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Cleanup Complete, China To Let Foreign Brokerages Back In

  • September 10, 2007
  • Maria Trombly

Chinese regulators will soon lift the ban on foreign investment in the country’s securities industry, a top official said Thursday. Foreign brokerages have not been allowed to invest in local companies or open joint ventures since September 2006, when the China Securities Regulatory Commission (CSRC) declared a moratorium while it enacted market reforms.

The cleanup of the country’s domestic brokerages is now complete and foreign firms will be allowed back in, CSRC chairman Shang Fulin told the World Economic Forum in Dalian, according to the state-owned Xinhua news service. Fulin did not say specifically when the ban will be lifted.

“China’s capital market, fueled by its booming economy, has made huge strides in the past few years,” said Fulin. “After the brokerage industry restructuring, the domestic securities companies have become more competitive” and a path to healthy development has been established.

“That is very positive news for foreign companies,” said Xinjun Xu, a spokesperson for the Beijing office of Tokyo-based brokerage Nikko Cordial Securities. “But there are no more details about this. We did not get the detailed policy yet.”

The CSRC did not say whether the previous ownership limits for foreign firms--up to 33 percent of an investment bank, or 25 percent of a brokerage--would remain unchanged. A handful of firms, including Morgan Stanley and Goldman Sachs Group, set up investment banking joint ventures before the ban went into effect. USB is the only foreign firm with a stake in a mainland brokerage.

Brokerages are eager to tap into the large--and rapidly growing--Chinese market, said Raymond Ng, director of operations at Hong Kong-based Dows Financial, which offers financial planning and investment banking services to investors in mainland China, Hong Kong, Taiwan and Japan. China has more than 1,500 listed companies, with a market capitalization of over $3 trillion. The country also has 17 trillion yuan ($2.25 trillion) in savings, according to China’s central bank.

But foreign firms that enter China through joint ventures or direct investment will encounter the same limits faced by domestic firms, said Ng. The Chinese securities industry is relatively closed--financial derivatives have still not received approval, for example. Outside of qualified institutional investor programs, domestic investors cannot buy foreign stocks and foreign investors are not allowed to buy Chinese stocks. There are also tight limits on cross-border currency flows.

According to Xingdong Chen, managing director and chief China economist at BNP Paribas Equity (Asia), new policy guidelines may be out in time for the third round of the U.S.-China Strategic Economic Dialogue in December. Thus far, however, it appears that China will simply return to the same foreign investment rules that were put in place in 2001. “We all know that does not work,” Chen said. “But how foreign investors will participate in fully licensed securities firms--that remains a big question. The CSRC has not made it clear how China would further open the securities industry.”

In May, during the second round of the Strategic Economic Dialogue, vice premier Wu Yi promised U.S. Treasury Secretary Henry Paulson that the ban would end in the second half of 2007. She also said that foreign securities firms would be allowed to expand their operations in China to include brokerage, proprietary trading and fund management. “This will create opportunities for U.S. firms and provide new competition and expertise in the Chinese securities industry,” said the Treasury Department in a fact sheet it issued after the meeting.

U.S. firms would like to see China go further. In June testimony before the House Financial Services Committee, the Securities Industry & Financial Markets Association (Sifma) urged China to let foreign brokerages open fully owned subsidiaries in China. Michael Decker, senior managing director of research and public policy for Sifma, said that China should “amend its process of developing and implementing domestic market regulations to be more transparent and fair.”

Added Decker: “Many of Sifma’s leading member-firms have identified China as the largest single emerging-market opportunity in the next few decades. Despite difficulties entering and operating in China, numerous U.S. securities firms have established offices in China and have participated in China’s international securities offerings.”

Eventually, the rules are likely to be relaxed, said Ng of Dows Financial, but not during the current phase of reforms. “I don’t think that [foreign firms] will be able to offer anything different at this stage,” he said. “That is easier for the government to manage.”

Chinese investors are not allowed to invest directly in foreign stocks, though they can put money in funds through qualified domestic institutional investor (QDII) licenses that allow for limited investment in foreign bonds and equities. Regulators recently expanded the QDII program--previously limited to pension, insurance and mutual funds--to banks and brokerages (Securities Industry News, Sept. 3).

According to Ng, foreign brokers in China will probably follow the path set by foreign banks, offering innovative marketing and service rather than new financial products.

Li Bin contributed to this report.

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