Further Opening-up of the Financial Services Industry

HSBC

Executive Summary

China’s long-standing objective has been to create what President Xi calls “a moderately prosperous society”, and from there “a great modernised socialist country”. Reform and opening up has been the critical enabler of that vision, and fundamental both to China’s rapid economic transformation and its integration within the global financial system.

But while opening up has been integral to China’s past success, it’s arguably even more important to its future. As China enters the next stage of its growth, further reform is necessary to help the economy generate its own demand without the need for significant stimulus. This means boosting the role of the real economy, moving industries up the value chain and improving the environment for foreign investment. Further reform and opening up of the financial sector goes hand-in-hand with this.

Recent examples show the benefits reform can bring. The incremental opening up of the onshore bond and equity markets has started to increase foreign participation, and paved the way for China’s inclusion in global indices like the MSCI. Recent announcements about reform of state-owned enterprises, funding support for the private sector and steps to create a more level playing field within China are also all significant.

While China is the world’s second largest economy, in contrast, there is still some way to go in the further opening up of its financial sector. In recent years, China's overall business environment has improved significantly. High-level policy for opening-up the financial industry is largely in place; however implementation is now the key.

Drawing on various sources of feedback, including white papers from the European and American Chambers of Commerce in China, the common issues could be summarised as below from the perspective of market entry and market participation of foreign investment:

a) Even after the lifting of restrictions on market entry for foreign investment, promulgation of detailed rules and implementation plans does usually require time, and the approval process relating to some business licenses can be time consuming given the complexity.

b) Implementation of the opening-up policies of the financial services industry is still dominated by the “positive list” approach.

c) Financial regulatory framework should be more flexible; and the barriers for foreign investment participation should be reduced.

d) Coordination amongst different regulatory authorities in implementing policies needs to be strengthened.

Based on our observations of implicit and explicit institutional barriers to market access and market participation for foreign financial institutions, as well as operational obstacles and difficulties facing foreign financial institutions and their customers, the following four initiatives are proposed to the Chinese regulators and government authorities for consideration. These recommendations may be operational in nature, but would greatly aid in the actual implementation of policies.

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