China deregulation will see increased interest from foreign investors

China's decision to ease restrictions on foreign ownership of financial institutions will likely pave the way for foreign insurers, fund managers and securities to invest in or compete with China's firms.

This is according to S&P Global Ratings, who suggested this is because insurers, as well as fund managers and securities firms, will likely attract more foreign capital and interest if China's pledged deregulation moves forward in a timely fashion.

Foreign investors will have less scope or interest in competing of investing in China's major commercial banks, in S&P's view.

"We believe foreign investors will have significant interest in acquiring small and midsize domestic Chinese financial firms or gaining control over existing joint ventures," said S&P Global Ratings analyst Eunice Tan. "In our view, some may also seek access through establishing wholly owned subsidiaries."

While there are no set rules on the liberalisation of China's financial system, the State Council has committed to relax or end limits on foreign participation in commercial banking, distressed-asset management, securities trading and broking, and insurance.

Foreign companies had previously been prohibited from owning majority stakes in financial sector companies and S&P expects that the shareholding restrictions on banks and distressed-asset managers will be fully lifted, while thresholds for investment in securities firms, fund managers, and insurers will be gradually phased out in the next few years.

In S&P's view, it is in China's interest to strengthen resilience in its financial system by opening the playing field wider to foreign competitors, which could usher in global best practices in governance, risk management, and operations. Further internationalisation is unlikely to displace domestic leaders, S&P said.

"Chinese financial institutions have a large lead and will continue to enjoy a home-field advantage. Foreign entrants will still rely on domestic franchise for access to customers and local knowledge. Moreover, domestic partners in existing joint ventures with international firms may be unwilling to dilute their stakes," Tan added.

S&P also expects that openings in China's insurance sector will attract the most foreign interest, in part because international investors will be advancing from a lower base. The 28 foreign-invested life insurance companies accounted for around 6.5 percent of the gross premiums written as of August 2017 (2016: 6.3 percent).

"Once foreign insurers have the scope to take controlling stakes, they will have a bigger say in areas of business strategy and risk governance. This could waylay earlier concerns around unaligned interests among shareholders in domestic-international joint ventures," said Tan.

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