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China further opens up financial sector (VII)

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Since the Chinese government made a commitment to further open up China's financial sector at the Boao Forum for Asia (BFA) in April 2018, Chinese financial regulators have launched a series of policies to lower access barriers to China's financial industry (please refer to the previous Point of View reports in this series: China Further Opens Up Financial Sector (I) – (VI) for details).

On 1 May 2019, the Chinese Banking and Insurance Regulatory Commission (the “CBIRC”) issued a press release for an interview of its Chairman, Guo Shuqing. Chairman Guo announced plans for CBIRC to further introduce 12 new opening-up measures following in-depth research and evaluation of the effects of policies launched previously. The new proposed measures introduce substantive reforms directly touching core areas of the banking and insurance industries.

EY teams have long followed China's financial market open-up process, and in this Point of View report, we will analyze the impact of the 12 new measures proposed by the CBIRC. We also review and summarize the main achievements of the opening-up measures announced at the Boao Forum for Asia in April 2018 that have already been implemented to historically inform our predictions for further developments going forward.

Summary of the proposed new policy

The proposed new measures involve core areas of the banking and insurance industries, including:

EY - China further opens up financial sector (VII)

EY Insights and Perspectives

Observations on the implementation of opening-up policies show that the central government and major financial regulators have taken a positive attitude towards the opening-up of China's financial sector and fulfilled the commitment to opening up the market systematically. We believe that more favorable policies are expected to be introduced to support China's financial sector opening-up initiative.

1. Previously restrictive market entry thresholds create room for more favorable policies going forward

EY - China further opens up financial sector (VII)

Since China's accession to WTO, the financial sector has been subject to continuous liberalization efforts. However, since heavy restrictions have been in place for many years, the market share of foreign financial institutions in China is still lower than that of major developed economies and a majority of developing countries. As mentioned above, foreign banks control less than 2% of the total assets in the domestic industry, far below the 10% OECD average. Likewise, foreign-funded insurance companies in China hold a far smaller share of China-based assets than the 20% average seen in OECD countries.

We can refer to the services trade restrictiveness indices (STRIs) regularly issued by OECD to measure the extent of market opening. The STRIs take values between zero and one to score 45 countries using 5 identifiers, including restrictions on foreign entry, restrictions on the movement of people, other discriminatory measures, barriers to competition and regulatory transparency. Zero represents a perfectly open market, and one represents a market completely closed to foreign investors. In 2019, the STRI of China's commercial banks is 0.409, improving slightly from 0.410 for 2014, ranking 42nd among 45 countries, edging out only Brazil, Indonesia and India.

Comparison with other countries indicates that the decisive factor leading to high STRI on China's banking industry is the restrictions on foreign entry (Figure 3). Similarly, China’s insurance industry STRI of 0.444 ranked 43rd due to the same factor (Figure 4). Nonetheless, by introducing a series of initiatives for further opening up of China's financial sector, the STRIs of China’s banking and insurance industries are expected to improve significantly in the future.

2. Expectations on increased efficiency in issuing regional licenses to foreign banks and insurance companies

Many foreign-funded banks and insurance companies complain that obtaining a financial license is slow and often subject to various restrictions. Furthermore, the process must be repeated in every region that issues licenses valid only in its geographic jurisdiction. In our opinion, although setting strict requirements and capping the number of licenses to be issued can help control industry risk to a certain extent, these hurdles also suppress market vitality and hinder nationwide expansion by foreign financial institutions.

We observed that China's ongoing financial reform and opening-up has attracted attention from the international community, which we see as a tailwind for earlier implementation of the newly announced opening-up policies to accelerate the process of China’s financial market liberalization. It appears that the initiatives launched so far are just part of China’s efforts to drive successful financial sector reforms and opening-up, and the whole process is guided by ongoing improvement in response to market needs. We will follow up on subsequent implementation of these opening-up policies and analyze the impact on international and domestic markets.

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