"Ⅰ. Further Opening-up of China's Financial Industry

On May 1, 2019, the website of the China Banking and Insurance Regulatory Commission(CBIRC) released a message. Guo Shuqing, Party Secretary of the People’s Bank of China(PRC) and Chairman of CBIRC, was interviewed by the media to answer related questions about the expanding opening-up of the banking and insurance industry. At the 19th National Congress of the Communist Party of China, President Xi Jinping gave instructions to make new ground in pursuing opening up on all fronts, and he repeatedly emphasized that the major measures of opening up on all fronts including the financial industry, should be implemented as soon as possible. Guo Shuqing said that the financial management departments shall resolutely implement the instructions and arrangements of the Central Committee and the State Council and continue to promote the opening up of the banking and insurance industry. After an in-depth study and evaluation of the 15 measures for opening up(the 15 Measures) in April last year, CBIRC recently proposed 12 new measures for opening up(the 12 Measures; or the New Measures).

The specific contents and related evaluations of the 12 Measures proposed by CBIRC were demonstrated as follows:

1. In accordance with the principle of consistency between domestic and foreign investment, the shareholding ratio ceiling of a single Chinese-funded bank and a single foreign-funded bank to Chinese commercial banks is cancelled simultaneously;

On June 8, 2018, CBIRC issued the Decision of the China Banking and Insurance Regulatory Commission on the Abolition and Amendment of Some Regulations(Exposure Drafts)(the Decision), the second of which canceled the limitations of the shareholding ratio for foreign investment to Chinese-funded banks that were stipulated in the Measures for the Implementation of Administrative Licensing Issues for Chinese-funded Commercial Banks. It also delated relevant provisions of the above-mentioned measures stipulating a shareholding ratio ceiling of 20% for a single overseas financial institution and its related parties as sponsors or strategic investors to individual Chinese-funded bank, and of 25% for multiple overseas financial institutions and its related parties.

According to Xiao Yuanqi, the spokesman of CBIRC, the difference between this measure and the Decision was that after the release of the measures last year, there was no shareholding ratio ceiling for eligible investors to large banks while there was a 20% shareholding ratio ceiling for eligible investors including major shareholders and strategic investors to small and medium-sized commercial banks such as joint-stock banks and city commercial banks.
 

The shareholding ratio ceiling for a single Chinese-funded bank and a single foreign-funded bank to joint-stock banks and city commercial banks was eliminated comprehensively this time. The shareholding ratio ceiling of a single Chinese bank and a single foreign bank to Chinese commercial banks was explicitly cancelled this time, which actually laid the foundation for the acquisition and merger among banks. Though foreign banks were partially involved in the process of restructuring, reorganizing, and listing of Chinese commercial banks, they gradually divested themselves of their holdings in Chinese banks because their shareholding ratio was too small to have a say in corporate governance and business operations. A lot of risks were brought about with the Chinese commercial banks, including city commercial banks and rural commercial banks developed by leaps and bounds. With regional financial risks further extended, perhaps some small and medium-sized commercial banks could not avoid mergers and reorganizations by large and medium-sized banks. The Regulations on the Disposal of Bankruptcy Risks of Commercial Banks, which is being drafted by CBIRC, has also paved the way for the advancement of this measure. In addition, the Interim Provisions on the Administration of Rural Banks(2007) clearly stated that the largest shareholder or sole shareholder of rural banks must be a Chinese or foreign banking financial institution, and the shareholding ratio of the largest banking financial institution shall not less than 20% of the total share capital of the rural bank. This proportion was adjusted to 15% by the Implementation Measures for Administrative Licensing Issues of Rural Small and Medium-sized Financial Institutions.

2. Cancel the capital requirements of 10 billion dollars for foreign banks to set up foreign-funded corporate banks in China and of 20 billion dollars to set up branches in China；

Article 10 of the Regulations on the Administration of Foreign Banks(2014) stipulates that foreign bank intending to establish an exclusively foreign-owned bank as the sole or controlling shareholder shall possess the condition that “the total assets at the end of the year prior to applying for the establishment are no less than 10 billion dollars”. Article 11 stipulates that foreign bank intending to establish a Sino-foreign joint-venture bank as the sole or controlling shareholder shall also possess the condition that “the total assets at the end of the year prior to applying for the establishment are no less than 10 billion dollars”. Article 12 stipulates that foreign bank intending to establish a branch shall possess the condition that “the total assets at the end of the year prior to applying for the establishment are no less than 20 billion dollars”.

In recent years, the number of exclusively foreign-owned banks and its branches in China has decreased significantly. The author knows that the total assets of 10 billion dollars and 20 billion dollars are “roadblocks”. Banks of America and Africa are already eager to try after the announcement of the New Measures. Of course, this measure does not mean lowering the regulatory standards for foreign banks. In the future, Chinese regulators will be more inclined to focus on the business professional capabilities, quality and efficiency of foreign banks in order to attract more foreign banks to operate in China and upgrade the diversification of China’s banking industry. Foreign banks of small-scale but having their own characteristics will inject new strength into the China’s banking industry.

3. Cancel the requirement of one-billion-dollars total assets for the overseas financial institutions to invest in the trust companies；

Article 9 of the Implementation Measures for Administrative Licensing Matters of Trust Companies(2015) stipulates that overseas financial institutions, as investors of trust companies, shall meet the following requirements at the same time: “the total assets at the end of the most recent fiscal year are no less than one billion dollars in principle”  and “single investor and its related parties may not invest more than two trust companies, of which no more than one absolute holding is allowed.”

Although the New Measures have cancelled the requirement of one-billion-dollars total assets for the overseas shareholders to the trust company, the specific types of “foreign financial institutions” are still not clear. In practice, the definition of financial institutions in China is strictly limited to financial institutions licensed by PRC and CBIRC. The controversy surrounding whether a local financial asset management company, a financing guarantee company, and a private equity fund management company is a financial institution has not been determined. It remains to be proved that an overseas financial institution shall be understood solely as a financial institution that has signed a memorandum of regulatory cooperation with CBIRC, or it shall cover the institutions approved by overseas regulators that have signed a memorandum with China Securities Regulatory Commission or PRC such as a securities company.
 

4. It’s allowed for overseas financial institutions to hold shares of foreign-funded insurance companies in China.

Article 2 of the Regulations on the Administration of Foreign-funded Insurance Companies(2016) states that foreign-funded insurance companies include: 1) joint insurance ventures that are invested and operated in China by foreign insurance companies and Chinese companies; 2) exclusively foreign-owned companies invested and operated in China by the foreign insurance companies; 3) the branch offices of the foreign insurance companies in China.

Therefore, foreign capitals, intending to join foreign-funded insurance companies in China, shall take the form of foreign insurance companies before the New Measures are officially implemented. After that, qualified non-insurance financial institutions can also hold shares of foreign-funded insurance companies in China, which not only enriches the financing sources for foreign-funded insurance companies in China, but also broadens types of shareholder. However, it is noteworthy that after the official implementation of this measure, the major shareholders of foreign-funded insurance companies in China shall remain insurance companies to ensure their professionalism.
 

5. Cancel the requirements for foreign insurance brokerage companies in China, which demand 30-years operation period and total assets of no less than 200 million dollars;

The legal basis for establishing foreign-funded insurance brokerage companies and their branches mainly includes: Insurance Law(2018), Regulations on the Administration of Foreign-funded Insurance Companies(2016), Implementation Measures on the Administration of Foreign-funded Insurance Companies(2018), Notice on the Issuance of China's WTO legal documents concerning the insurance industry(2002) and Insurance Brokerage Management Regulations(2015) and so on. According to the documents above, a foreign insurance brokerage company applying for the establishment of a foreign-funded insurance brokerage company shall meet the following conditions: 1) operating insurance business for more than 30 years; 2) having established a representative office in China for more than 2 years; 3) the total assets at the end of the year exceed 200 million dollars within 4 years after China's accession to the WTO; 4) the country or region where it’s located has a sound insurance supervision system, and the foreign insurance company has been effectively supervised by the relevant authorities of the country or region; 5) the relevant authorities of the country or region approve its application; 6) other prudential conditions stipulated by the China Insurance Regulatory Commission(CIRC).

On April 27, 2018, in order to further expand the opening-up of the insurance industry and promote its development, the 15 Measures issued by CBIRC mentioned liberalizing the business scope of foreign-funded insurance brokerage companies, which was consistent with Chinese-funded institutions. The New Measures further abolished the relevant requirements of the operation period and total assets for foreign insurance brokerage companies to operate insurance brokerage business in China.
 

6. Loose the restrictions on Chinese shareholders to Sino-foreign joint venture banks, and cancel the requirements that the Chinese sole or major shareholder must be a financial institution；

Article 11 of the Regulations on the Administration of Foreign-funded Banks(2014) stipulates that the Chinese sole or major shareholder of a Chinese-foreign joint venture bank shall be a financial institution. This article is aiming at Chinese shareholders in Sino-foreign joint venture banks, that is, the domestic non-financial institutions may also participate in Sino-foreign joint venture banks. China established several Sino-foreign joint venture banks at the beginning of reform and opening-up. However, after a period of honeymoon, some were reformed into foreign wholly-owned banks after the Chinese shares were wholly merged by the foreign capital(e.g. BNP Paribas China Ltd). Some were changed into city commercial banks after the foreign capital withdrew or transferred its shares(e.g. Xiamen International Bank and Ningbo Commerce Bank). The New Measures liberalizing the qualifications of domestic and overseas shareholders of Sino-foreign joint venture banks may ignite the wave of setting up joint venture banks in China.
 

7. Encourage and support overseas financial institutions and banking insurance institutions of private-capital holdings to carry out various types of cooperation in equity, business and technology;

In recent years, CBIRC has guided civilian capital to enter the banking and insurance industry. So far, it has approved the establishment of 17 private banks, but this is only a small-caliber of “private banks”. In essence, the number of bank insurance institutions controlled by private capital has exceeded 50%. Among them, the civilian capital of joint-stock banks, city commercial banks, rural commercial banks and insurance companies accounted for 43%, 56%, 83% and 49% respectively. The average proportion of social capital holdings to five large commercial banks listed in China or overseas reaches up to 30%, and some exceeded 40%. Most of the trust companies, consumer finance companies and rural banks are private capital holdings. Foreign financial institutions are full of enthusiasm for equity, business and technology cooperation with some private banks in China. However, the Guiding Opinions on Promoting the Development of Private Banks and Guiding Opinions of China Banking Regulatory Commission on the Supervision of Private Banks explicitly require that the shareholders of private banks should not include foreign-capitals components and that shareholders of private banks to bear the “residual risk”. Private banks should specify the institutions in the bank charter or agreement, indicating shareholders assume the residual risks, promoting shareholders to increase credit for the bank, and implementing the shareholder's responsibility in the bank's disposal process. This kind of demand similar to “unlimited liability” frustrates foreign capital. The New Measures have lifted the ban on foreign capitals joining private banks, but the problem of “residual risk” remains unresolved, and foreign regulators will not allow foreign-funded financial institutions to undertake unlimited joint and several liability in China.
 

8. Allow foreign insurance group companies to invest and establish insurance institutions;

According to the previous regulations, foreign insurance group companies can only apply for establishing insurance companies in China through their subsidiaries. At present, they may directly set up insurance institutions in China, including insurance companies, reinsurance companies, insurance asset management companies and insurance intermediaries and so on.

9. Allow domestic foreign-funded insurance group companies to initiate insurance institutions with reference to the qualification requirements for Chinese-funded insurance group companies;

On November 23, 2018, CBIRC issued an approval to Allianz Insurance Group to approve the establishment of Allianz(China) Insurance Holdings Co., Ltd.(Allianz Insurance Holdings). Allianz Insurance Holdings became the first foreign-holding insurance company in China. The New Measures further clarify the future development path of domestic foreign-funded insurance groups, which enjoy the same treatment as Chinese insurance group companies.

Before the implementation of the New Measures, only foreign insurance companies were allowed to set up foreign-funded insurance companies in China. However, many of the subsidiaries of foreign insurance group companies were insurance institutions with extensive experience in insurance management and operation, but they could not directly operate insurance business. The purpose of these two new measures was to encourage more prominent foreign insurance institutions to enter the Chinese market.
 

10. In accordance with the principle of consistency between domestic and foreign capital, the access policies for Chinese and foreign financial institutions to invest and establish consumer finance companies are relaxed simultaneously;

According to the Article 8 of the Pilot Management Measures for Consumer Finance Companies(2013), compared with domestic financial institutions, overseas financial institutions, as the main investors of consumer finance companies, should additionally meet the follow conditions: “establishing representative offices in China for more than 2 years, or having established branches in China already, doing sufficient analysis and research on Chinese market, the financial supervision authorities of the countries or regions where they locate have established a sound supervision and management cooperation mechanism with the China Banking Regulatory Commission(CBRC). Following the 15 Measures loosening the conditions for the foreign capitals to establish institutions, including the nationwide cancellations of the requirement to open a two-year representative office before establishing a foreign-funded insurance institution, the implementation of this measure represents equal conditions for domestic and overseas financial institutions’ contribution to domestic consumer finance companies. At present, the largest consumer finance company in China is Czech Republic’s Jiexin Consumer Finance Company, with a total scale of hundreds of billions.
 

11. Cancel the approval procedure of foreign-funded banks to start RMB business, and allow foreign-funded banks to operate RMB business upon the commencement of business;

Article 34 of the Regulations on the Administration of Foreign-funded Banks(2014) stipulates that “when a foreign-funded banking business institution operates RMB business within the scope of business as stipulated in Article 29 or Article 31 of these Regulations, the following conditions shall be met, and shall be approved by the banking regulatory agency of the State Council: 1) operating for more than one year in China before submitting the application; 2) other prudential conditions stipulated by the banking regulatory agency of the State Council.”

On April 27, 2018, the 15 Measures issued by CBIRC mentioned “expanding the business scope of foreign-funded institutions, including completely cancel the premise of one-year operation period when it comes to foreign-funded banks applying for RMB business. The 15 Measures allow foreign-funded banks to operate RMB business upon the commencement of business, which still needs the approval of related regulators. The New Measures further eliminates the approval procedure, allowing foreign-funded banks to operate RMB business simultaneously upon the commencement of business. However, it remains to be seen whether foreign-funded banks that have already opened before the New Measures could directly start the RMB business.
 

12. Allow foreign-funded banks to operate “agent receipts and payments” business;

According to Articles 29 and 31 of the Regulations on the Administration of Foreign-funded Banks(2014), foreign-funded banks may operate the following businesses with approval: 1) absorb public deposits; 2) issue short-term, medium-term and long-term loans; 3) handle bill acceptance and discounting; 4) trade government bonds, financial bonds, and other foreign currency securities other than stocks; 5) provide letter of credit services and guarantees; 6) Arrange settlement of both domestic and overseas accounts; 7) trade foreign exchange by itself or as an agent ;8) insurance agency; 9)interbank lending; 10) deal with bank card business; 11) provide safe deposit box service; 12) provide credit investigation and consultation services; 13) other business approved by the banking regulatory agency of the State Council.

The 15 Measures allow foreign-funded bank branches to “issue, cash and sell government bonds as agents”, and reduce their threshold to receive a single regular retail deposit to 500,000 yuan. The New Measures have further expanded their business scope, allowing foreign banks to enter more business areas including government financial procurement services.
 

Ⅱ. The negative list gradually expands the opening-up of the Chinese banking and insurance industry

On June 28, 2018, the State Development and Reform Commission and the Ministry of Commerce issued the Special Management Measures for Foreign Investment Access(Negative List)(the 2018 Edition)(the 2018 Negative List), which were implemented from July 28, 2018. The special management measures for foreign investment access in the Industry Guidance Catalogue for Foreign Investment(Revised in 2017)(the 2017 Negative List) issued on June 28, 2017 was abolished at the same time, and the encouraged programs in the catalogue shall continue to be implemented.

The Industry Guidance Catalogue for Foreign Investment was first promulgated in 1995. It has been revised seven times by 2017. It divides the permitted foreign-invested industry into three categories of ""encouraged"", ""restricted"" and ""prohibited"". Since 2017, China has begun to implement the management system for “pre-establishment national treatment plus a negative list”, but relevant policy documents are still in the form of Industry Guidance Catalogue for Foreign Investment. The 2018 Negative List is the first specific document showing the negative list of foreign investment access, and the negative list is no longer divided into “restricted” and “prohibited” but appears as a whole instead. The corresponding special management measures are also specified in the text.

The 2018 Negative List introduces opening-up measures to 22 areas, retaining only 48 restriction measures , which reduces by 15 comparing to 63 in the 2017 Negative List. Not only has the 2018 Negative List reduced the number of restriction measures, but also expanded the opening-up of financial industry greatly. The similarities and differences of them are shown in the following table:
 

On March 28, 2019, the spokesperson for the Chinese Ministry of Commerce said that the Ministry of Commerce is conducting research on matters related to reducing the negative list of foreign investment market access with relevant departments. He also said that the dynamic adjustment mechanism of the list would be gradually established. In the meantime, the information disclosure mechanism would be improved as soon as possible, and Special Management Measures for Foreign Investment Access(Negative List)(the 2019 Edition)(the 2019 Negative) List would be published in due course.

Ⅲ. The legal basis for foreign-funded enterprises to participate in China’s banking and insurance industry

As China's financial industry is opening up on all fronts, more foreign financial institutions intend to participate in the China’s banking and insurance industry. The author briefly reviews the legal basis for foreign-funded enterprises participating in China’s banking and insurance industry. The basic information is as follows:

Foreign financial institutions used to participate in the opening-up process of the China banking industry in the form of following conditions: overseas financial institutions establish solely foreign-funded banks in China, or overseas financial institutions collaborate with Chinese companies and enterprises to jointly establish Sino-foreign joint venture banks. However, overseas foreign non-financial institutions hardly participate into the domestic Chinese-funded banks. With the gradual liberalization of foreign investment restrictions, it is inevitable that overseas non-financial institutions, that is, investors with industrial backgrounds, intend to participate in or even hold Chinese-funded financial institutions. The attitude of the regulators to foreign investment is very subtle, and the qualifications are also very strict.

The author argues that whether overseas non-financial institutions and foreign-funded enterprises could hold shares of commercial banks in China is one of the historical issues left in the opening-up process of China banking industry.

First of all, although the Commercial Banking Law(2015) stipulates the conditions for establishing commercial banks, it never command the founders or registered capital shall come from China or from overseas. The law does not specifically stipulates shareholder qualifications of commercial banks as well. The Article 4 of the Interim Measures for the Equity Management of Commercial Banks(2018) says that “the validity period of the administrative licensing reply for holding more than 5% of the commercial banks through domestic and foreign securities markets is six months. It’s not difficult to find that the shares of commercial banks in China could be bought through the overseas securities market.
 

Secondly, according to Article 8 of the China Banking and Insurance Regulatory Commission about Implementation Measures for Administrative Licensing Issues of Chinese-funded Commercial Banks(the Implementation Measures), “establishing a Chinese-funded commercial bank institution shall have qualified sponsors, including domestic financial institutions, overseas financial institutions, domestic non-financial institutions and other sponsors recognized by CBRC.” Unlike foreign shareholders of Chinese-funded commercial banks that are bound to be financial institutions, the domestic shareholders shall be financial institutions as well as non-financial institutions. Article 12 of the Implementation Measures puts forward ten conditions for domestic non-financial institutions to act as sponsors of Chinese-funded commercial banks. The author believes that overseas non-financial institutions and foreign-funded enterprises that meet the standards of Article 12 of the Implementation Measures should also become shareholders of commercial banks in China.

Finally, according to the spirit of Company Law of the People’s Republic of China, foreign-funded enterprises legally registered in China are independent legal entities and should enjoy “national treatment” under Chinese regulations. In addition, Article 4 of the Foreign Investment Law(2019) that will take effect soon stipulates that “China implements the management system for pre-establishment national treatment plus a negative list. The pre-establishment national treatment above-mentioned refers to the treatment given to foreign investors and their investment at the stage of investment access is not lower than that of domestic investors and their investments; The so-called negative list refers to special management measures for foreign investment in specific areas. The state gives national treatment to foreign investment outside the negative list.” The special management measures for the financial industry in the 2018 Negative List are limited to capital market services and insurance industry, which have not taken the banking industry into account. For areas outside the negative list, management should be implemented in accordance with the principle of consistency between domestic and foreign investment.

In summary, the current law does not clearly stipulates whether overseas non-financial institutions and foreign-funded enterprises could become shareholders of commercial banks in China, which is a blank area in legislation. According to the spirit and value of laws, regulations and policies, we can see that foreign non-financial institutions and foreign-invested enterprises are not prohibited from investing in commercial banks in China. However, there has been no regulations clarifying this question in the opening-up process of China banking industry.
 

Ⅴ. The opening-up of China's insurance industry is expected to be further expanded

With the advancement of reform and opening-up, China's insurance industry has gradually opened its doors to the world. The 2018 Negative List increases the foreign-capital ratio of life insurance companies from “no more than 50%” to “no more than 51%”, and will cancel the limitation of foreign-investment ratio in 2021. This is a major policy for the insurance industry to open up, which is of great significance to the development of the domestic insurance market and the reform of the insurance market. It not only helps foreign life insurance companies to exploit the domestic market, but also helps to further raise the opening-up level of China's insurance industry and accelerate making new ground in pursuing opening up on all fronts in the insurance industry. Specifically, the short-term impact will not be great as the ceiling of foreign shareholding ratio is increased to 51%, which means the proportion of foreign shareholding in the past three years has only increased by 1%. Even if the ceiling of foreign shareholding ratio was abolished after three years, foreign life insurance companies still need time to adapt to China's market conditions and national conditions. In addition, Chinese-funded insurance companies are also constantly improving their comprehensive competitiveness. It is not easy for foreign life insurance companies to surpass the domestic insurance companies.

However, China's insurance industry still needs to be further opened up. At the time of China's WTO accession negotiations in 1999, the opening-up of China's insurance industry was one of the focus of negotiations. On March 12, 2002, CIRC promulgated the Notice on Printing and Distributing "