November 14, 2017 / 8:10 AM / in a year

Fitch: China Foreign-Ownership Relaxation Not Yet A Game Changer

(The following statement was released by the rating agency) HONG KONG/TAIPEI/SINGAPORE, November 14 (Fitch) Relaxed foreign-ownership limits for financial institutions announced last week represent an important step forward in opening up the financial services sector to foreign investment, and may signal a rising government commitment to market-based reform, says Fitch Ratings. However, the relaxed limits are not yet a game changer, as substantial foreign inflows into the financial sector are unlikely without reforms to break down administrative and other non-tariff barriers that create an uneven playing field for foreign investors. Greater foreign ownership could potentially support improvements in governance and transparency. The authorities are planning to remove limits on foreign ownership of commercial banks and asset-management companies, which are currently set at 20% for single foreign investors and 25% for total foreign ownership. Caps on ownership of securities firms, fund-management companies and life insurers will also be relaxed to allow foreign investors to take a majority stake, and eventually full ownership. Timelines for most changes are open-ended and yet to be clarified. Foreign banks currently have a very limited presence in China's banking sector, notwithstanding their larger role in a few large cities and in cross-border activities. Only a few foreign banks still hold minority stakes in Chinese banks, with some divesting their stakes in recent years - due to operational difficulties and because organic growth prospects no longer justified the capital commitment. The scale of China's larger banks could be a constraint for potential acquirers, and it is not yet clear how the strategic benefits would compare against the costs. Joint stock banks vary in size, and only a few have an equity base that is smaller than USD15 billion. The more likely acquisition targets in the banking sector would be the relatively smaller city commercial banks or rural banks. However, these banks also face challenges that will factor into a foreign bank's decision on whether an acquisition makes good strategic and business sense. For example, they tend to have higher concentration risks due to their narrower geographical presence. Profitability pressures on these banks are also stronger than in the broader banking sector. Fitch expects system-wide net profit growth to stay in only the low-single-digits in 2018, as loan growth has slowed, funding conditions have tightened, and the sector continues to face lingering asset-quality issues. The smaller banks have also, in general, been the most active in shadow-banking activities that are now being pushed back on-balance-sheet by tighter regulation - a process that is consuming bank capital. Some are currently trading at below book-market valuations, but potential acquirers would also need to consider the extent of these off-balance-sheet activities. Foreign investment could help with their recapitalisation, which may have been a motivating factor behind the relaxation of ownership rules. In the non-bank sector, foreign investors would face operational challenges associated with regulatory uncertainty and a lack of transparency, which could deter acquisitions. Pricing competition is also intense, particularly in the brokerage and underwriting segments, where brokerage commission rates have fallen to less than 3bp. Moreover, business relationships tend to be important to winning institutional business, which could represent a practical hurdle for potential foreign entrants. China's life insurance sector could prove more attractive to foreign acquirers, given the industry's low penetration rate and growth potential. An experienced international operator could bring expertise in product offering, distribution and balance-sheet management. However, the small life insurers that are the most likely acquisition targets usually focus on low-margin products sold through bancassurance channels. Market competition is also high. Foreign investors would most likely need to make a long-term commitment and a large capital investment to establish meaningful scale and profitability. Contact: Grace Wu Senior Director Financial Institutions +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Sabine Bauer Senior Director Financial Institutions +852 2263 9966 Jonathan Lee Senior Director Financial Institutions +852 2263 9951 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 . Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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