This content is from: Local Insights

China

Under the WTO concessions, notional majority ownership is possible only in the insurance industry. In fund management, securities and commercial banking, foreign strategic investors in an onshore financial services company need to think harder about the risks and rewards of a notional minority position.

Whether through voting agreements, allocation of board election rights, composition of board committees, or designation of senior management, the ability of the foreign strategic investor to influence and even control the operations, related party transactions, and treasury policy of the company cannot be assured by contract alone. It must be in the partners' self-interest not to thwart the foreign strategic investor. By continuing to convince its partners that the path to top-line earnings leads inextricably through the unique franchise it contributes, a foreign strategic investor gives its partners an incentive to act like the recipients of an annuity that is conditional (on the partners' compliance) and can be (directly or indirectly) leveraged and margined. Governance and remedy for failed expectation then become conceivable.

One extrinsic factor that must be considered is the extent to which Chinese regulatory policy will support financial holding company (if not universal banking/mixed business) structures. Given the cash flow, balance sheets, customer visibility and political power of Chinese banks relative to other forms of financial institutions in China, and the foreign ownership limitations that apply to most of them, Chinese bank participation in non-banking businesses will be more dramatic than the Citibank acquisition of Salomon Brothers through its merger with Travelers, an inroad that was nearly three-quarters of a century in the making.

Fred Chang

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