Is China bank liberalization good news?

Thought of the day

The Chinese stock market barely took notice of the government’s decision to open up its financial services firms to foreign control by easing ownership limits. The foreign share of total bank assets in China has been trending lower for a decade – and dropped to a record low in 2016 of around 1.4% – so a significant impact may be slow to emerge.

But the pace and scope of the liberalization is faster than expected and could have broader benefits for the Chinese economy and financial system:

  • China’s concession on ownership rules reduces the threat of a disruptive trade conflict between the US and China. An opening up of financial services to foreign ownership has been a long-standing goal of US trade diplomacy.
  • The old minority control system effectively constrained foreign firms to an operator role. The prospect of majority control, either via existing joint ventures or by new firms, will allow foreign players to better control how their money is invested and deployed, increasing the incentive for Foreign Direct Investment (FDI).
  • At the margins, this has the potential to help reduce risks to China’s financial stability. A less state-oriented financial system with more active foreign involvement should lead to more efficient and less opaque markets.

So we view the liberalization as a welcome step in the opening up of China’s markets and further evidence of the government's commitment to reform, following the 19th Party Congress. We expect continued government efforts to gradually deleverage the financial system.

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