Foreign firms in line to benefit from CSRC reform plan

The China Securities Regulatory Commission has thrown its weight behind reform of foreign ownership limits and the pension system, and voiced support for the extension of mutual recognition beyond Hong Kong.
Foreign firms in line to benefit from CSRC reform plan

China’s securities regulator has announced a reform framework for the nation’s asset management industry that among other things stands to benefit foreign managers.

It covers 11 areas and addresses issues including mutual recognition of investment products, limits on foreign ownership of Chinese firms and long-term savings.

Importantly, the regulator indicated it supported the extension of mutual recognition to offshore markets other than Hong Kong. It is the first time the China Securities Regulatory Commission (CSRC) has said the scheme could be extended beyond its initial scope.

CSRC chairman Xiao Gang spoke about the mutual recognition of investment products between China and Hong Kong this April, as reported.

Shanghai-based consultancy Z-Ben Advisors said in a note that although the mention of including other markets could prompt some foreign mangers to rethink their business strategies, “there are simply too many unknowns for any manager to move aggressively at this point in time.”

The CSRC did not reveal an implementation timetable, although further details are expected this week.

The changes would increase openness and competition and benefit foreign managers, stated Z-Ben.

The announcement, the CSRC’s first public commitment to relaxing foreign ownership limits, comes as two foreign firms prepare to exit their Chinese joint ventures, with others expected to follow.

Earlier this month, State Street Global Advisors was reported to be selling its 49% stake in SSgA Fund, its mainland joint venture with partner Zhongrong Trust, just a year after it was set up.

SSgA’s decision to exit the partnership is largely because the partners cannot agree on the direction of the business, reported Chinese daily the Securities Times, citing people familiar with the matter.

The move followed reports that US financial services firm BNY Mellon plans to exit its mainland JV, BNY Mellon Western Fund Management, by disposing of its stake to Shanghai Leadbank, as reported. 

The exit, if confirmed, shows how the strategic value of mutual fund licences has diminished, suggested Howhow Zhang, research director at Z-Ben Advisors.

In 2010, Belgian financial group KBC sold its stake in its loss-making China JV KBC Goldstate Fund Management to Hong Kong-based Value Partners.

Z-Ben has forecast that the 49% cap on foreign ownership will be abolished. “Our outlook was for such a change to be made by mid-2016, but our predictions may actually have been too conservative,” said the consultancy, while cautioning that the liberalisation process won't be simple.

In the announcement late last week, the CSRC also said it supported expansion of the number of participants and size of quota for the qualified institutional investor (QFII) and qualified domestic institutional investor programmes as well as the Shanghai-Hong Kong Stock Connect link.

The CSRC also announced it would promote long-term savings programmes and reform of the country’s pension system.

Though reform is necessary to meet the demands of the country’s aging population, Z-Ben noted such a move would require consensus among at least six government agencies.

“If political capital can be spent and groups such as the State Administration of Taxation support the inclusion of real incentives to participate, then the outlook for asset management in China could potentially exceed even the most optimistic projections,” it said.

However, the consultancy went on to note that the framework constitutes guiding principles, and the timing of policy implementation is unclear.

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