Australian Financial Service Business In China

Transcription

1 Australian Chamber of Commerce Financial Services Working Group 2011 s Paper Australian Financial Service Business In China

2 Statement & Contacts Statement The information contained in this s Paper is based on input and analysis from January 2011 to April The information in the s Paper is provided for informational purposes only, and should not be construed as business or legal advice on any specific facts or circumstances. No users of the Paper should act or refrain from acting on the basis of any content included in the s Paper without seeking appropriate professional advice. Neither of participating Chambers assume any legal liability or responsibility for the accuracy and completeness of the information provided in the Paper. Contacts The China - Australia Chamber of Commerce AustCham Beijing Add: E Floor, Office Tower, Hong Kong Macau Centre {Swissotel} Tel: Fax: Web: AustCham Shanghai Add: Suite 1101B, Silver Court 85 Taoyuan Road {near Xizang South Road} Tel: Fax: Web: by the Australian Chambers of Commerce in China, all rights reserved. This s Paper may not be reproduced either in part or in full without prior written consent of the participating Chambers.

3 Contents Contents Welcome message 2 Australia s financial services sector 4 China s financial services sector 5 Australian financial services in China 6 Key recommendations 7 Specific issues and recommendations 8 Banking Mortgage Securitisation Insurance Asset Management Accounting Services Conclusion 18 Appendix 19

4 Welcome message Welcome message Welcome to the first s Paper on the Australian financial services business in China. We are pleased to publish it as an initiative of the Joint Financial Services Working Group (the Working Group ) of the Australian Chambers of Commerce ( AustCham ) in Beijing and Shanghai. Australian financial services institutions have long been active participants in China s markets but to date there has been no platform through which those institutions can discuss matters of mutual interest or communicate as a coordinated industry body to governments or policy makers. The joint Working Group was established in 2010 to provide its members with a platform for discussion and communication. Key aims of the Working Group are to raise awareness of strategic and emerging issues for Australian financial services firms operating in the China market, and to leverage the strength and reputation of Australia s financial system to facilitate a dialogue with key officials and policy makers in China. The s Paper has been developed with the intention of assisting the ongoing development of the financial regulatory process in China. It does so by providing detailed recommendations for improving the competitiveness of the current financial services sector in China, specifically those aspects in which Australian financial institutions and firms continue to play an increasingly important role. Australian financial service business in China 2

5 Welcome message It is the aim of this document to become a positive initiative in highlighting the contribution these Australian organisations are, and can make to the development of the financial services sector in China, and to serve as a foundation for future dialogue with Chinese Government officials on resolving the identified issues to the benefit of both nations. AustCham promotes and represents the interests of Australian businesses in China. We hope that this s Paper will go some way to assisting the ongoing development of the Australia-China commercial relationship. The recommendations are directed primarily to policy makers in China, but we hope that they will also be of more general interest to anyone interested in the development of the China financial markets. For that reason, we have also included as an introduction in the paper an overview of the capabilities of Australia s financial sector. David Olsson Chairman AustCham Beijing Working Group Andrew Whitford Chairman AustCham Shanghai Working Group 3 Australian financial service business in China

6 Australia s financial services sector Australia s financial services sector As with China, the underlying strength of the Australian financial sector was clearly demonstrated by its good performance during and since the global financial crisis. Australia did not fall into recession, experienced no bank failings and avoided financial turmoil on the scale of other advanced economies. The strength of the Australian financial services sector is due to the world class professional capabilities and skills of the companies and individuals operating within the sector, and is underpinned by a world s best practice regulatory system. Australia was ranked by the IMD World Competitiveness Yearbook as the most resilient economy in the Asia Pacific in 2010 and the second globally. Australia s financial services sector is extremely strong, with four of its banks achieving credit ratings of AA out of only nine globally enjoying a rating of AA or above. The Australian stock market is the 6th largest free-floating stock market in the world, more than double that of Hong Kong and more than four times larger than that of Singapore, and Australia has one of the largest pools of funds under management globally (A$1.8 trillion). In the market, the second largest free-stocking market, the third largest debt securities market, the sixth largest insurance market, the largest merger and acquisition market, and the second largest hedge funds market 1. Australia has continued its aim of being a leading financial services sector in the region. With the right balance of financial oversight, transparency and innovation, the sector has kept investment entry barriers low and allowed for the easy movement of capital in and out of Australia, creating greater opportunities to invest in the industry by Chinese investors. The Australian and Chinese financial sectors are also becoming increasingly integrated as evidenced by the number of Memorandums of Understanding (MOUs) and investment agreements signed at regulatory 2, and in more recent times, at industry 3, as well as organisational levels. As examples of the latter, Australian banks have made a number of acquisitions and partnerships with Chinese other financial services organisations. The current standing of these investment are highlighted in the table contained in the Appendix. Asia-Pacific, it ranks as the largest securitisation 1 Australia: A Global Financial Services Centre; Benchmark Report 2010 and subsequent updates - Australian Trade Commission. 2 The Australian Securities and Investments Commission (ASIC) has signed MOUs with each of the China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC). 3 The Securities Association of China (SAC) and the Australian Financial Markets Association (AFMA) have signed an MOU. Australian financial service business in China 4

7 China s financial services sector China s financial services sector China s implementation of its plan to open up its financial sector to foreign investment and to undertake a constant reform and development process is to be commended. Recent reforms to the industry have included the introduction of cross-border renminbi (RMB) settlement, the promotion of the domestic bond market, the support given to the use of financial derivatives, as well as new opportunities in consumer and auto finance and a renewed focus on prudential supervision. All of these initiatives are in line with the positive evolution and increasing sophistication of this sector of the Chinese economy. Chinese banks have also been active in developing their overseas operations. In Australia, many of the major Chinese banks now have a formal presence there, or are conducting business on a regular basis. These organisations include: Bank of China Industrial and Commercial Bank of China China Construction Bank People s Bank of China Communications Bank of China China Development Bank Agricultural Bank of China China UnionPay China s central bank, the People s Bank of China, is the only foreign central bank to have established a representative office in Australia. 5 Australian financial service business in China

8 Australian financial service in China Australian financial services in China Australian financial service providers are already active in China within the banking, insurance, funds management, and securities sectors. These companies have already helped to build up local experience and skills in areas such as credit risk management, consumer banking and fraud management. As China develops its domestic financial sector the Australian financial services sector stands ready to provide the needed skills, technical expertise and management systems to help China develop its new financial services and products. China s current regulatory regime, though, still imposes some strict limits on the operation of foreign financial sector businesses. Chinese authorities to reduce these hurdles. Both the Australian industry and government are keen to pursue commercially meaningful outcomes such as better market access and a regulatory framework which encourages new investment and sharing of expertise. Through mechanisms such as the Free Trade Agreement (FTA) negotiations and supporting documents such as this financial services s Paper, Australia hopes to continue to share its best practice financial services standards with China, and see further mutually beneficial cooperation between regulators and financial services companies which operate within these two markets. These barriers to participation in China s financial sector still remain despite the strong progress of China in developing and opening up many areas of its financial services sector. These impediments within the banking, insurance and mortgage securitisation sectors are highlighted in this report, along with other areas which also currently face additional hurdles operating in China s financial sector. The Australian financial services sector supports the Australian government s efforts to work with Australian financial service business in China 6

9 Key recommendations Key recommendations 1. Forum for communication Establishment of a mechanism for Australian financial institutions to have regular access to regulators and policy makers in China with a view to discussing matters of mutual interest, communicating matters of concern and sharing information about the Australian and Chinese regulatory environment for financial services institutions. 2. Market access Policies to be put in place to encourage greater foreign market participation in the local banking industry. Examples of these policies include - increasing the number and scope of investments permitted by Australian banks, insurers, funds managers and other financial institutions; accelerated approval processes for local incorporation of foreign banks; speeding up the approval process for a RMB license and changes to the capital requirements for locally incorporated subsidiaries of foreign banks to allow them to operate on a similar basis to local banks. 7 Australian financial service business in China

10 Banking Specific issues and recommendations Banking 1. Restriction on foreign bank investments The overall market share in China of foreign banks in terms of total assets remains at around 2%. Reasons cited for this lack of growth of market share include economic factors and limited available product offerings. For foreign banks in China, a further significant constraint on their ability to grow is the current limit of two investments in Chinese-funded financial institutions (i.e. those financial institutions set up upon approval of CBRC) by foreign financial firms 4. The investment ceiling be lifted to three investee banks, particularly in regions of priority development (i.e. Central or Western China). This recommendation would increase the willingness of foreign financial institutions for invest in China s banking sector, bringing with it opportunities for Chinese banks to access world class know-how, international experience and information. Increased investment in Central and Western provinces could also help support economic development in these areas through the provision of innovative forms of finance (especially in the areas of consumer and small to medium enterprise (SME) finance), and by providing skills training and employment opportunities % Maximum regulatory allowable equity interest Management control by foreign investors in local banks and trust companies is limited due to the current 20% cap on equity investment. Increase this cap to a more reasonable level (i.e. 49%) with a suggested trial of this reform for Central and Western provinces to increase developments in these less developed regions. This recommendation is expected to increase the commitment of foreign banks to improving China s 4 In The Measures for the Administration of the Investment and Shareholding in Chinese-funded Financial Institutions by Overseas Financial Institutions, the term Chinese-funded financial institutions refers to the Chinese-funded commercial banks, urban credit cooperatives, rural credit cooperatives, trust and investment companies, enterprise group finance companies, and financial leasing companies that are duly set up within China and other Chinese-funded financial institutions that are set up upon approval of the CBRC. Australian financial service business in China 8

11 Banking financial services sector. This would also lead to increased transparency of local banks and (for listed local banks) improved public investor confidence, with potentially positive impacts on share prices of these organisations. 3. Time limits on obtaining RMB Business Licenses Current waiting periods for RMB Business Licenses (based on 3 years for operation and 2 years profitability) are impeding business scope and creating considerable barriers to market entry for foreign banks into China. Further, recent regulatory changes have meant the waiting period for Hong Kong and Taiwanese banks has been reduced to 2 years operating history and 1 year profitability, creating potentially a different starting point among foreign banks. Tier the waiting period into different categories, with incentives for foreign banks which meet the relevant regulatory targets and perform above industry averages to be granted earlier eligibility, similar to the levels Hong Kong and Taiwanese banks now enjoy. A move toward the eventual abolition of this 3 year waiting period is also recommended. This recommendation would likely result in increased customer satisfaction and greater flexibility for customers when choosing financial products and services. More foreign banks in China would facilitate investment in China by the large successful population of Chinese immigrants living in overseas, resulting in increased benefits in employment growth, exports and technology transfer. 4. Communicating with Chinese regulators and policy makers Communication with regulators and interpretation of specific regulations is sometimes a difficult and frustrating process. This increases the risk of non-compliance and reduces foreign entity competitiveness. 9 Australian financial service business in China

12 Banking s It would be helpful if the Chinese regulators could implement channels to encourage greater clarity of regulations and enhance communication among the various regulatory bodies, and look to improve communications and relationships with Australian companies via a central communication point. This might be through an Australian Department of Treasury official at the Australian Embassy in Beijing or through the AustCham Financial Services Working Group. Regular meetings could also provide opportunity to discuss various of the issues raised in this s Paper, to share best practice experiences and collaborate generally around matters including product development, regulatory regimes and mutual cooperation. Increased clarity of communication which would help eliminate misunderstandings in the interpretation of the regulations and lead to greater efficiencies in the identification and resolution of issues. It would also increase information flow back to the regulator, which in turn would lead to increased exposure to world best practice processes and procedures and faster adoption of these practices within the Chinese financial services sector. 5. Prudential ratios The 30% requirement for foreign banks to deposit their branch s operating capital with Chinese banks limits the use of the capital by these branches. Foreign banks must also comply with a minimum daily liquidity ratio of 25%, which is not in line with international practice. Bring the calculations of liquidity ratios in line with international standards by not including intra-branch placements with tenors greater than one month. Adoption of this recommendation would bring this area in line with world best practice, assisting Chinese banks in understanding international Australian financial service business in China 10

13 Banking standards and facilitating overseas expansion. It would also allow for smoother debt flow, potentially reducing funding costs for small and medium enterprises in China. 6. Foreign debt quotas State Administration of Foreign Exchange (SAFE) short-term and National Development and Reform Committee (NDRC) long-term foreign debt quotas for foreign banks are highly restrictive. The transparency of the allocation methodology have also been called into question, as these limits significantly affect foreign currency lending and liquidity management and creating a misalignment of the foreign banks business growth, with the growth of these debt quotas over time. Introduce a fairer and more transparent allocation methodology for foreign debt quotas for all banks operating in China, and increase (and ultimately remove) the short-term debt quotas for genuine trade related uses which do not impact on the money supply in China. Relaxation of this policy would help support local trading companies, by increasing the level of committed funding available to them, thereby reducing their risk of operating under current uncommitted funding levels. Such a change would also decrease the administrative burden on the regulator (i.e. banks would not have to apply as often to increase their foreign debt quota levels over the course of the year). 7. Internationalisation of RMB In 2010, China stepped up efforts to increase renminbi use beyond mainland China, including allowing RMB held abroad to flow in and out of the domestic bond market, allowing companies to settle trade contracts in RMB, using the RMB in currency swaps with emerging market economies and allowing institutions to issue RMB securities in Hong Kong. Australian banks are keen to support this initiative and are developing their business models accordingly. For now, the RMB is not fully convertible and can 11 Australian financial service business in China

14 Banking be difficult to acquire outside of China, making it difficult for banks and companies to manage the bilateral exchange rate. In particular, there are concerns that in times of market disruption offshore RMB liquidity may not be sufficient to enable foreign banks to settle RMB trade and financial transactions. We encourage the People s Bank of China (PBOC) and the Reserve Bank of Australia (RBA) to establish a reciprocal currency arrangement (swap line) to support the settlement in RMB of trade transactions between Australian and Chinese businesses. Such a facility would give the RBA the capacity to borrow RMB when financial market disruption makes it difficult for businesses to access RMB to settle transactions with Chinese businesses. We also encourage the Australian Treasury, the RBA and PBOC to explore the possibility of the RBA adding RMB assets to its reserve holdings, through the purchase of sovereign RMB bonds. These recommendations would help to accelerate China s internationalisation of the RMB and provide greater opportunities for Australian and Chinese businesses to expand their trading activities. In addition, these steps may help Chinese companies better hedge currency risks and pave the way for a more convertible currency that could eventually be used as a store of value (reserve currency) particularly within Asia. 8. Coordination between regulators The financial markets in China are regulated by a number of different regulators, each having particular sectoral focus. For example, the China Banking Regulatory Commission (CBRC) regulated banks, the China Securities Regulatory Commission (CSRC) regulates securities businesses and the China Insurance Regulatory Commission (CIRC) regulated insurance companies. Many financial institutions have now developed multiple financial services businesses and are accordingly regulated by more than one regulator. At times, a lack of coordination between the different regulators creates confusion and jurisdictional issues. Australian financial service business in China 12

15 Banking Increase cooperation and jurisdictional control between the various regulators. Establish a national government body authorised to coordinate the formulation and implementation of policies and guidelines involving these different regulatory bodies. Increased coordination between the different regulator bodies would help eliminate policy discrepancies and help interpretation of the regulations by foreign banks. It would also increase information flow between the regulators and create a more efficient regulatory system overall. 9. Account opening procedures Foreign banks should be allowed to enhance their own account opening risk control mechanisms (e.g. utilisation of lawyers, accountants and other reputable notaries in other cities) to minimize the compliance burden on customers, as well as be granted a certain degree of flexibility in developing detailed procedures based on the CBRC guidelines, as long as the ultimate goals of fraud-prevention can be achieved. Decreasing the time and complexity involved in account opening compliance would enable more local businesses throughout China to open accounts and with foreign banks thereby increase and improve overall trade and business processes with foreign companies. To prevent fraud, CBRC has issued a series of detailed measures relating to account opening procedures and rules. While we greatly respect the high attention given by the CBRC to mitigate the risks, these detailed account opening procedures can impact retail customers. 13 Australian financial service business in China

16 Mortage Securitisation Mortgage Securitisation 10. Lack of ability of foreign mortgage lenders to securitise The Australian experience has shown that a well regulated securitisation market is an important part of an effective and efficient financial market. In China, the securitisation market is only in its early stages of development, with trust companies acting as intermediaries between borrowers and fund providers. While this provides some benefits to market participants, the market is largely unregulated and limits the ability of banks and companies to effectively manage their balance sheets. There is a need for the development of a robust legal framework and regulatory regime to allow the combination of assets in an asset pool which can then be securitised. This is particularly the case in the area of property mortgages. s It is recommended that the development of a formal securitisation market with clear, consistent and enforceable rules, be fast tracked in China. As part of this there is also a need to develop a more robust and transparent domestic debt ratings system. In addition, Australia has one of the most robust and active secritisation markets in the world which was largely unaffected by the recent financial crisis. The experience of Australia s leading banks and mortgage originators and servicers can be of great benefit to China as it seeks to introduce more innovative financing techniques into the local market. As part of the forum and discussion process referred to in 4 above, Australia s leading banks and financial institutions are willing to share their experiences with their Chinese counterparts and regulators. The creation of such a framework would lead to greater operational transparency, increased flexibility for banks (i.e. timing of bond issuance and securitisation) and more efficient allocation of capital. It would also support the continued development of the domestic corporate bond market providing greater depth in the Chinese financial markets by transferring risks from banks to professional investors. Australian financial service business in China 14

17 Insurance & Asset Management Insurance 11. Lack of access by foreign insurance firms to statutory insurance business Foreign insurers are limited to an investment of less than 25% in any current Chinese insurer to retain domestic status. Any increase above this level prevents foreign insurance institutions from participating in the statutory (i.e. third party insurance) business, the major section of China s non-life insurance market. Allow investment cap to increase to 49.9% without the insurer losing its status as a domestic insurer. Implementation of this recommendation would allow for greater incentive to increase foreign direct investment into this sector. It would also help facilitate further transfer of technical capability via improved risk pricing, product innovation and service delivery within the insurance sector. Asset Management 12. Revisions to Securities Investment Funds Law The 2004 Securities Investment Funds Law is not consistent with the more recent regulatory and market developments that have taken place in regard to the marketing of offshore funds into China under the Qualified Domestic Institutional Investor ( QDII ) scheme. Australian fund managers, (which possess an outstanding reputation around the world for their high performing and responsible fund management) currently remain confused on how they should engage with QDIIs in the marketing of their offshore fund products. Develop a clear set of rules on how foreign fund managers should engage with QDIIs in the marketing of their offshore fund products and a llow foreign fund managers to review and comment on the proposed revisions to the Securities Investment Funds Law. Australian fund managers have much to share with Chinese regulators and market players in respect of their experience in achieving greater industry 15 Australian financial service business in China

18 Insurance & Asset Management competitiveness (e.g. among mutual fund companies and private funds). In addition, Australian fund managers and regulators can assist their Chinese counterparts in developing plans and strategies for the continued normalisation and institutionalisation of the investment industry s regulatory structures. A clearer framework for Australian and other foreign fund management companies now operating in, or together with, China s investment industry, and a more competitive investment management industry for China. This increased transparency would provide a greater incentive for foreign funds to establish operations in financial centres such as Shanghai and other big Chinese cities. The transference of these best practice management processes and technologies from these foreign funds, in turn will help accelerate the overall development of China s fund management sector. 13. Obstacles for foreign banks in engaging in local fund agency The CBRC and the CSRC have not yet provided a clear regulatory platform for locally-incorporated foreign banks to engage in agency activities for local fund distribution. Like many foreign banks, Australian banks have a wealth of expertise in fund distribution and fund agency sales more generally. This expertise covers areas such as product design, investor education, fund selection and allocation, and portfolio analysis. The transfer of foreign expertise and experience into local fund agency sales will result in improved fund selling practices in China (including among domestic banks) and will encourage local fund managers to better engage in financial innovation. This will provide a stronger platform for local investors to achieve their investment goals and to improve their wealth management capabilities, with flow-on benefits to Chinese society at large. Australian financial service business in China 16

19 Accounting Services Accounting Services 14. Recognition of accounting professional qualifications. The Chinese Institute of Certified Public Accountants (CICPA) does not give any exemptions to Australian qualified accountants (ACA, CPA Australia) seeking membership and vice versa. Although the number of students undertaking accounting and commerce courses with Australian institutions is not insignificant, this is a disincentive to Chinese business students to choose further education and/or professional training in Australia. This recommendation would likely result in increased potential for international recognition of the CICPA qualification and also incentivise Chinese (PRC and ethnic Chinese) students with Australian qualifications to utilise their skills in the Chinese marketplace. Explore steps to joint recognition of professional qualifications, with admission exams limited to areas of unique differentiation, e.g. tax laws. 17 Australian financial service business in China

20 Conclusion Conclusion This s Paper acknowledges China s macro policy goal to transition its economy to a more balanced growth model. The Working Group s aim in commissioning this paper is to help bring about these changes and so assist China develop a vibrant services sector, promote domestic consumption and establish China as a sustainable and innovative society, particularly in the financial services sector. These aims are aligned with those of the Australian financial services organisations which operate in China. China has done much in recent times to progress the development of its financial services sector and the recommendations outlined in this s Paper support this growth and moreover a vision of partnership between Australian financial services organisations and their Chinese counterparts. However despite this strong progress in many areas, impediments to growth in this sector in the form of the difference of regulatory application, unpredictability of operational outcomes, lack of transparency of process and barriers to entry to many segments of the financial services sector still remain. Australian financial services organisations represent world s best practice when it comes to both delivering financial services and regulating financial markets. They are committed to growing their current partnerships and contributing to moving forward in partnership with their Chinese colleagues toward the healthy development of this China s Financial Services sector well into the future. We hope the recommendations made in this s Paper can form part of that process. Australian financial service business in China 18

21 Appendix A - Overview of Australian banking investments and relationships in China Australia and New Zealand Banking Group Limited (ANZ) Commonwealth Bank of Australia (CBA) National Australia Bank (NAB) Westpac Banking Corporation (Westpac) Macquarie Bank Limited (Macquarie) Starting year in China Infrastructure Local incorporation in Oct branches in Shanghai, Beijing, Guangzhou and Chongqing 2 sub-branches 1 rural bank in Liangping branch in Shanghai 1 rep-office in Beijing 1 country bank in Henan 1 rep-office in Beijing Awaiting approval for Branch in Shanghai 1 branch in Shanghai 1 branch in Beijing 1 rep-office in Shanghai 1 rep-office in Beijing Business scope Corporate Banking Commodity & Trade Finance Markets Retail National funds license in Shenzhen Foreign life insurance license in Shanghai Corporate and Institutional Banking Trade Finance Consultancy concerning finance and trade between China & Australia Corporate and Institutional Banking Trade Finance Investment Banking, Corporate Finance and Advisory, Corporate and Asset Finance (Leasing), Securities Research, Environmental Finance Products, and Principal Investments Partnership and cooperation 20% stake in Tianjin City Commercial Bank 19.9% stake in Shanghai Rural Commercial Bank MOU with China Development Bank 20% stake in Qilu Bank (formerly Jinan City Commercial Bank) 19.9% stake in Bank of Hangzhou Colonial First State Global Asset Management 46% of First State Cinda Fund Management Co Ltd. BoComm Life Insurance Company (49:51 JV between CBA and China Life) 20% state in Union Trust & Investment MOU with Export-Import Bank of China 20% state in Sino Australian Trust Company with State Development and Investment Corporation Macquarie China Everbright Infrastructure Fund Macquarie Wanda Real Estate Fund