China's Big Bang Bombshell: Beijing Opens Financial Sector To Foreign Ownership, But Why Now?

That was quick.

Trump leaves China (only to go back on the offensive about unfair trade practices in his APEC speech) and just hours later Trump's new Beijing friends announce that foreign firms will be permitted to take majority ownership in Chinese financial firms… well capped at 51% for now anyway. We doubt that this occurred out of the blue and was surely being worked on in the run-up to Trump’s visit. Furthermore, we suspect that Bloomberg’s Chief Asia Economist, Tom Orlik, had got wind of it ahead of time. In our preview of Trump’s visit (see “Will Xi Offer Trump A Small Victory On Trade As Cover For His Longer-Term Ambitions"), we noted this comment of his.

"In an optimistic scenario, Trump’s appetite for tweetable wins and China’s longer-term focus could coalesce around financial market opening -- a boon for the U.S. investment banks, and a support for China as it attempts to tame its credit boom," Orlik said.

Bloomberg is describing China’s move as “China’s Big Bang moment”, harking back to the deregulation of the London Stock Exchange in 1986, which permitted commercial and investment banks, both UK and foreign, to own brokers and dealers, all backstopped by deposits. Following today’s announcement foreign firms will be able to take a majority ownership in banks, securities brokerages (China’s term for investment banks), asset managers and life insurers. The chatter on the financial news networks this morning is beyond superlative, including comments such as “giant step”, “milestone”, “timing auspicious” and “the timing is conciliatory”.  In reality, it could be a giant headfake.

Here's Bloomberg.

China took a major step toward the long-awaited opening of its financial system, removing foreign ownership limits on its banks and asset-management companies, and allowing overseas firms to take majority stakes in local securities ventures and insurers. Regulators are drafting detailed rules, which will be released soon, Vice Finance Minister Zhu Guangyao said at a briefing in Beijing on Friday. Foreign firms will be allowed to own up to 51 percent in securities ventures and life-insurance companies, caps that will be removed gradually over time, he said.


China’s steps look poised to end years of frustration for foreign banks, who have long been marginal players in Asia’s largest economy. The announcement could be seen as a major win for U.S. President Donald Trump, whose first official visit to China was followed by a string of Sino-U.S. deals. On Thursday, China’s Foreign Ministry foreshadowed the latest moves, with a statement saying that entry barriers to sectors such as banking, insurance, securities and funds will be “substantially” eased. Those comments came following a meeting between Trump and his counterpart Xi Jinping.

On the surface, this is the most significant move to deregulate China’s financial system for a decade when foreign banks were allowed to set up minority-owned operations in 2007. Furthermore, the new regulations will remove the 51% cap in securities brokerages after three years. In the life insurance sector, foreign firms will be allowed to own 51% after three years with the cap being removed after 5 years.

Prior to this announcement, foreign banks had diverging China strategies. In a high-profile announcement last year, JP Morgan announced that it would sell its stake in the JPMorgan First Capital Joint Venture – a securities trader – due to poor profitability. In contrast, likes of UBS and Morgan Stanley have stated their intention to raise ownership in their joint ventures.

The South China Morning Post reported on the response to the news.

International banks doing business in China welcomed the news. “The Chinese government’s decision to allow foreign companies to take up to 51 per cent in securities joint venture represents an important step in further opening up China’s financial sector. China is a key market for UBS and...we continue to work towards increasing our stake in [joint venture] UBS Securities,” Eugene Qian, chairman of UBS’ China Strategy Board, said in a statement. Securities trading in China has been dominated by large domestic players, with the foreign banks’ joint ventures struggling to gain market share. In 2015, UBS Securities was ranked the best performing foreign joint venture among securities firms in terms of net profits, but was still 95th overall in the country, according to data from the Securities Association of China.

However, the ongoing internationalisation of China’s capital markets will provide an opportunity for the foreign players to help them overcome domestic competition. “Domestic players are already strong in areas like securities brokerages. However, with China’s capital markets opening up to foreign investors through the connect schemes, China’s securities brokerages might need more foreign strategic partners to help them better serve these new investors,” said Wang Cong, professor of finance and co-director of the centre for globalisation of Chinese companies at the China European International Business School.

The key question regarding China’s “Big Bang” moment is whether the motivation was mainly directed at placating Trump, who was always going to return to the trade issue, which had been a major part of his campaign. That was undoubtedly part of it, although Trump’s APEC speech in Vietnam in which he reverted to slamming China for its trade practices has probably caused some loss of face and irritation in Beijing.

However, what if it was more than that… and here we return again to China’s need to deflate its obscene credit bubble in an orderly fashion. No matter if we view it as a near impossibility. However, they at least need to try and outgoing PboC Governor, Zhou, has been warning of “Minsky’s moments” and “debt disguised as equity” in the last few weeks.

China’s credit bubble is far more fragile than most western investors want to acknowledge and the local authorities know this only too well. Consequently, we were impressed by these comments from Bloomberg’s Shuli Ren, who’s thinking along the same lines. Her angle, and China’s credit bubble is awash wish them, is non-performing loans and medium-sized banks.

China desperately wants to recapitalize its mid-sized joint-stock commercial banks, which it sees as posing systemic risks. Last year, the People's Bank of China said that if a mid-sized bank were to default, on average, four to five other lenders would also be affected and more than 8 per1cent of the industry's capital would be wiped out. Taking a look at 41 publicly listed Chinese banks shows that only the very largest -- Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and China Merchants Bank Co. among them -- are reasonably capitalized. Plenty of lenders, from Postal Savings Bank of China Co. to Bank of Jiangsu Co., are in need of cash. Except for China's largest banks, mid-sized and regional lenders are in need of greater capital buffers.

Ren speculates where foreign firms might be able to play a role in saving some of these banks.

The one area that may be of interest to foreigners is bad-debt asset management firms. Beijing has been urging lenders to set up soured-loan managers to conduct debt-for-equity swaps and offload unmet obligations. Pricing and restructuring bad debt, however, is so technical and tiresome that even China's two most prominent specialists, China Huarong Asset Management Co. and China Cinda Asset Management Co., have been busy earning their keep in the offshore high-yield corporate bond market. But, as I wrote in August, Beijing is serious about reducing corporate debt and establishing new asset-management companies for that purpose. Authorities want the firms to have a wide range of financing options open to them, from bond issues to private placements and perhaps even tapping interbank liquidity. Although China's capital markets are getting deeper by the day, more external expertise wouldn't go amiss. So far, only about 10 percent of the announced 1 trillion yuan ($151 billion) of debt-swap deals have been funded, in part because private-sector investors aren't interested. That's where foreign financial institutions should be turning their attention. There's business here for the taking.

We wouldn’t disagree, which that's why our initial reaction to the news last night was... skeptical.

To be sure, a foreign bailout masked as investment would certainly help, however, we share the sentiment that it’s probably too late.


cheka Stuck on Zero Fri, 11/10/2017 - 12:58 Permalink

i know the answer.  we just got sold out AGAIN.  the same old thing that's been going on with 'free trade'.  the foreign country gets our flyover-country jobs and 'we' get more access to their markets (ie bankster jobs).chump, instead of installing the tariff that he promised, cut a deal for the tens of thousands of manufacturing jobs were traded for hundreds of nyc bankster jobsfree trade bitchez 

In reply to by Stuck on Zero

Son of Captain Nemo Whoa Dammit Fri, 11/10/2017 - 08:15 Permalink

"China wants to scarf up the Saudi money before ((someone else)) does."

I think you nailed IT! And then promptly "DUMP IT" which anyone in their right minds would do to buy more oil and PM with it!!!

Ergo... PRC has been dancing on the "head of the pin" just long enough that they need foreign investment to keep the Mah-Jongg card game "goin"... That...

And because Xi's a fucking "pussy"!...

In reply to by Whoa Dammit

Batman11 Fri, 11/10/2017 - 07:47 Permalink

China’s central banker has just spotted the Minsky Moment on the horizon.The BIS spotted this about a month ago.I knew months before that, the less influential you are, the more likely you are to know what’s going on.I got it out of Steve Keen’s book “Can we avoid another financial crisis?”He saw 2008 coming in 2005 by looking here: wasn’t hard if you knew where to look (the FED didn’t).This is my sort of expert; he knows what he’s doing.On page 97 of this book you can see how bad things are for Chinas coming Minsky Moment, it’s bad they have let things really get out of control.China’s one real hope was its total control over its financial system.It’s just gone, oh dear.

Batman11 Batman11 Fri, 11/10/2017 - 07:48 Permalink

“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.That’s financial intermediation theory and it’s no good at all.The less influential you are, the more likely you are to know what’s going on.Monetary theory has been regressing since 1856, when someone worked out how the system really worked.Credit creation theory -> fractional reserve theory -> financial intermediation theory“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner’s better.

In reply to by Batman11

Endgame Napoleon Batman11 Fri, 11/10/2017 - 09:03 Permalink

I remember a ZH article from a long time ago, describing the problem with too many unsecured loans in China and a so-called expansion of American financial services jobs in places like credit processing to investigate those loans. It seems like Chinese speakers would get those jobs, but maybe not.

It was probably those financial “activities” jobs that raised the job numbers slightly one month for back-office mommas in $10-per-hour jobs like credit processing. The low-wage daycare worker job numbers arose in alignment with those hires, as financial services jobs are dominated by near-100%, non-college-educated, frequently absentee mom workers in the state where I live.

I do not see how this will change the job scene in the USA very much, and that is what concerns Deplorables about trade with China: JOBS, not stock market gains or ownership opportunities for the rich.

But maybe, the Chinese will hire a [lot] of foreign workers, not just a few highly paid experts in that field, married to other highly paid people, which will change the dynamics of the employment scene here very little.

As for the rich and their investments in foreign countries, it seems like ownership of unsecured loan bundles would be a recipe for another 2008, even if “bundles” of married, Chinese homebuyers are better bets than bundles of American, single-mom homebuyers with help from government to purchase homes they cannot afford due to their womb productivity.

During the housing collapse, which was close to a decade ago now, it was also made clear that Asian life insurance policies were a big part of the business of one of the bailed-out companies.


Knowing plenty of licensed insurance agents who struggle to cover rent here in the USA, I find that pretty interesting.

Without a large and responsible middle class in the USA to pay premiums regularly, licensed agents working in pyramid sales arrangements on straight commission, paying twice-as-high SS tax due to 1099 employment, with expenses for leads and other things, also must weather more cancellations than in past eras, when the mostly married, middle-class households in the USA were a much more stable clientele.

Now, we have a 62% out-of-wedlock birth rate and mommas, getting more pay-per-birth freebies from government than ever before in history—free rent, free food, monthly cash assistance, electricity assistance and child-tax-credit checks that, at the $6,269 max, equal four months of full-time wages in many insurance jobs. But they still do not provide a stable market for agents.

They would rather spend their $6,269 “child” tax credit checks on trips to Florida with their latest boyfriend than a life insurance policy to protect their kids. Although the few married households have two incomes to cover major expenses, like rent, they, too, are not the market they once were due to the same type of parent-pampering allocation of available funds.

Agents who actually made a decent amount of income for all of that effort and expense sold most of their policies in the pre-fake-feminist era, when jobs were more stable due to less humans with unearned income for womb productivity chasing jobs and driving down wages, to people who maintained them over time, possibly because parents had a greater commitment to their children when they made more sacrifices for them, rather than being showered with welfare, tax-code welfare and workplace privileges for sex and reproduction.

As the middle class decreased to a narrow sliver of the US population, shipped off to China and other countries, more policies cancelled. If you have ever worked in insurance, you know that it is often the first thing people drop when they experience a job loss or a pay downgrade.

These giant companies make straight-commission agents who also have zero company-provided benefits pay chargebacks when policies cancel.

Most of the companies staff corporate offices and call centers with almost 100% unlicensed moms, with one or two licensed signers. They pay the mommas between $9 ad $11 per hour, and many talk about receiving EBT free food, reduced-cost housing and child tax credits up to $6,269 that bridge the gap between low pay and living expenses for unlicensed moms selling insurance. Other mom-gang employees have spousal income or child support that covers their major household bills.

Insurance management talks openly about locating in areas where many such unlicensed moms, willing to work for beans due to their unearned income for womb productivity, live, and they indulge them with lots of excused absenteeism and frequent mom-bonding activities, like Halloween dress-up days and baby-mommy-look-alike-bulletin-board-decorating contests.

In other financial services, like credit processing, all the distraction of mommy-baby hoopla and absentee employees likely does not serve the interests of customers, seeking loan refinances, etc.

Meanwhile, agents who were told that licensing was a legal requirement for insurance sales pay recurring license renewal fees and take state-required test after test after test to get and maintain these licenses, while mom-gang workers sell insurance without licenses in many cases, when they are not absentee due to all of the back-watching gangs in “financial activities” offices.

On the sales side, with an upsurge in foreign business, I wonder if any of that will change to the benefit of those who jump through all those hoops to maintain the so-called legally required licenses.

Doubt it. It probably just gives the rich another place to invest their money, with a trickle down of jobs to the same ole groups.

In reply to by Batman11

Endgame Napoleon TheLastTrump Fri, 11/10/2017 - 09:20 Permalink

There is certainly no reward for hard work of any kind for most in America’s family-friendly workplaces. All of the reward structure tilts toward rewarding womb productivity, not work productivity.

Pelosi wants to tax your paid-off mortgage, reducing the value of hard work and responsible behavior, to give more money to single moms and immigrants with sole, male breadwinners to reward sex and reproduction on a per-child-produced-to-compete-with-robots-for-jobs basis.

This is an even worse situation than being taxed on a paid-off asset: being taxed on money you owe.

When my ex and I were struggling to pay a loan on a small Main Street shop, we were taxed on the loan, like it was income. We managed to pay the loan off, having little to show for it ourselves other than living on what we made and paying the bank, but it was just incredible to be taxed on a loan, like it was income.

It was a huge chunk of money going out the door every month, much more than the loan payments that most of these students complain about. The monthly payment was far bigger because it had to be paid back in 5 years, not over 30 years. All of that on top of twice-as-high SS taxes and all of the overhead.

In reply to by TheLastTrump

Son of Captain Nemo FX223 Fri, 11/10/2017 - 08:51 Permalink

And you'd still be better off owning that bridge in Beijing if they offered it to you than the one in Brooklyn!...

Nevertheless I agree with your overall assessment and the American "head" where money is ONLY to be spent because it has no store of value!...

Like India China really never recovered after Britain's "putting it in"! Kind of like the fat unintelligent rat in the wife beater t-shirt where "she" always comes back to him with the "black eye"!!!

In reply to by FX223

buzzsaw99 Fri, 11/10/2017 - 07:52 Permalink

those things are WORTHLESS!worse than worthless.  the books are a fraud.  gee that sounds like a really good deal.  maybe i can buy the aramco ipo and get double fucked on the same day.  i really like to get double fucked.  NOT!

buzzsaw99 Arnold Fri, 11/10/2017 - 08:26 Permalink

they will just take usa pension fund money and use it to bid up vancouver residential real estate.  whatever "investments" they get will go right out the freaking door with them and their families maybe to buy a house in your neighborhood with your money.

In reply to by Arnold

buzzsaw99 Arnold Fri, 11/10/2017 - 09:01 Permalink

i don't think the current administration would bail out the chicago teachers or calpers.  i could be wrong.  interesting angle though.  in that case it really would be our money taken by force.  that said, i don't care if the chinese steal from calpers et al and move into my neighborhood just not from me.

In reply to by Arnold

buzzsaw99 Salzburg1756 Fri, 11/10/2017 - 07:56 Permalink

the big state owned tbtf banks the chinese maggots will keep.  the tiny pecker up the ass with the rotten books, yeah, those you can buy.  a huge percentage of chinese loans go bad.  without fraudulent book keeping and state guarantees (or retard foreign investors) they would be out of business.

In reply to by Salzburg1756

Honest Sam TheLastTrump Fri, 11/10/2017 - 08:16 Permalink

How your or anyone can still waste their precious time watching the propagandists, day in and day out speaks more to the BDSM mentality of a too large a sector of the people.Turn the god damned propagnada off and save yourself countless aggravation, anger, hostility and depression.You'l thank me immediately. 

In reply to by TheLastTrump

truthalwayswinsout Fri, 11/10/2017 - 07:54 Permalink

LOL. Total B.S. Either you have free trade or you don't and your markets are open or they are not.If this is Trump's idea of free trade we need to get rid of him.All we have to do is get our allies and boycott China until they stop North Korea, and stop their expansion into the China Seas and open their markets to real and honest free trade.China doesn't want free trade because it will mean the end of the 30,000 plus Bernie Madoff Frauds in China right now and also would mean an end to the Communist party. A boycott would remove the Communist party in 60 days and destroy most of the fraud in China. It would end the North Korean regime as well.