China to remove foreign ownership caps on fund companies from April 2020

Written by

When it comes to financial reform in China, the devil's not in the details. It's in the implementation. When Beijing wants to enact change in the financial system, it can do so quickly. Consider the rise of fintech in China over the past five years. It's transformed the Chinese financial system. Unfortunately, foreign firms largely missed out on that opportunity. Paypal, who just got approval to enter China, is arriving a bit late to the party. Never mind that, say some observers. If only Paypal can get 3-5% of that market of 1.4 billion people, it will have a sizable business, they say. If only.

That brings us to the latest chapter in the Chinese financial reform saga. In early October, China’s securities regulator announced it would scrap foreign ownership limits on fund management companies from April 2020. Global asset managers would very much like increased access to China's massive $2 trillion retail fund market. This would seem to be their chance.

"CSRC will continue to implement China’s opening-up measures, actively boost the opening up of China’s capital markets and continue to approve the establishment and change of control of fund firms and securities firms, in line with law and regulations,” the CSRC said in a statement on its website.

In July, Chinese Premier Li Keqiang first mentioned that Beijing planned to lift on the foreign ownership restrictions on Chinese fund management companies as well as securities firms a year earlier than planned.

In fact, per its WTO commitments, Beijing should have allowed foreign asset managers to compete evenly with domestic fund companies beginning in 2006. China had a five-year grace period after entering the WTO in 2001 during which its financial services industry could maintain certain market barriers. However, once the deadline passed, and there was little pushback, Beijing kept the barriers in place.

As a result, local fund managers have had years to build up their businesses. Foreign firms have been limited to minority stakes in joint ventures. The foreign fund managers won't be able to just swoop in and dominate - as perhaps they might have, if they had been granted unrestricted access to the market 13 years ago.

At present, 20 foreign firms have joint ventures with Chinese fund managers, 9 of which are 49% stakes, according to Fund Selector Asia. They could move to increase those stakes once the restrictions are lifted.

“China’s announcement to bring forward the removal of foreign ownership limits on domestic securities companies to 2020 is a welcome development and will likely continue to help attract overseas capital into China’s stock and bond markets,” a spokesperson for JPMorgan Chase told Fund Selector Asia in July.