InAugust 2017, the State Council promulgated the “Notice on Several Measures for Promoting the Growth of Foreign Investment”. In order to deepen the supply-side structural reform, China will further lift admittance restrictions on foreign investment, expand the scope of market access and promote the opening up of banking, securities and insurance industries to the outside world, and clarify the opening-up schedule and road map.

At a briefing on the economic outcome of the Beijing Summit of Heads of China and the US held on 10 November 2017, Zhu Guangyao, the vice minister of finance, further clarified the specific information for further opening up of China’s financial industry: (1) to relax the restrictions on the proportion of single or multiple direct or indirect foreign investment in securities, fund management, futures companies to 51%, which, three years after the implementation of the above measures, will be limited no longer; (2) to cancel the restrictions that the foreign capital shall not hold more than 20% of shares of Chinese-funded banks and financial asset management companies individually and 25% collectively so as to implement the rule of consistent domestic and foreign banking equity investment ratio; (3) to relax the proportion of investment by a single or multiple foreign investors in the establishment of insurance companies carrying out personal insurance services in China to 51% three years later, which, five years later, shall not be limited any longer.

Previously, other than the arrangements for Hong Kong or Macau-funded financial institutions, financial institutions in mainland China have the following admittance restrictions on foreign investment according to regulatory requirements.

Chinese-funded banks. Share ratio restrictions: the investment of a single overseas financial institution and related parties under its control or joint control as a sponsor or strategic investor in a single Chinese-funded commercial bank shall not exceed 20%; and that of a number of overseas financial institutions and their related parties under their control or joint control as sponsors or strategic investors shall not exceed 25%. Relevant legal basis includes Measures for the Administration of Investment in Capital of Chinese-funded Financial Institutions by Overseas Financial Institutions, Notice of General Office of China Banking Regulatory Commission (CBRC) on Strengthening Audit of Qualifications of Main Shareholders of Small and Medium-sized Commercial Banks, CBRC Implementation Measures on Administrative Licenses for Chinese-funded Commercial Banks, and Guiding Catalogue for Foreign Investment Industries (Amended in 2017).

Joint venture life insurance companies. Share ratio restrictions: where foreign insurance companies establish joint-venture insurance companies in China with Chinese companies and enterprises, the proportion of ownership interest the foreign insurance companies directly or indirectly held in the joint venture insurance company of personal insurance services shall not exceed 50% of the total equity.

Relevant legal basis includes the Regulations for the Administration of Foreign-funded Insurance Companies, and Catalogue for the Guidance of Foreign Investment Industries (Amended in 2017).

Securities Companies. Share ratio restrictions: the proportion of shares held by or equity owned by overseas shareholders in foreign-invested securities companies in aggregate (including direct holding or indirect control) shall not exceed 49%, and at the same time, it shall be controlled by the Chinese party. Relevant legal basis includes Rules for the Establishment of Foreign-invested Securities Companies, and Catalogue for the Guidance of Foreign Investment Industries (Amended in 2017).

Fund management companies. Share ratio restrictions: the proportion of shares or ownership interest owned by foreign capital in a Sino-foreign joint-venture fund management company accumulated (including directly or indirectly) shall not exceed what has been undertaken by China’s securities industry in opening up to the outside world; and it shall be controlled by the Chinese party. Relevant legal basis includes Management Measures of Securities Investment Fund Management Company, and Catalogue for the Guidance of Foreign Investment Industries (Amended in 2017).

Futures Companies. Share ratio restrictions: the proportion of ownership or equity held by foreign investment in the futures company accumulated (including direct and indirect) shall not exceed what has been undertaken by China’s futures industry in opening up to the outside world or to Hong Kong, Macau and Taiwan; it shall be controlled by the Chinese party. Relevant legal basis includes Supervision and Management Measures of Futures Companies, and Catalogue for the Guidance of Foreign Investment Industries (Amended in 2017).

The adjustment of the above admittance restrictions on foreign investment will have a greater impact on the banking industry. In the meantime, the CBRC is currently soliciting opinions on the Interim Measures for the Management of Equity in Commercial Banks (Exposure Draft), the launch of which will further standardize the behavior of shareholders and improve the corporate governance structure of commercial banks, so as to consolidate system foundation for speeding up the opening of banking industry to foreign capital.

Foreign M&As. In recent years, cases of overseas shareholders reducing their shareholdings in Chinese-funded banks gradually increased. For instance, ANZ Bank sold its 20% stake in Shanghai Rural Commercial Bank. Bank of America reduced its investment in CCB, Goldman Sachs unloaded its shares in ICBC, etc.

The reasons behind the reduction may more or less be related to the 20% limit on the number of shares held by foreign shareholders to increase their speaking rights. After the round of relaxing admittance restrictions on foreign investment, Chinese-funded banks and financial asset management companies will implement the rules on the proportion of equity in the banking sector consistent for both domestic and overseas investment. The restrictions on the proportion of foreign investment in securities, fund management, futures companies and life insurance companies will also be gradually cancelled – so qualified shareholders will enjoy national treatment in the financial market and cooperation space for domestic financial institutions and overseas investors expanded.

Where overseas shareholders who previously reserved the term that “the proportion of the investment can be raised to the maximum amount permitted by the regulatory body at the time but not exceeding 51% of the equity” or similar terms in investing in Chinese-funded banks, the shareholding may be considered to be increased accordingly; however, the specific effect is still to be tested.

Jennifer Zhang is a partner and Hu Anran is a trainee at East & Concord Partners