It allows foreign investors to hold up to 51% of total shares in a joint venture security company. Four days later, the first working day after Chinese Labour Day vacation, UBS Securities applied to taking control of its JV firm in China by increasing its original 24.99% share ownership up to 51%. Without a doubt, there will be more foreign-invested security companies to fill in their applications in the coming months.
The newly released regulation on foreign-invested security companies is one of the first steps for China to open its financial sector gradually. “Sooner rather than late, faster rather than slow”, following President Xi’s note about the plan to open the Chinese market, CSRC’s action is on full speed. The official measure came only one month after CSRC started gathering opinions and thoughts on exposure draft. There are 13 foreign-invested security companies in China at the moment, and 18 more are applying for their licences. What influences will the new law bring to the market when more security firms are controlled by foreign capital?
In a short period of time, the influence is limited. When more foreign investments came to the Chinese market, they will bring more experiences in management system and investment strategy. To certain extent, the competing ability of security firms will be improved. For foreign investors, more control on joint-venture firms can ensure their long-term strategy in China. However, because most of the foreign-invested security firms are small or medium sized, their impact towards the industry will be limited. Besides, many of the joint venture security firms only hold investment banking licenses without being able to develop a broker business. Together with the foreign exchange controls, the assets under management at these firms are much lower than at their Chinese competitors. Although the new measure allows foreign-invested security firms to apply for more licenses, the domestic security firms still have advantages in the amount of offline branches. It won’t be easy for foreign security firms to catch up due to the heavy working capital. As a result, the future challenge for domestic firms may only focus on services and product innovation.
In general, the new measure is a landmark event in the history of Chinese securities market. In the long run, the improvement on openness will help the Chinese securities market demonstrate more value worldwide. As the first response to China’s recent promises of openness, it has sent positive message for the further financial market opening, as well as reducing tariffs in auto industry. It may also impact the trade war talk between the U.S. and China.