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China's FS FDI opportunities

Opening up China's financial sector

The proposed easing of ownership limits in China’s financial sector has aroused great interest among investors eager to gain a greater share of the world’s second largest economy.

Following the November 2017 announcement, foreign financial companies and other interested parties are considering their next steps. This article looks at the changes and discusses the implications for investors.

A snapshot of the key changes

Securities, futures and fund management

Foreign investors will be permitted a 51 percent holding (up from 49 percent) in securities brokerages, futures companies and fund management companies. After a further 3 years, all such caps on investment are to be removed.

Insurance

The timescales for insurance are longer. In 3 years’ time, the cap on investment in and establishment of Chinese life, health and personal accident insurance companies increases from 50 percent to 51 percent, and will be completely removed after 5 years.

Banking and financial asset management companies

The caps on single and collective foreign ownership of Chinese-funded commercial banks and financial asset management companies (which are now mostly tasked with processing non-performing loans), which are currently at 20 percent and 25 percent respectively, will be removed. The rules that govern foreign and domestic investment in the banking sector will become the same going forward.

Evaluating the impact

These changes are likely to affect different parts of the sector in differing ways, and we expect a variety of responses as firms re-appraise their China strategies. See our full report for further details on:

  • Fund management companies
  • Investment management wholly foreign owned enterprises (WFOEs)
  • Securities firms
  • Futures companies
  • Life insurance companies
  • Banks
  • Financial asset management companies (AMCs)

Rethinking strategies

The various regulatory changes in the Chinese financial services sector offer some potentially exciting opportunities, which calls for a revised strategy based on a greater market presence. Any new joint ventures, for example, should focus on capturing commercial value, such as synergies between the two shareholders.

Traditionally, joint ventures have offered a route to gain a foothold in China, and partners chosen based on their contacts with key stakeholders and ability to help with licensing applications. In the new world of growth and value, foreign investors now need to select partners based on the strength of their customer base, distribution power, capital and brand.

When it comes to existing joint ventures, the foreign party may be tempted to be more assertive over the daily management, especially where the Chinese shareholder does not have a financial industry background. Foreign partners looking to increase their stakes should carefully assess what value they can bring to their Chinese partners beyond money, such as additional operational benefits.

Very few life insurers or securities firms have developed a China strategy based on a WFOE platform. But independence brings new responsibilities, and less reliance on Chinese partners to navigate the vast market or build initial critical mass. Building a WFOE is likely to be more challenging and resource-intensive, requiring a highly rigorous business and operating model.

China’s financial services industry is now approaching a point where all sectors will be fully open to foreign companies. Financial conglomerates that engage in multiple sub-sectors face additional coordination challenges. For instance, for a company with joint ventures in insurance, asset management and securities, there is no longer a regulatory firewall preventing it from conducting asset and wealth management businesses, which means they have to revisit their relationship with Chinese partners.

Success in China’s financial services sector will not be easy, and is dependent on a strategy that aligns the goals and operations across different sectors. Moreover, it is not just about foreign investors. Chinese players will also be affected by the relaxed rules. They may need to closely monitor the strategies of their international counterparts in order to adapt to a more challenging environment and compete with new foreign entrants.

How can KPMG help?

At KPMG firms, we think like investors, looking at how opportunities to buy, sell, partner or fund a company can add and preserve value. Our teams of specialists combine a global mindset and local experience with deep sector knowledge and superior analytic tools to help you navigate a complex, fragmented process. KPMG professionals can help with business strategy, acquisition strategy, plans for divestments or for raising funds.

Download the report or speak to one of KPMG's integrated specialist with global and on-the-ground experience

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