China to Speed Up Pace of Opening Markets: Banks to Gain?

China plans to abolish all ownership limits for foreign firms in its financial sector by 2020, a year earlier than previously stated. The country is expected to further open its manufacturing sector, including the auto industry. Additionally, it will reduce its negative investment list that restricts foreign investment in some areas.

This move comes after the Presidents of both China and the United States recently decided to resume trade negotiations, in an effort to sign a deal. The U.S.-China trade war-related tensions have been having an adverse impact on the economies of both countries for the past few months.

In order to prop up growth internally, China has been taking some measures, of late. To aid credit growth (which has remained soft over the past few quarters) within the country, the People's Bank of China has already reduced the amount of cash that banks need to hold as reserve, six times since early 2018. Moreover, additional reductions in banks' reserve requirement ratios are likely to take place in the coming months.

While these efforts have helped its financial markets to grow, China has not been able to achieve significant economic growth as of now. For a long time, companies in the United States and other countries have been complaining that Beijing has been blocking foreign access to its fast-growing financial markets. Due to the restrictions imposed on ownership, global investment banks’ expansion has been limited in China for the past few years.

However, under the liberalized rules announced in 2017, China eased restrictions in its financial markets, allowing greater foreign participation. Indicating its readiness to allow greater access to global banks into the country’s financial markets, the China securities regulator allowed foreign companies to increase their stake to 51% in securities joint ventures, up from 49%.

In response to this, many foreign investment firms have either set up new businesses onshore or expanded their presence through majority ownership in domestic joint ventures. Notably, JPMorgan JPM and Nomura Holdings Inc. NMR have already received regulatory nod for setting up brokerage joint ventures in China, while Citigroup C is planning to establish a majority-owned securities joint venture.

Last December, UBS Group AG UBS became the first foreign bank to receive the regulator’s consent, since the rules on foreign investment in brokerages were announced in 2017.

Furthermore, Morgan Stanley MS, which has two joint ventures in China — Morgan Stanley Huaxin Fund Management Co and a securities joint venture with Huaxin Securities — seeks to acquire majority ownership of one of these. Recently, the Chinese partner of Morgan Stanley’s securities joint venture said that it is ready to sell 2% stake and Morgan Stanley has until July 29 to submit a bid.

Thus, once foreign banks are allowed to conduct business in China without any restrictions, it will help these banks in expanding geographically, which will boost revenues. Moreover, the current global operating backdrop looks challenging. Once foreign firms establish and expand businesses in China, it is likely to further support their financials.

Of the companies mentioned above, UBS Group AG and Citigroup currently carries a Zacks Rank #3 (Hold), while JPMorgan holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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