China: Writing a Check for Financial Reform

4 MINS READNov 10, 2017 | 22:36 GMT
Forecast Update

In Stratfor's 2017 Fourth-Quarter Forecast, we wrote that China would pursue economic reform and attempt to steady its precarious financial system while mitigating the risk of external volatility. As the country continues to pursue economic reforms and foreign investment, a number of factors must be considered.

Just weeks after China's landmark Party Congress, the Chinese government appears to be rapidly opening its markets to showcase the country's commitment to reform. On Nov. 10, Beijing issued a blueprint for the long-awaited opening of its financial industry. According to the new rules, foreign companies will be allowed to own up to 51 percent of any joint venture in the "securities, funds and futures industries" and in three years will also be permitted to own up to 51 percent of joint ventures in life insurance. Following that, the 51 percent cap will be phased out after three and five years, respectively. In addition, Beijing has reportedly considered waiving the requirement for foreign-owned banks to operate for a minimum number of years before launching business in yuan and has considered removing restrictions on Chinese shareholders wanting to enter into joint-venture security firms.

China and the United States reportedly agreed on the blueprint during U.S. President Donald Trump's visit to China, where the leaders of both countries oversaw the signing of business deals worth up to $245 billion. Foreign investors have long complained about their restricted access to Chinese financial and insurance sectors, and now that Beijing is embroiled in the lengthy process of structural reform to balance the Chinese economy, the country has a growing need for foreign capital. More than just capital, China needs foreign expertise to ensure the market allocates that capital efficiently and hedges against systematic risks brought on by mounting debt and financial distortion. Although Beijing has long been considering greater openness, its plans were delayed over the past five years. Substantial overhauls to the banking, security and financial sectors under the auspices of its anti-corruption campaign, as well as attempts to further consolidate the country's sprawling financial industry, did little to speed things along.

Although the blueprint could encourage foreign financial firms to invest, the scope of that investment will depend on implementation. Even with fewer regulatory hurdles, foreign investments often still hinge on bureaucratic and industrial connections in China. In addition, China's banks and financial institutions are now so large and domestically dominant that foreign ownership of a few companies won't fundamentally threaten the market share of the country's state-owned behemoths. These factors could greatly diminish the impact of reduced regulation to China's financial systems.

Nevertheless, the proposed changes would be a significant step toward opening China's restrictive financial market. The proposal also sheds light on the future direction of the reforms to regulations for foreign businesses that Beijing has promised to roll out over the next 5-10 years. Recently, Beijing made the noteworthy announcement that the country would ease restrictions on foreign investment in the country's electric vehicle industry by June 2018. Chinese officials additionally promised that foreign companies would no longer be required to turn over technology to gain access to the Chinese market and highlighted the service, the transport and other industries as opportunities for greater openness.

None of this progress will move fast — if it comes at all — and Beijing will calculatedly leverage new openings to fit the country's domestic transformation. Five years of broad consolidation to China's industrial and political power has served to ease obstacles to reform. Because of this, demands and expectations are high for the country to move forward with many politically challenging structural reforms that are imperative for China to achieve economic balance.

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