What will be the impact of foreign ownership of the banking and insurance industries on China?
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Background. Recently, according to the Financial Times, Xiao Yuanqi, deputy director of the China Financial Supervision and Administration Bureau, said that foreign capital can control 100% of China's banks and insurance institutions. This policy measure will have a significant impact on the domestic financial sector. This paper examines the impact of foreign participation in the banking and insurance industry on China, and analyzes the differences in the profit models of banking and insurance institutions in China and developed countries.
Bank profit model: interest rate spreads and intermediary business.
Bank of China's profits are mainly derived from the interest rate differential between deposits and loans. Interest rate spreads in China have always been high, and as a result, Chinese banks have consistently had the highest profits in the world. However, as China's interest rate spreads fell, banks began to struggle. In contrast, banks in developed countries derive a smaller share of their income from interest rate differentials and rely more on intermediary business to make profits. Intermediary business refers to the income earned by banks through the provision of various services in a wide range of areas, including traffic fines, payment of wages, block transactions, opening letters of credit for cross-border transactions, and escrow of funds.
Insurance profit model: the interests of the insurance company and the interests of the insurer.
In China's insurance industry, the interests of insurance companies and policyholders are not equal, and the two grow together. Over the past two decades, the number of insurance companies in China has increased several times, but at the same time, it is doubtful that the value of insurance products of a similar financial nature has increased commensurately. This means that domestic insurance companies cannot achieve half of the profits, and most of the profits remain owned by the company, and the insurance companies can only share a small part of it. For example, some insurance companies give 70% of the company's profits to themselves and only 30% to the insurance company. The full participation of foreign investors in China's insurance institutions can force domestic insurance companies to improve their service levels, which is of positive significance for the development of China's insurance industry.
The impact of full foreign ownership.
The purpose of foreign ownership of Chinese banks and insurance institutions is to attract more foreign capital into the Chinese market. For a variety of reasons, it has become increasingly difficult for China to want foreign investment into industrial sectors such as manufacturing, and the financial sector has become an area that can attract foreign investment. The changes are also forcing domestic banks and insurance institutions to reinvent themselves, with banks having to focus on intermediary business and compete with foreign counterparts in areas such as cross-border and asset management. The investment banking sector will be more competitive, while the insurance sector can improve the quality of services with the participation of foreign investors. As foreign capital is stronger and more capable, Chinese financial institutions need to compete with it in order to maintain their position in the industry.
Competition in the investment banking industry.
There is still a big gap between China's investment banking industry and that of developed countries. China's ordinary investment banks have relatively little influence on the public, and people are more familiar with international investment banks such as Morgan Stanley, Citigroup, Goldman Sachs, and Nomura. Compared with developed countries, there is still a big gap in the strength and ability of China's investment banks. Therefore, while fully accepting foreign investment, China's investment field must compete with foreign capital so as not to become a weak player in this field.
Development of the insurance industry.
Full foreign participation in China's insurance institutions can force domestic insurers to improve their service levels and ensure a fairer insurance industry. In order for insurance companies to win more market share in the competition, they must improve the quality of their products and the interests of insurance companies. The participation of foreign capital will also help to introduce more advanced insurance concepts and technologies and improve the development level of the entire industry. Change is also a challenge for the domestic insurance industry, and domestic insurers must take the initiative to adapt to market changes and improve their competitiveness.
Conclusion. Full foreign participation in China's banking and insurance institutions will have a range of implications. In the case of the banking sector, domestic banks may be forced to strengthen the development of intermediary business and improve the level of service. In the insurance industry, domestic insurers may be forced to improve the quality of their services and protect the interests of insurers. In the field of competition, domestic financial institutions should compete with foreign capital to enhance their competitiveness. In short, the full participation of foreign investors in China's financial institutions will activate the competition in China's financial industry and promote the development of China's financial industry.
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