China's Post-WTO Reforms in Financial Services: Achievements and Challenges

February 28, 2003 | BY

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Over a year after its WTO accession, how has China done in the key securities, fund management and insurance markets?

After 15 years of negotiation, the People's Republic of China joined the World Trade Organization (WTO) on December 11 2001 as the 143rd member. The tortuous negotiation of China's bilateral market access agreements with the United States and the European Union concluded in 1999 and 2000, and another year and a half was required to bring all of the bilateral market access agreements together into China's Protocol of Accession.1 Even before the ink was dry on China's Protocol of Accession, many pundits were questioning whether China would live up to its WTO obligations.

Over a year since China joined the WTO, it is clear that China has expended significant efforts towards implementing its WTO commitments. For example, as of September 2002, at least 2,300 government regulations were reviewed and either amended or abolished by over 30 governmental agencies under the PRC State Council. In addition, it has been reported that the State Economic and Trade Commission, the primary regulator for trade matters in China, has amended many of its regulations and cut the number of businesses subject to official examination by one third. The revised Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录), effective April 1 2002, also reflects significant revisions for implementation of China's WTO commitments.

China's efforts in implementing its WTO commitments include fulfilling its obligations under the General Agreement on Trade in Services (GATS). In the area of financial services,2 China promulgated new regulations and implementing rules governing the establishment of Sino-foreign joint venture fund management companies and Sino-foreign joint venture securities companies, amended the PRC Insurance Law(中华人民共和国保险法), and issued new regulations concerning the administration of foreign-invested insurance and reinsurance companies, insurance appraisal companies, insurance brokerage firms, and insurance agency institutions. The China Securities Regulatory Commission (CSRC), the regulatory authority in China's securities market, and the China Insurance Regulatory Commission (CIRC), the regulatory authority in China's insurance market, each announced the abolition of approval requirements for certain businesses and operations of market participants.3 Moreover, the Supreme People's Court published guidelines in August 2002 (effective October 1 2002) to grant foreign investors a private right of action to sue Chinese administrative authorities in respect of service licence-related decisions.

Have China's efforts towards implementing its WTO commitments been sufficient? Now that over one year has passed since China's accession, it is perhaps an appropriate time to assess China's compliance with its WTO commitments.4 The experience of the first year generally indicates that during 2002 China successfully promulgated new, and amended existing, regulations to generally implement its WTO commitments in the financial services industry. However, in the case of new types of entities permitted under China's WTO commitments, foreign investors generally were not able to take advantage of liberalization committed as of accession until well into the second half of the first year since accession.

Fund Management

China committed to permit foreign fund management companies to establish Sino-foreign joint venture fund management companies in China with the foreign investor owning up to 33% upon accession, and to increase the permitted foreign ownership in such joint venture to 49% within three years after accession. China also committed that it would only apply prudential requirements, and not any economic needs tests or quantitative limits on licences in connection with the review and approval of Sino-foreign fund management joint ventures. China made no commitment as to when, or if, it would permit foreign fund management companies to hold more than a 49% equity interest in a joint venture, or to establish wholly owned subsidiaries in China.

On December 20 2001, the CSRC published for public comment a set of draft rules5 relating to the establishment of joint venture fund management companies. In the accompanying notice, the CSRC indicated that the comment period would be 11 days and would conclude on December 31 2001. Notwithstanding the rather short comment period, the CSRC did not promulgate the finalized Establishment of Fund Management Companies with Foreign Equity Participation Rules (the Fund Management Rules) until June 1 2002.6 The Fund Management Rules took effect on July 1 2002. The CSRC promulgated the Relevant Issues in the Examination and Approval Procedures for the Establishment of Fund Management Companies Circular on January 7 2002, and Several Issues Concerning Major Changes of Fund Management Companies Circular on March 21 2002, respectively. Only on July 12 2002 did the CSRC clarify that these regulations were also to be applicable to foreign-invested fund management companies.7

The CSRC officially accepted the first application for a joint venture fund management company from Allianz AG and Guotai Junan Securities Co. Ltd on July 31 2002. As of the end of February 2003, the CSRC had officially accepted eight applications and had granted only one operating licence8 to China Merchants Fund Management Company (CMFM), the joint venture established jointly by ING Investment Management, China Merchants Securities and certain other Chinese companies. As of the end of February 2003, the CSRC had also granted establishment approvals to the Allianz joint venture and three other joint ventures.9 The other three applications are still being reviewed by the CSRC. In addition to the newly established joint venture fund management companies, ABN Amro announced, on February 27 2003, that it reached an agreement with an existing fund management company, Xiangcai Hefeng Fund Management Company, to purchase a 33% stake in Xiangcai Hefeng. As of the end of February 2003, no fund has yet been launched by a Sino-foreign joint venture fund management company.

Securities Businesses

China committed to, within three years after accession, permit foreign securities institutions to establish Sino-foreign joint venture securities companies in China, with the foreign investor permitted to own up to one third of the total equity interest. China committed to permit Sino-foreign securities companies to: (i) underwrite A share offerings; (ii) underwrite and trade B shares, H shares, government and corporate bonds; and (iii) launch managed funds. China committed to permit these joint venture securities companies to engage in business directly, without any Chinese intermediaries. China made no commitment as to when, or if, it would permit foreign companies and banks to increase their ownership in joint venture securities companies above 33.3%, or to establish wholly owned securities companies in China.

On December 12 2001, the CSRC published for public comment the Draft Rules on the Approval of Sino-foreign Joint Venture Securities Companies. In the accompanying notice, the CSRC indicated that the comment period would be 13 days and would conclude on December 25 2001. As with the Fund Management Rules, despite the short comment period, the final regulations were issued much later. The Establishment of Securities Companies with Foreign Equity Participation Rules (外资参股证券公司设立规则) (the Securities Rules)10 were issued on June 1 2002 and took effect on July 1 2002, the same day as the Fund Management Rules. The effective date of July 1 2002 was two and a half years earlier than China had committed to under its WTO obligations. As of the end of January 2003, the CSRC has officially accepted three applications and granted an establishment approval to one applicant

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