Financial sector optimistic on U.S.-China Phase 1 trade deal

Under the recent Phase 1 U.S.-China trade deal, China has agreed to expedite by nine months a previous December 2020 deadline for removing foreign ownership caps on securities firms, which includes investment banking, underwriting and brokerage operations.

The Phase 1 trade deal, signed by U.S. President Donald Trump on Wednesday, promises improved access to China’s financial services for the asset management, banking, insurance, payment and fund management sectors.

It aims to address a number of longstanding U.S. complaints regarding investment barriers to China’s financial sector, including opaque licensing processes, restrictions on foreign equity ownership, and discriminatory regulatory requirements.

“China is very eager to get more private funds to invest in the economy” to help fuel economic growth, said Andrew Collier, managing director of Hong Kong-based Orient Capital Research. He went ont o add, foreign financial companies are likely to struggle to corner a sizeable market share given the dominance of state-owned and private Chinese rivals.

According to the text of the Phase 1 deal, by no later than April 1, China will have to remove foreign equity limits and allow U.S. investment banks to participate in local securities businesses.

In 2018, cap on ownership on foreign investment banks in China securities joint ventures was lifted to 51% from 49%. for global investment banks, a lack of control and limited contribution to revenue have long been a source of frustration.

Morgan Stanley and Goldman Sachs are awaiting regulatory approval to raise their holdings to 51% in their China securities ventures; Citigroup also plans on setting up a wholly-owned securities business after agreeing in 2019 to sell its stake in its previous joint venture.

In December 2018, JPMorgan had got a final approval from regulators to set up a majority-owned securities venture.

Since years China has pledged to open up its financial services sector to more foreign companies.

“China has already been opening up its markets,” said a Beijing-based lawyer, who works with Chinese regulators. “The real test will be how quickly the applications and regulatory processes are handled.”

In July 2019, Chinese Premier Li Keqiang had announced that Bejing would expedite by a full year its plans to allow 100% foreign ownership in a raft of financial sectors.

In January 2020, China has scrapped foreign ownership limits in futures companies. A 51% cap on ownership in life insurance ventures was also removed this month.

Ken Bentsen, CEO of the Securities Industry and Financial Markets Association, who has previously been critical of China for failing to make good on previous promises to level the playing field, struck a cautious note on the U.S.-China Phase 1 trade deal.

“We will examine this agreement closely including what it specifically means for our members in terms of its implementation and enforcement,” said Bentsen in a statement.

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