Chump Change? The risks of Banking on financial sector opening in China

China has long assured others of its intent to open up its financial sector. While it has never been entirely clear what this means, many have expected China not just to let in more foreign companies, but also to let them hold greater ownership stakes in their China operations and conduct more lines of business. Not surprisingly, foreign companies salivated at the prospect of minting huge profits by offering services to Chinese firms and individuals. Changes in fall last year—examples include China’s authorization of majority foreign ownership stakes in banking, insurance, and securities, Germany’s Allianz receiving permission to set up a wholly-owned insurance company, and UBS AG’s authorization to take a majority stake in a mainland securities venture—led one consultancy to opine that China’s financial sector “opening is happening…at a much faster pace than most realize.” There are many possible reasons for China’s shift. It might have been banking that such changes would alleviate American reform pressures. It might have wanted to inject competition and better practices into the sectors. It might reflect a sense of confidence given the dominant position of Chinese financial institutions. These motives ensure some forward movement, but there is a stock of factors that will bond Chinese to a more illiberal stance. A critical one is the fact that the government exploits the financial institutions to achieve policy goals. A second is the view that the financial system is a security issue. A third is China’s sensitivity to financial risks. The currency of such risks means there will be added pressure to control the sector. Regardless, it remains to be seen, given past failed ventures, the risks of expanding in China, and so on how willing foreign firms will be to make a deposit on China’s financial sector opening even if it happens.