Within Acceptable Limits

By+Lan+Xinzhen

‘Foreign investors will be allowed to own up to 51 percent of shares in joint ventures in securities， funds or futures， and this cap will be removed after three years； the 20-percent cap on a single foreign investor holding shares of a Chinese bank or fi nancial asset manager will be eased； and the 25-percent cap on several foreign investors holding such stakes will also be relaxed. After three years， foreign investors will be allowed to own up to 51 percent of shares in joint ventures in life insurance， and this cap will be removed after fi ve years.”

As the meeting between the state leaders of China and the United States wrapped up on November 10， Chinas Vice Finance Minister Zhu Guangyao made these remarks on the much-awaited step to widen foreign investors access to the Chinese mainlands fi nancial markets at a news briefi ng in Beijing.

On the opening up of its financial markets， China has long been prudent. China stuck to orderly and conditional opening up policies when negotiating for World Trade Organization （WTO） membership. Infl ux of foreign investment bringing risks to the healthy development of the national economy was the major concern for China， whose modern fi nancial industry on the mainland has not existed long. Since the founding of the Peoples Republic of China in 1949， securities， funds， futures， and insurance have only been created and developed on the Chinese mainland since 1978. Compared with those of developed nations and regions， the Chinese mainlands financial industry lagged behind due to its underdeveloped systems and weak risk management abilities.

But there was improvement in Chinas financial sector. After entering the WTO， China adopted modern company governance structures in its fi nancial companies. Still， no one is clear about the Chinese mainlands ability to fend off financial risks， as it has never been tested in the modern era. No major financial crisis like those that have occurred in Western countries has ever happened in the Chinese mainland in modern times. Chinas fi nancial sector remained resilient in the face of crises such as the Asian fi nancial crisis in 1997 and the world fi nancial crisis in 2008. But imagine if crisis came from the inside， especially when the nation is opening up its fi nancial markets. How would China respond to that？

It is safe to draw the conclusion that risks in Chinas fi nancial sector are controllable after a review of regulations and the recent history of the Chinese mainlands fi nancial industry.endprint

China reformed its state-owned banks by establishing modern company governance structures for them before the year 2000. In 2001， China joined the WTO. In 2003， China fi nished setting up shareholding structures in its four state-owned commercial banks， which marked the very beginning of the opening up of the Chinese mainlands banking industry， whose institutions have since enjoyed fast development. In global rankings， Chinas banks rank at the top by total assets and profi t ratios. In the worlds top 10 largest banks， China has fi ve. In 2016， the total assets of foreign banks were 2.93 trillion yuan， only 1.29 percent of the total assets of Chinas banking industry.

The Chinese mainlands capital markets kicked off with the establishment of the Shenzhen Stock Exchange in 1990. Now the total value of these capital markets is over 33.7 trillion yuan， making them some of the most infl uential markets in the world. Through the Qualifi ed Foreign Investment Institution （QFII）， ShanghaiHong Kong Stock Connect and Shenzhen-Hong Kong Connect schemes， foreign investors can access the Chinese mainlands capital markets. However， up to May 26， only 283 qualifi ed foreign investment institutions had attained a combined investment quota of $92.74 billion.

The Chinese mainlands insurance sector was primarily state controlled. Major foreign insurers on the list of the worlds top 500 companies set foot in the market beginning in 2001. But the proportion only grew from less than 1 percent that year to 5.19 percent at the end of 2016.

Judging from the scale of foreign capital in banking， stocks and insurance， we can say that it is impossible for toxic assets to upset the stability of the Chinese mainlands fi nancial sector from the inside out. Minor turbulence might occur， but is unlikely to become a major threat.

As China completely opens up the its fi nancial industry， the proportion of foreign capital will undoubtedly rise. However， there is no need to worry. China has already launched preliminary countermeasures targeting possible risks. In 2017， China convened its National Financial Work Conference and made overall arrangements for opening up the financial sector. China also established the Financial Stability and Development Commission of the State Council to conduct overall coordination of the supervision of the fi nancial sector.

With its control and countermeasure capabilities， China is ready to open the fi nancial markets to global investors. The change is required for building a socialist market system with Chinese characteristics. Global investors have long hoped to get access to the Chinas fi nancial markets. China is now preparing for it to happen.endprint