Reforms won’t put China's bank sector under foreign control

By Lian Ping Source:Global Times Published: 2018/7/1 22:12:39

Illustration: Luo Xuan/GT


China is making further headway in pursuing comprehensive opening up. In December 2017, the country's banking regulatory body announced new opening-up measures. Among the new measures are eased limits on foreign ownership in all Chinese-invested banks and financial asset management firms except privately run banks, and the implementation of stake holding rules that allow for equal treatment for foreign and domestic financial institutions.

The opening up of China's banking sector at an accelerated pace has been positively received by the market at large. But there are concerns that greater opening-up might result in the domestic banking sector being regarded as a group of foreign entities, considering the experiences of some Latin American and East European countries. I would argue such worries are overblown. In light of the current situation of the banking sector, regulations concerning greater opening-up in the banking sector, and overall guidelines for financial sector development, the assimilation of domestic banks by their foreign peers is not supposed to occur in China in the foreseeable future.

Since the reform and opening-up 40 years ago, especially following the nation's entry to the WTO in 2001, the banking sector has seen an immense improvement in its overall strength. The Chinese banking sector's total assets reached $33 trillion in 2016, based on the exchange rate at that point, unseating the EU with total banking assets of $31 trillion as the world's No.1. US banks booked $16 trillion in total assets in that year, while Japan numbered $7 trillion.

The operational strengths of commercial banks derive from a combination of size and quality. Thus far, leading commercial banks in developed countries may still have an advantage in quality terms, but they no longer maintain an edge as measured by size. But for a country's banking sector to be controlled by foreign influence, it would be not enough for foreign-invested banks to just have a quality edge. A scale advantage appears to be more important instead. It's hard to imagine that a controlling stake for a bank can be gained without having a scale advantage. It's equally unimaginable that foreign institutions without an overwhelming advantage in terms of assets could play a dominant part in other countries' banking sector. In fact, what the banking sector in some Latin American and East European countries had experienced was an outcome of foreign investment's absolute or dominant strength. Certainly, foreign banks' advanced operational mindsets and management methods are one of the factors that boost banking industry development. Looking ahead, the possibility of foreign investment holding a controlling stake in some small- and medium-sized commercial banks in China can't be ruled out. Nonetheless, there is no chance foreign banks, comparatively weak in asset terms, can obtain a controlling stake in large State-owned banks or the whole banking sector in China.

Although the upper limit on foreign ownership in commercial banks has been lifted, the majority of the country's large- and medium-sized commercial banks are still controlled by State capital. The primary prerequisite for a substantial increase in foreign stake holding in Chinese banks is the ceding of controlling stakes by large State-owned shareholders. By the end of March, the combined stakes of the Ministry of Finance, social security fund, Central Huijin Investment Company and China Securities Finance Corporation (CSFC) in the Agricultural Bank of China and the Industrial and Commercial Bank of China stood at 84.48 percent and 72.68 percent, respectively. The combined stakes of the social security fund, Central Huijin and CSFC in the Bank of China reached 70.56 percent. Although State ownership is likely to gradually decline in the future, there's little possibility of it falling below 50 percent in the country's four largest State-owned banks, where the country is expected to absolutely keep a controlling stake. Even in the case of the Bank of Communications, which boasts a relatively diversified ownership, the finance ministry, social security fund and CSFC still hold a combined stake of 44.47 percent, 25 percentage points higher than that held by HSBC, the bank's next-largest shareholder.

Commercial banks with a national presence and city commercial banks operating regionally often have high levels of State ownership. It's often the case that investment firms representing local governments or State firms hold a large portion of shares in a multitude of city commercial banks. And local governments generally wouldn't easily abandon their control over local banks, taking into account fundraising needs for the sake of economic development. In recent years, investment firms led by local governments and various privately owned firms have also flocked into the banking sector. Against such a backdrop, buying into small- and medium-sized banks and particularly gaining a controlling stake is a difficult mission for foreign investment.

Per current regulations, foreign investors are required to get regulatory approval if their ownership in domestic commercial banks hits a certain level. Commercial banks are linked to the country's economic lifeline and are considered the most pivotal part of the financial sector. Under no circumstances will the country easily give up its controlling stake in large State-owned commercial banks. Meanwhile, the nation will hold its influence over the entire banking sector. If some smaller banks turn out to be controlled by foreign investment, there won't be an impact on the sector at large. The availability in the market of more small- and medium-sized banks that highlight foreign ownership will help in improving Chinese banks' corporate governance mechanisms and operational management. This will allow the banking sector to play a better part in serving the real economy.

The author is chief economist at the Bank of Communications in Shanghai.


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