HONG KONG: China stunned the finance world last week when it unveiled plans to allow foreign control of its financial institutions.
Few bankers thought their long-held dream of better access to the world´s largest banking market was within reach. The likelihood, however, is that even fewer will rush to take advantage of that opening.
In theory, foreign banks will be allowed to take larger stakes in their Chinese commercial peers - currently capped at 20 percent - while investment banks will be able to take control of their securities joint ventures.
In practice, a combination of well-entrenched local companies and an opaque regulatory regime means global banks will move only very cautiously to exploit the new rules, bankers and lawyers said.
Besides its stringent ownership limits, China has for decades carefully controlled the range of activities open to foreign banks in an effort to protect domestic players, they say, and few expect that to change soon.
"Lifting shareholding limits is just one part of the problem, the bigger concern is whether the foreigners will get a level-playing field in the country," said a Beijing-based lawyer, who works with Chinese banking and securities regulators.
"The global financial industry has changed a lot in the last few years and there´s a lot more scrutiny happening on capital allocation, compliance and risks," he said, he said referring to bank managements.
"The impact of this move would have been very different four, five years ago. "Before the 2008 global financial crisis, many western banks took stakes in Chinese peers. But most of the banks were forced to sell them after the crisis as global regulators tightened capital standards.
The banks also found that their investments did not give them the solid foothold they had hoped for in China. Tighter capital regulations are also likely to curb interest this time around by making already costly acquisitions even tougher.
Since the
global financial crisis, "most foreign banks have refocused on home markets, serving key customers overseas and, for some, had to repair balance sheets," said Paul McSheaffrey, head of banking at KPMG.
With a 19 percent equity holding in Bank of Communications , HSBC, is one of the few global banks to still hold a substantial stake in a Chinese bank.
China´s banking system has also grown rapidly, along with the Chinese economy in the last few years. Ten years ago, foreign lenders held 2.4 percent of the country´s banking assets, according to KPMG.
In spite of those foreign-held assets growing at 20 percent a year for the past decade, today foreigners hold just 1.4 percent of what has become a 181.7 trillion yuan ($27.40 trillion) market.
Foreign entrants also face a banking market dominated by China´s big five state-backed lenders who themselves face a tough environment due to rising bad loans and the country´s hard-to-read regulatory regime.
"It would be very difficult for them to change the (business) landscape," said a banker with an European bank. The bankers and lawyers declined to be named due to the sensitivity of the issue.
The China Banking Regulatory Commission (CBRC) did not respond to a request for comment. One area with potential could be the securities joint ventures operated by big global investment banks in partnership with local players, industry insiders said. China has said banks will be able to raise stakes to 51 percent from the current cap of 49 percent, and that in three years, even those restrictions will be lifted.