China is reportedly considering implementing comprehensive changes to its securities industry. The changes would effectively enable foreign banks in the country to have greater control of their joint ventures and widen their stock offering.
China Is Considering Easing Restrictions on Foreign Securities Companies
If the changes are effected this year, foreign firms will be able to become majority stakeholders in local businesses and eventually, they may become full owners of these local ventures.
Chinese regulators are also keen on permitting foreign-owned joint firms to venture into other business activities beyond bond underwriting and stock.
Currently, overseas banks can only have 49% ownership. However, easing these restrictions will allow foreign banks to compete on an equal level with the local banks and other large equity market players in Asia.
At the same time, by broadening overseas participation, China will boost its securities industry. It has been more than ten years since leading industry players such as Goldman Sachs established a joint venture in China’s capital.
According to Edmond Law, an analyst at UOB-Kay Hian Holdings in Hong Kong, “This is a very significant move as it will incentivize foreign banks to invest more resources in China.”
Law further added, “With some control, the banks will now focus on establishing their own brand and deploy their own strategy.”
Following its admission to the World Trade Organization in December 2001, China eased restrictions on it capital markets. Consequently, the government compelled the local brokerage firms to enter into joint ventures with overseas banks in an effort to make the industry stronger and to eliminate corruption and mismanagement.
As a result, securities firms in China have seen their value surge as the country’s impressive economic growth boosted stock market. Higher stock markets saw a boom in trading volumes in Shenzen and Shanghai. At that time, local ventures that were backed by foreign firms were only allowed to engage in bond underwriting, trading and share sales and did not enjoy as much advantages as local securities firms.
Law of UOB-Kay Hian added, “The most effective way to expedite reform in its capital market is to let in more capital into the market. It may take some time before overseas firms can fully venture into the market, thus there is no imminent threat to local firms.”
When deciding how much a firm’s business mandate should be broadened, the Chinese securities regulator is likely to take into consideration how long a foreign company has been in operation. This approach would certainly be beneficial to the super-majors, UBS Group AG and Goldman Sachs, which have the oldest joint ventures with local Chinese firms.
UBS has been licensed to conduct A-share trading in Shenzhen and Shanghai while Goldman was allowed to establish a joint venture with local firm Beijing Gao Hua Securities Co. UBS was also permitted to establish a joint venture, two years before the Chinese securities regulator stopped overseas firms from entering the market.
On March 23, Chinese stocks closed the day on a high. Shanghai shares extended their winning streak, which has been witnessed for nine consecutive sessions. This comes after the bullish remarks made by the Chinese security regulator. The regulator’s spokesperson said there was a possibility that Shanghai A shares could be added to the FTSE and MSCI Inc. indexes.
The Hang Seng China Enterprises, mainland-China’s gauge rallied by 0.2% while the Shanghai Composite Index SHCOMP, rallied 2% and added to its recent increases.
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