Bank Regulation

Amid Push To Open China’s Financial Markets, Some Banks May Hesitate

Will China’s invitation get the party started?

Put a different way: If you open a country’s financial markets, will the (foreign) banks bring the capital?

News came last week that China offered up plans to let outside investors into its markets — allowing for stakes big enough to take control of that country’s financial companies.

But the rush to plant flags in the ground and snap up larger slices of banks, specifically, may be no rush at all.

Reuters reports that the current caps in place limiting the ownership percentage of Chinese banks that stands at 20 percent will be lifted. But before the (investment) deluge, a trickle. The newswire reports that “a combination of well-entrenched local companies and an opaque regulatory regime” mean that there will be cautious movement to take advantage of the increased access.

In one sense, there’d be a rebuilding going on. Consider the fact that the big players in Western banking, which had built up holdings in Chinese financial firms, had to sell their stakes in the aftermath of the 2008 financial crisis.

Capital requirements remain stringent, which means that there’s less money to tie up abroad. The newswire reported that one key player, HSBC, has a 19 percent equity investment in China’s Bank of Communications. The field is open, of course, as foreign companies have just 1.4 percent of the Chinese banking assets as a whole — a slice of the economic pie worth as much as USD $27.4 trillion.

Unnamed sources told Reuters that should foreign banks bring efforts to bear on China, the landscape is still dominated by five lenders who have the backing of the Chinese government. At the same time, the lending environment is marked by bad loans.

Yet a bright spot remains amid securities joint ventures (JVs), which link western (among them Citigroup, Credit Suisse and UBS) and Chinese banks. Opening financial markets means that these joint ventures can boost activities, such as sales and trading of various asset classes across equity and fixed income vehicles. If foreign firms are allowed to take over the day-to-day operations of these JVs, the ventures could be more tightly combined with global operations.

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