of foreign capital will undoubtedly rise. However, there is no need to worry. China has already launched preliminary countermeasures targeting possible risks. In 2017, China convened its National Financial Work Conference and made overall arrangements for opening up the financial sector. China also established the Financial Stability and Development Commission of the State Council to conduct overall coordination of the supervision of the financial sector.
With its control and countermeasure capabilities, China is ready to open the financial markets to global investors. The change is required for building a socialist market system with Chinese characteristics. Global investors have long hoped to get access to the China's financial markets. China is now preparing for it to happen.
With its control and countermeasure capabilities, China is ready to open the financial markets to global investors
Copyedited by Chris Surtees
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