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China’s Financial Sector to Open Further

WSJ, Dec. 28
China May Let Foreign Brokers Do More — Including Trading 

BEIJING — China is cracking open the door for foreign investment banks seeking entry into China's booming stock market — but just barely, at least for now.

In coming days, China's securities regulator is expected to outline rules for global investment banks looking to set up joint ventures to tap the country's domestic exchanges. Morgan Stanley and Credit Suisse Group have already signed preliminary agreements for joint ventures that will be governed by these rules.

Foreign investment banks will be able to take a maximum 33% stake in new local underwriting joint-ventures, a cap that could be raised to 49% over time, according to a person briefed by Chinese regulators on the plans. These joint ventures initially will be limited to securities-underwriting activity, for an unspecified "seasoning period" after which regulators can decide whether to grant other licenses that extend their range of business to include proprietary trading (bets with the firm's own money), brokerage services and money management, the person said.

At the same time, foreign investors will be allowed to invest in established Chinese brokerages with smaller stakes and less control. The new rules for foreign investment in existing brokerages are likely to be modeled on control limits for investors in Chinese commercial banks, the person briefed by regulators said.

In China, individual foreign investors are allowed to own as much as 20% of a domestic commercial bank. Total foreign investment in a single domestic bank is capped at 25%.

The China Securities Regulatory Commission didn't reply to a request for comment. In a statement earlier this month, it said the new rules would "relax restrictions" on foreign equity participation in domestic securities firms and "clearly define the conditions and sequence for progressively expanding the scope of securities joint-ventures."

The new rules give future entrants into the onshore market less access than what the two major foreign players that currently manage securities joint-ventures in China — Goldman Sachs Group Inc. and UBS AG — have. Both won key approvals for local joint ventures before regulators shut the door on other applicants in late 2005. Other smaller joint-venture securities firms exist in China but don't have the profile of those run by Goldman and UBS.

Global investment banks without a domestic joint-venture have long courted Chinese business from outposts in Hong Kong, connecting Chinese firms to the international capital flowing through the Hong Kong or U.S. exchanges.

With the Chinese government pushing the development of the domestic markets in Shanghai and Shenzhen, global investment banks haven't been able to reap the rewards of China's domestic stock boom.

Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454

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