U.S. sees reform push in China moves on brokerage JVs

BEIJING Fri May 4, 2012 5:44am EDT

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BEIJING (Reuters) - China will raise foreign ownership limits in domestic joint venture securities firms and allow them to trade commodities and financial futures in a move to further liberalize the country's capital markets, a senior U.S. official said.

Beijing had agreed to raise the ownership cap to 49 percent from 33 percent and to start applying it with immediate effect, the official told reporters on the sidelines of the fourth Strategic and Economic Dialogue between the United States and China on Friday.

"It will provide important opportunities and again help to strengthen China's capital markets," said the U.S. official, who spoke on condition of anonymity.

Permitting the expansion of brokerage activities into the commodities and financial derivatives markets represents a further step in the diversification of China's capital markets, the official said.

"We see it as (part of) a bigger pattern that will signal a continued shift toward more opening and liberalization of the financial sector, which again we see as connected to a broader reform agenda," the official added.

Reforms are ready to be rushed out over the next 12 months to boost two-way capital flows, drive diversification of business finance and accelerate corporate currency hedging, sources in close, direct contact with the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) told Reuters in late April.

Beijing took a milestone step in opening up its currency regime last week when it widened the daily onshore trading band for the yuan to 1 percent. The move underlined its desire for reforms designed to ease speculative pressures in the economy and rebalance capital flows, while taking the country closer to its goal of a basically convertible yuan by 2015.

China's promises on liberalizing the financial sector dovetail with a campaign by Guo Shuqing, head of the securities regulator, to clean up and modernize the country's capital markets. Guo earlier this year allowed greater participation by foreign firms in China's securities markets as part of that effort.

"This is a gesture that China is willing to open its financial industry further to foreigners, and follow what happened in China's mutual fund industry," Liang Jin, an analyst at Guotai Junan Securities, told Reuters.

China in late 2004 lifted the limit on foreign ownership in Chinese fund management ventures to 49 percent from 33 percent as part of its obligations under the terms of the country's accession to the World Trade Organisation.

Liang added that he didn't expect the changes to have a big impact on management control of brokerage ventures and would not affect the competitive landscape in the short term.

NO MOVE ON BANK JVs

The U.S. official added that Washington negotiators had not pushed Beijing to lift the 20 percent cap on foreign ownership in pure banking joint ventures, but said the topic could be raised in future meetings.

U.S. banks Goldman Sachs (GS.N) sold $2.3 billion worth of Hong Kong-listed shares in China's ICBC (1398.HK) last month, leaving it with a remaining holding worth about $3 billion.

Citigoup (C.N) said in March it has sold its stake in Chinese lender Shanghai Pudong Development Bank (600000.SS), booking a profit of around $349 million as the U.S. lender looks to shore up its balance sheet after failing a U.S. Federal Reserve stress test.

Other banks that have held or hold stakes in major Chinese lenders include Bank of America (BAC.N), RBS (RBS.L) and UBS (UBSN.VX). All of them have sold or watered down their investments over the years, mostly to bolster capital levels or reduce earnings volatility.

China's big state-backed banks are crucial instruments of monetary policy, controlling the vast majority of credit creation in the world's second-biggest economy and lending largely at Beijing's behest.

Premier Wen Jiabao said in April he wanted to break the monopoly banks enjoy on lending, a line that analysts have taken to mean via the creation of alternative sources of corporate finance by expanding direct access to and deepening capital markets, especially for bonds and equities.

The U.S. official also said China had agreed to commence negotiations on reforms to export credit financing in the summer, and that Beijing was willing to make its state-owned enterprises start paying dividends at a similar rate to those typically paid by internationally listed companies.

China's domestic share markets have been dogged for years by fears of price manipulation and oversupply of stock in poor-quality companies paying low dividends. Guo has made plain his determination to revive interest in investing in equities.

Giving domestic investors a credible alternative to the real estate market is seen by policymakers as a key part of long-term efforts to stem rampant - and risky - speculation in property, where prices across the country have risen 10-fold in a decade.

(Reporting by Rachelle Younglai; Additional reporting by Kazunori Takada and Samuel Shen in Shanghai; Writing by Nick Edwards; Editing by Ryan Woo)

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