China Urged To Further Open Financial Markets

by Mike Godfrey, Tax-News.com, Washington

08 June 2007

The US Securities Industry and Financial Markets Association (SIFMA) has testified before the House Financial Services Committee on the need for China to open its markets to greater participation by foreign financial services firms.

Michael Decker, SIFMA’s Senior Managing Director of Research and Public Policy told lawmakers that for China, opening their markets would bring capital, expertise, innovation, experience and efficiency.

“For securities firms in the U.S. and elsewhere, better access to the Chinese markets would bring the opportunity to help build a financial system from its very early stages and would represent an unprecedented commercial opportunity, with major implications for the competitiveness and growth of this vital sector," he testified.

Decker also noted that in conjunction with the US Treasury, SIFMA has urged China to make several key policy changes. These include:

• Lifting the effective moratorium on the approval of new joint ventures between Chinese and non-Chinese securities firms. China announced at the recent SED meeting that they will lift the moratorium later this year, but they did not specify precisely when.
• Permitting foreign securities firms to own 100 percent of their local operations in China and to organize themselves in whatever corporate form is best. Currently, non-Chinese securities firms can only participate in the local market through minority positions in joint ventures with Chinese companies or by acquiring stakes in local firms.
• Expanding the types of securities activities that foreign firms can engage in. Currently, joint ventures involving foreign securities firms can underwrite and trade certain securities, but are prohibited from trading in the large and liquid “A shares” market. China announced recently that they will expand the permitted activities for foreign securities firms, to include brokerage, proprietary trading, and fund management. While this development has been welcomed by SIFMA, China has said only that they will announce such an expansion prior to the SED-III, planned for this December.
• Expanding the Qualified Foreign Institutional Investors program. The QFII program permits certain foreign institutional investors to invest in the A shares market and is a major step forward in opening the Chinese markets. But SIFMA said that China can go even further by lifting certain restrictions on QFIIs that limit the program’s attractiveness. During the most recent SED meeting, China agreed to raise the QFII quota from $10 billion to $30 billion.
• Finalizing the implementation of the Qualified Domestic Institutional Investor program. The QDII program permits Chinese banks to pool funds from local investors to invest outside China.

Decker added: “In addition, we have urged China to amend its process of developing and implementing domestic market regulations to be more transparent and fair. We have also recommended changes to China’s interim derivatives rules, which have prevented securities firms from creating and distributing derivative products.”

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