 oreign companies expanded their presence in China's banking, insurance, and securities industries in 2002, thanks to World Trade Organization (WTO)-mandated liberalization. Of particular interest to foreign investors, China detailed schemes to allow foreign capital to invest in PRC listed companies and to acquire PRC state-owned assets. China's leaders evidently hope that these reforms will help transfer not just foreign funds but also foreign expertise, which, in turn, will help improve corporate governance of Chinese firms. At the same time, however, China erected frustrating new market impediments to foreign participation that threaten to undermine these goals (see Foreign Investment in China).
Within China's financial sector in 2002, the rise of consumer credit (see box) and the challenge second-tier players are beginning to present to the big four state banks were important developments. As for Chinese companies launching initial public offerings (IPOs), several were disappointed by low interest. Banking Foreign banks have moved quickly to take advantage of the new opportunities in banking that China agreed to provide in its WTO accession package. Foreign investment in foreign currency services was allowed upon WTO entry nationwide, and foreign and joint venture banks have received licenses along with domestic banks (see Table 1).The right to offer renminbi (RMB) loans to foreign companies and individuals has been expanded beyond the pilot programs in Guangdong and Shanghai--several Japanese and South Korean banks have been approved to provide RMB services in Dalian, Liaoning, and Tianjin.
At the same time, China is permitting foreign-funded financial institutions to establish only one branch per year and is demanding high licensing fees for each branch. China also proposed rules in late 2002 on interbank lending that threaten to restrict foreign banks' access to RMB. Foreign investment in China's collective and joint stock banks jumped significantly in 2002 (see Table 2). The World Bank's International Finance Corp. (IFC) continued to lead the way as a strategic stakeholder, announcing new investments in the Bank of Shanghai and the Bank of Xi'an. Citibank, a unit of Citigroup; HSBC; and Newbridge Capital Ltd. announced their acquisitions of strategic stakes in Shanghai Pudong Development Bank, Bank of Shanghai, and Shenzhen Development Bank, respectively. The joint-stock shareholding structure of these banks facilitates investment and provide investors with shares of significant regional and, in some instances national, networks. These second-tier, joint stock banks are appealing to foreign investors because they have less exposure to nonperforming loans.
PRC law is unclear on whether foreign investors can acquire more than a combined 25 percent equity stake in a single Chinese bank, particularly if some of that foreign stake is acquired via a public listing. The People's Bank of China (PBOC) is currently drafting a new "Rule on Foreign Equity Participation in Joint Stock Commercial Banks," which will likely clarify the maximum permitted foreign stake. SecuritiesNew fund management and investment bank ventures approvedChina in summer 2002 announced that it would begin approving joint venture securities companies more than two years before the WTO deadline for opening securities to foreign participation. China also relaxed restrictions on foreign investment in fund management firms. Only one securities joint venture won approval by the end of 2002, however. Credit Lyonnais Securities Asia and Xiangcai Securities Co. formed China Euro Securities Ltd., the third securities house allowed to engage in the full range of investment banking services, including underwriting RMB-denominated A shares. Morgan Stanley's venture with China Construction Bank, known as CICC, and the Hong Kong branch of the Bank of China's wholly owned subsidiary, Bank of China International, both existed before China's WTO entry. A raft of applicants is expected to file in 2003 as foreign partners solidify cooperative relationships forged in the run-up to market opening. Foreign investors also quickly solidified cooperation agreements for fund management operations. In October, Germany's Allianz AG and France's SG Asset Management won licenses for 33 percent stakes in ventures with Guotai Jun'an Securities Co., Ltd. and Huabao Trust and Investment Co., Ltd., respectively. Two months later, the China Securities Regulatory Commission (CSRC) approved two joint ventures. The Dutch-Belgian Fortis Investment Management holds a 33 percent stake in a venture with Haitong Securities Co., Ltd. ING Investment Management of the Netherlands holds a 30 percent stake in a venture with China Merchants Securities (40 percent) and China Power Finance Co., China Huaneng Finance Co., and COSCO Finance Co. (10 percent each). Companies negotiating with potential partners or still awaiting CSRC approval include JP Morgan Fleming Asset Management and Hua'an Fund Management Co., Ltd.; Franklin (Templeton) Resources, Inc. and Guohai Securities Co. Ltd.; and Japan's Daiwa Securities Group, Inc. and Shanghai International Group Corp. New openings for state share purchases China instituted two major reforms in fall 2002 that open the door wider to foreign investment in state-owned enterprises as well as in tradeable and non-tradeable shares of listed companies. The first reform lifted the 1995 ban on the transfer of non-circulating shares of PRC listed companies to foreign investors and lays out guidelines for M&A involving listed companies. Because about two-thirds of listed companies' shares are held by the government and not traded, the reform sets the stage for the sale of state assets to private investors on a significant scale. China issued a separate rule to govern foreign investment in unlisted SOEs. The second reform is the long-awaited, if only partial, opening of the RMB-denominated A-share market to foreign investors. CSRC, PBOC, and SAFE introduced in November 2002 a framework that allows foreign financial entities to apply for Qualified Foreign Institutional Investor (QFII) status. QFIIs will be able to invest via domestic trustees in A shares and to repatriate profits and principal, though they face a range of restrictions. The overvalued A-share market took a steep dive on the announcement.
InsuranceChina's insurance premium income leapt 44.7 percent in 2002 to reach $38 billion. Life insurance premiums grew most quickly, up 59.8 percent. China's top domestic insurance companies continued to restructure and announced plans to list in 2003. PRC insurers are also utilizing foreign expertise and investment. Last year HSBC Insurance Co. purchased a 10 percent stake of Ping An for $600 million dollars while Huatai Insurance Co. sold 22 percent of its equity to ACE INA companies in May 2002.The China Insurance Regulatory Commission (CIRC) issued licenses to 10 foreign insurers in 2002 and, in a positive trend, opened up the life insurance markets in Beijing and Tianjin and Suzhou, Jiangsu, a year earlier than promised. American International Group, Inc.'s AIA won wholly foreign-owned branch licenses in Suzhou and Beijing, while the United Kingdom's Standard Life was approved for a Tianjin venture with partner TEDA Investment Holdings Co., Ltd. Other US licensees in 2002 included CIGNA, which was approved to open a Shenzhen joint venture with the China Merchants affiliate SDZ Investment Consulting Co., Ltd., and Liberty Mutual, which won a wholly foreign-owned branch license in November. TransAmerica, the US subsidiary of Dutch insurer ING, was also approved to establish a joint venture life insurance company with the Beijing Capital Group in Dalian.
A trend begun in late 2001 continued in 2002 as seven foreign insurers pulled out of China when September 11-related settlements began to take their toll on the industry and inflated expectations for the China market were punctured. Only Germany's property and casualty insurer Gerling disbanded its China operations entirely. Japan's Dai-Ichi Life and Meiji Life, and American firms Lincoln National and St. Paul Fire and Marine closed their representative offices, as did Swiss life and property and casualty insurer Zurich Insurance Co. CIRC started off 2003 by approving the first full foreign-invested brokerage license in the form of a joint venture between Aon Corp. and China National Cereals, Oils, & Foodstuffs Import & Export Corp. (COFCO) in Shanghai. Two reinsurance companies, Swiss Re and Munich Re, received CIRC approval to establish wholly owned branches in China, though CIRC has not officially approved either operation.
CIRC issued several new regulations directed at foreign insurance companies in early 2002. While the rules codify China's WTO commitments, they create additional problems for market access. One issue is the amount of investment required to establish insurance ventures, which is well above that of any other country. Some foreign companies reported that CIRC was slow to process their applications. And CIRC still requires nonlife insurance companies to establish national subsidiaries before they can set up branches and sub-branches. China's National People's Congress amended the 1995 Insurance Law in October 2002. The revisions, which took effect January 1, codify WTO commitments and allow insurers to offer short-term health insurance policies and to invest in other insurance-related enterprises. What to Watch in 2003A new bank regulatorProposals tabled in late 2002 called for a China Banking Regulatory Commission to be established as part of the government restructuring planned for March 2003. The plan would split banking supervision authority currently managed by PBOC. Reports from the central financial work conference in late January suggest that reforms could be delayed until the assets of the big four banks reach a level of quality that would allow more uniform enforcement of capital adequacy and other regulatory requirements. New leadership of insurance industry The CIRC leadership changed in 2002, perhaps signaling a move toward better supervision and transparency. Ma Yongwei retired and Wu Dingfu assumed the top position. Wu is a former executive commissioner of the Chinese Communist Party Discipline Inspection Committee. Another strong new leader is Li Kemu, a vice director of the Central Financial and Economic Leading Group, who was appointed CIRC vice chair in May 2002. New IPOs A number of PRC firms are gearing up for listings in 2003. Air China, Beijing Capital Land, China Life Insurance Co., People's Insurance Co. of China, Ping An Insurance Co., SinoTrans, SOHO China Ltd., and Zhongxing Telecom hope to list abroad. CITIC Securities listed in January--the first Chinese securities company to go public since Hong Yuan in 1994. The massive Three Gorges dam also hopes to list via the IPO of China Yangtze Electric Power. Other power producers, such as Shanghai Municipal Electric Power, Shandong International Power, and Beijing Datang Power Generation, hope to list domestically following the completion of asset transfers in the wake of State Power Corp. reform. China Aviation Industry Corp. II (AVIC II) also plans a domestic listing.
Copyright 1996-2008 by the US-China Business Council Last Updated: 20-May-03 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
