China agreed to open its market to foreign financial institutions when it joined the World Trade Organization in 2001. Photo: VCG

Foreign banks and insurance companies have now technically crossed the finishing line in their long march to be allowed greater market access in China after the State Council, the cabinet, formally announced revised regulations (link in Chinese) that relax restrictions on them doing business in the country.

The changes, which take effect immediately, are the culmination of almost two years of work by officials to fulfill pledges made by the government in November 2017 to open the financial sector wider to overseas institutions. The promises included scrapping limits on foreign shareholdings, which effectively gave overseas financial companies the green light to set up wholly owned entities or take control of joint ventures in banking, insurance, fund management and securities by 2021. Premier Li Keqiang announced in July 2019 that the deadline would be brought forward to 2020.

As flagged by central bank Governor Yi Gang in April 2018, foreign banks will now be allowed to set up locally incorporated wholly owned subsidiaries and operate them side by side with branches that belong directly to their overseas entities. Alternatively, they can set up joint ventures with Chinese banks while simultaneously running branches that are wholly owned by their overseas entities. Working capital requirements for foreign banks have also been relaxed and the type of business they can carry out has been expanded, allowing them to undertake the same business as their domestic rivals.

The revised rules on foreign-funded insurers also relax market-entry barriers, scrapping minimum requirements that stipulated the firms had to have operated a related business overseas for 30 years and had a representative office on the Chinese mainland for two years.

“The revisions are to fulfill the already announced opening up measures in the finance industry and to provide better legal support for further opening up the banking and insurance sectors,” Liu Fushou, the chief legal counsel of the China Banking and Insurance Regulatory Commission (CBIRC), said at a State Council briefing (link in Chinese) Tuesday to discuss the revisions. The commission will publish detailed implementation rules soon, Liu said.

Slow progress

China agreed to open its market to foreign financial institutions when it joined the World Trade Organization in 2001. Foreign life insurance companies, for example, were promised that within five years of accession they would be able to set up wholly owned units in China. But progress has been slow. It was only in November 2018 that the government gave the green light to the first wholly foreign-owned insurance holding company, a unit of Germany’s Allianz Group. Allianz has been operating in China through a joint venture with Citic Trust Co. Ltd., a trust arm of state-backed conglomerate Citic Group.

China’s reluctance to open the market stemmed partly from concerns that domestic banks and insurers wouldn’t be able to compete with their foreign rivals. But Liu pointed out that overseas banks currently account for just 1.64% of total assets of China’s banking sector, and foreign insurers hold just 6.36% of the total assets of the insurance industry.

As the government worked toward meeting its 2017 pledges, a series of draft regulations and policies were released. On July 20, the State Council announced a set of 11 opening-up measures for the financial services market including Premier Li’s pledge to scrap restrictions on foreign shareholdings in life insurance companies and securities companies in 2020, a year ahead of schedule.

In the wake of the proposed changes, many foreign financial institutions have been planning to take control of their joint ventures or set up wholly owned companies on the mainland. U.S.-based investment bank Citigroup Inc., is planning to set up a wholly owned securities business, Bloomberg News reported on Oct. 15, citing people with knowledge of the matter.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)