The Current State of Regulations
China’s bond market is the second-largest bond market in the world according to China Foreign Exchange Trade System, amounting to US$6.6 trillion issuance in 2018. Apart from US$0.5trillion in treasury bonds, all other bonds must be rated by a bond credit rating company before their official issuing. At the moment, only 11 companies can conduct corporate and inter-bank bondcredit rating and S&P China Ratingsis the only foreign credit rating institution who has the ability to carry out all-type credit rating business in the inter-bank bond market. Inter-bank bond issuance alone was worth US$5.7trillion last year, 86.4% of the total bondissuance, according to the People’s Bank of China (PBOC).
Beside bond credit rating, a vital pillar of the bond market, underwriting licenses are also important for financial institutions.Foreign players only hold 6 positions out of total 132 currently, 3 with Type-B lead underwriting license and 3 withunderwriting licenses, while all of the 41 Type-A lead, 23 Type-B lead, and remaining 62 underwriting licenses are in the pockets of top Chinese financial institutions.
The situation for pension management market is similar, which is dominated by Pillar II enterprise annuity fund management businesses. CCB Pension Management is the sole player in the market.
Foreign investment into currency brokerage also faces strict limita. At present, five leading overseas currency brokerage companies have invested in the five Chinese currency brokerage companies through joint-stock ownership.
The new 11 policies open the window for foreign companies to apply for an operatinglicense, which would be good news for institutions like S&P, Moody's and Fitch. The three rating agencies operate more than 90% of the world's sovereign ratings. The credit rating industry overseas is comparatively more advanced than that in China. When companies with a high reputation enter the market, bond issuers would be more willing to do business with them in the hope that their bonds will get an authoritative and reliable rating. In addition, with the Type-A lead license, the business of foreign-funded enterprises can expand to all-type debt financing instruments compared with previously debt financing instruments of overseas non-financial institutions only. Then they would compete against domestic underwriting institutions for the market fairly, further helping domestic companies issue bonds for fundraising from overseas.
At the pilot stage of the new policy mentioned by the CBRC, sound and reputable overseas wealth management institutions that are well recognized in the global market will be prioritized to enter the market, who may raise the fund wholly in RMB, or partly in long-term foreign currencies. It is conducive to introducing cutting-edge investment ideas, management strategies, incentive mechanisms, and compliance risk control frameworks from the industry in developed markets, which will further enrich the supply of financial products, no matter for insurance asset management or pension management.
Meanwhile, domestic pension management companies are still at the pilot stage. Based on a KPMG report, the total pension assets in China, including those managed by the government, climbed to US$1.64 trillion in 2017 and the number is predicted to quadruple by 2025. The measure opens the channel for foreign professional pension companies to step into this rapidly growing market.
The CBRC has shown a positive attitude to open currency brokerage. The new policy supports the Chinese and foreign shareholders of existing currency brokerage companies to decide the proportion of foreign ownership on their own through mutual agreement, giving full play to foreign shareholders’ management expertise to improve the operational efficiency. Orderly competition will be promoted in the sector with enhanced financial market transparency and transaction efficiency.
New opportunities and challenges
Since the promise of opening financial market in WTO, China has been on a slow path to put the commit into reality. For example, the very first joint venture insurance asset management company, ICBC-AXA,was just approved in May 2018.
On the other side,the demanding wealth market is looking for reputable service providers. It is estimated thatfinancial assets owned by domestic enterprises and individuals exceededUS$30.2 trillion. Only a quarter of the wealth is properly managed by domestic asset management institutions – US$7.9 trillion as stated in an interview with a vice president fromHuaxia Bank. The rest US$22.3 trillion are not systematically managed. People are more aware of the fact that it is in their best interests to have professional institutions take care of their wealth, but according to the CBRC, the existing asset management institutions in China could barely meet the fast-growing and diversified demands. Most of the Chinese banking and insurance wealth management companies, including their asset management subsidiaries, were only set up not long ago and are not experienced.
The opportunity to enter the promising market is good news for foreign financial institutions and investors. On the other hand, this will definitelyraise the awareness of how to make the most of the beneficial terms to really develop the business. While foreign players have the advantage of mature skills and experience, how to be localized will be a challenge for them.
Meanwhile, these 11 new rules are good indicators for future foreign investment in China, yet the specific conditions for each remain vague. Although many related organizations claim that they are working on the complementary regulations, we are not sure how long will the process be. In addition, will the delicate choice of words imply corresponding attitudes of Chinese government? For example, does “encourage” mean that the policy is more favored by the government compared with “permit”? To put it in a further step, will subsidies or tax preference go along with the encouraged policy? In general, we are looking forward to the follow-up news from China and keep excited for tomorrow.