Market entry for foreign investors: the latest developments

Author: | Published: 1 Jul 2005
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There have been impressive developments in China's financial sector post-World Trade Organization accession. In line with the overall economic reforms and the country's WTO commitments, foreign investors are finding more and more opportunities in Chinese finance, such as banking, securities, fund management, insurance, trust, auto financing, and finance lease. But despite the increasing demand from the market for full-range financial services by one entity with one licence, different types of financial services still need separate licences and services are still provided by different types of financial institutions. And they are all subject to several sets of regulations and divided regulatory regimes.

But the gradual opening of this market is providing a clear roadmap for foreign investors in the sub-sectors of financial services.


Foreign banks have been establishing their presence by setting up branches, joint-venture banks or wholly owned banks in China since it opened its door 25 years ago. However, they are still not permitted to conduct banking business in the same scope as domestic banks. Gaps are gradually narrowing as China follows its commitment to open up the banking sector, but foreign banks still face difficulties in reaching new customers. Investing in a domestic bank and establishing business cooperation is a short cut for foreign banks looking to enlarge market shares and for domestic banks wanting to improve themselves in capital adequacy and management to meet market competition.

The banking supervisory body, China Banking Regulatory Commission (CBRC), has made measures to regulate investments in domestic banks. CBRC allows a single foreign investor to hold up to 20%, or more than one foreign investor up to 25%, of the shareholding of a domestic bank by way of subscription of new shares or acquisition of existing shares. The 25% cap comes from the benchmark where a bank must be licensed as a foreign invested bank if foreign investments exceed 25% of the total shareholding. However, a listed bank with foreign investments by more than one foreign investor will still be licensed and supervised by CBRC as a domestic bank even if the foreign investments exceed 25%.

The requirements for foreign investors include:

  • minimum total assets worth $10 billion at the end of the previous year;
  • paid-in capital in cash;
  • profitabilty for the immediate two previous years.

After Citibank acquired 5% of the shares in a listed commercial bank, Shanghai Pudong Development Bank, in 2003, HSBC paid $17.5 billion for 19.9% new shares of Bank of Communications in 2004, which was in turn followed by several investments by foreign banks in Chinese commercial banks this year. It is expected that more foreign investments will be made in the big four state-owned banks when they restructure.


Securities companies are regulated and supervised by China Securities Regulatory Commission (CSRC). A securities company may only be licensed to carry on brokerage business for stocks and bonds (a brokerage securities company), but it may also be licensed to underwrite stocks and bonds and deal in securities in its own account in addition to brokerage services (a comprehensive securities company).

In compliance with China's WTO commitments, CSRC allows foreign investors to enter into this service sector by setting up joint venture brokerage or comprehensive securities companies, or by acquiring a domestic company. Foreign investment is limited to one-third of the shareholding in any securities company, and no provision allows their increase. The threshold for foreign investments is as follows:

  • a minimum registered capital of Rmb500 million;
  • at least 10 years' financial practice by foreign investors;
  • at least one-third of the shareholding held by at least one domestic investor.

A joint venture is not allowed to conduct A-share brokerage business or deal in any securities (including A and B shares) in its own account. This reflects China's protection of the local capital market from foreign players.

At the end of 2004, four out of 130 securities companies were joint venture securities companies. Gao Hua Securities Company, established by a Chinese individual and a domestic company, is regarded as precedent setting. The individual was funded by Goldman Sachs, which in turn set up a joint venture securities company with Gao Hua Securities Company to undertake securities business.

Fund management

Fund management companies are regulated by CSRC in accordance with a set of regulations. Fund management was opened to foreign investment under China's WTO commitments, which allow 49% foreign investment. The Law on Securities Investment Funds (October 2003) and Administrative Measures for Securities Fund Management Companies (September 2004) also provides the following market entry requirements for foreign investments:

  • a minimum registered capital of Rmb100 million;
  • a minimum paid-in registered capital of Rmb300 million in convertible currency by a foreign investor;
  • sound financial management practice by the major investor;
  • one control shareholding and one minority shareholding only by one foreign investor in fund management companies.

At the end of 2004, 14 joint venture fund management companies existed out of 54 companies in total. By December 2004 they had launched 28 fund products into the market. Most of the funds raised by these joint venture fund management companies are securities investment funds.

Fund management companies established by commercial banks are a new trend in the market. People's Bank of China (PBOC), CBRC and CSRC jointly released Measures for the Pilot Administration of Establishing Fund Management Companies by Commercial Banks in February 2005, meaning commercial banks may establish fund management companies, a breakthrough from the limitation imposed on banks by the Law of Commercial Banks regarding setting up entities by investments. Foreign banks are not covered by the new regulation, so they can set up joint ventures with domestic banks that they have invested in.


The China Insurance Regulatory Commission (CIRC) supervises insurance companies in China. Foreign insurers may engage in insurance business in four sectors: non-life insurance, life insurance, re-insurance, and insurance brokerage.

In accordance with China's WTO commitments, shareholdings by foreign investors in life insurance companies are limited to 50%, and in insurance brokerage companies are limited to 51% (this restriction will be removed by the end of 2006). There is no limitation on non-life insurance companies. In addition to the commitment, the Regulation on Foreign-funded Insurance Companies (December 2001) and its Detailed Rules (September 2004) provide the market entry requirements for foreign investments:

  • a minimum paid-in registered capital of Rmb200 million;
  • the foreign investor must have practiced in insurance for more than 30 years;
  • the foreign investor's representative office must have been operating in China for more than two years;
  • asset volume must be at least $50 billion at the end of the immediate previous year.

By December 2004, 40 foreign insurance companies had established 75 operations in China, among which 23 were life insurance companies, 14 non-life insurance companies and three re-insurance companies. In early 2005, a set of circulars promulgated jointly by CIRC and CSRC blazed the trail in the management of insurance capitals. Insurance capital is now permitted to enter into the stock market directly, though the relevant approvals are strict and selective.


Trust companies are special financial institutions in China. They provide the platforms for unit trust, property trust, investment trust and other types of trust businesses as well as investment businesses.

CBRC is responsible for regulating trust companies and their businesses in accordance with a set of regulations. The Chinese government has not made any particular WTO commitment to open this sector but the regulations have allowed foreign investors access to this business. The market entry threshold for a trust company is:

  • a minimum registered capital of Rmb300 million, and $15 million in the registered capital for engaging in foreign currency business;
  • up to 20% cap for a single foreign investor and up to 25% cap for more than one foreign investor.

At the end of 2004, 47 trust companies had promoted 339 trust products, which raised Rmb34.6 billion. In November 2004, Hong Kong Mingli Co Ltd purchased 46.6% of Shanghai Aijian Trust Co, which was the first case of overseas investors holding shares in a Chinese trust company. In the market, trust companies are focusing on real estate investment trusts (Reits), asset trusts such as management buyouts (MBO), and employee stock ownership trusts (ESOT).

Auto financing

Auto financing loans are an effective way for Chinese consumers to purchase cars. Only domestic banks are allowed to provide car-financing schemes, but China's WTO commitment has opened the auto-financing business to non-banking foreign investment. The market was fully liberalized regarding foreign investment with the promulgation of the Regulation on Auto Finance Companies by CBRC in October 2003. The market entry requirements are:

  • a minimum registered capital of Rmb500 million;
  • a minimum asset volume of Rmb4 billion and a minimum operating revenue of Rmb2 billion at the end of the immediate previous year for non-financial institutional investors;
  • a minimum registered capital of Rmb300 million for non-banking financial institutions;
  • investment allowed in one auto financing company only;
  • capital adequacy ratios of 10%.

According to the figures at the end of 2004, only five auto-financing companies existed, all of which were foreign invested: Volkswagen, Toyota, GM, Ford and DaimlerChrysler.

It is estimated that by 2010 China will have grown into the third largest auto market in the world, behind the US and Japan. By then, it is predicted that 50 % of autos will be sold through auto-finance deals. Despite this, many Chinese consumers still claim that they do not want to borrow auto loans and prefer to save their own money until they can afford the vehicle outright.

Finance lease

Two types of finance lease companies are set up under different regulations by CBRC and the Ministry of Commerce. The Ministry of Commerce is in charge of administrating domestic investments and foreign investment, except for financial institutions regulated by CBRC and CIRC. This confusing plurality in types of finance lease companies reflects the undefined finance lease business in an emerging market and the overlapped jurisdictions of different supervisory bodies.

According to the Administrative Measures for Finance Lease Companies issued by PBOC in June 2000, and the Circular on Relevant Issues concerning Undertaking Finance Lease Business issued by the Ministry of Commerce and State Administration of Taxation in October 2004, the differences between them are:

  • finance lease companies approved by CBRC have a wider business scope, providing foreign currency and interbank lending/borrowing in addition to finance leases ;
  • a minimum registered capital of Rmb500 million is required for finance lease companies approved by CBRC while only Rmb170 million is required for finance companies approved by the Ministry of Commerce.

Market entry by foreign investors in Chinese finance lease companies already approved by CBRC requires:

  • a minimum total asset of $1 billion at the end of immediate preceding year;
  • paid-in capital in cash;
  • the investor company must have been profitable for the immediate two preceding years;
  • a 20% cap for single foreign investor and a 25% cap for more than one foreign investor.

The Ministry of Commerce issued a new Regulation on Foreign Invested Finance Lease Business in February 2005. It completely removed the restrictions on foreign investors' entry into the finance lease market. The new regulation sets out foreign market entry requirements for establishing such a company as follows:

  • the foreign investor must have total assets worth $5 million;
  • a minimum registered capital of $10 million;
  • an operation term of no longer than 30 years for limited liability companies;
  • wholly owned finance lease companies permitted.

At the end of 2004, there were 12 finance lease companies approved by CBRC and 41 finance lease companies approved by the Ministry of Commerce. Industry magnates such as GE capital and Caterpillar have entered into the market by setting up a wholly owned finance lease companies. More applications from foreign banks, lease companies and manufactures are waiting for approvals.

Finance companies

Finance companies fall into two types: finance companies of enterprise groups and finance companies with limited banking business. The former provides finance services to the affiliated companies of its enterprise group, while the latter provides finance services to, and conducts limited banking business with, corporate customers. CBRC supervises finance companies in accordance with a set of relevant regulations.

Under the Administrative Measures for the Finance Companies of Enterprise Groups in July 2004, the requirements for foreign investors to establish this type of finance company are as follows:

  • a minimum paid-in registered capital of Rmb100 million or in convertible currency, $5 million of which is required in the registered capital for engaging in foreign currency business;
  • a holding company must be established;
  • a minimum actual equity investments by the holding company in China of $80 million;
  • a minimum operating revenue of $3 billion in the immediate previous three years.

Foreign investors are encouraged to invest in domestic finance companies of enterprise groups. The cap for a single investor is 20% and for more than one investor is 25% of the shareholding.

A finance company with a limited banking licence is highly regulated as a deposit-taking and loan-lending non-banking institution by CBRC, and must meet the following requirements:

  • a minimum paid-in registered capital of Rmb200 million or in convertible currency;
  • the foreign investor must have a minimum asset volume of $10 billion at the end of the immediate previous year;
  • the representative office of a wholly foreign invested finance company must have been in operation for more than two years.

According to the figures given by CBRC, there are 74 finance companies of enterprise group companies in the market, meeting the inside finance needs among the members of enterprise groups. There are only four finance companies with limited banking licences and they are all foreign invested. As their funding sources, especially renminbi funding, are limited, this type of finance companies is less active in the market.

Removing barriers

The barriers imposed on foreign investment in Chinese financial services have not been removed completely, but the door has been gradually and steadily opening since China's entry into the WTO. More opportunities are provided to the foreign investors but first they must overcome the challenges of entering the market.

Author biography

David Liu

Jun He Law Offices

David Liu is a partner of Jun He Law Offices. Liu is a leading banking lawyer with 17 years' experience advising a number of international and domestic banks on regulatory matters. Liu advises many foreign banks on their entry into China and launching new products in line with the changing legal environment. He advised HSBC on its investment in Bank of Communications, Citibank's acquisition of Shanghai Pudong Development Bank, Hang Seng Bank's strategic investment in Industrial Bank and IFC's investment in Bank of Shanghai. He has also been involved in structuring, negotiation, document preparation and rendering legal opinion in many finance projects, including the first BOT project finance in Shanghai and the first renminbi limited recourse project finance in China.

Liu is an arbitrator of China International Economic and Trade Arbitration Commission and also the legal adviser to Shanghai Banking Association.