(C) China to Allow Foreign Mutual Funds

Foreign banks can distribute mutual funds in China from October 1, 2011, following a new rule from the China Securities Regulatory Commission. The move is expected to open up opportunities for companies such as Citigroup Inc. (C) and HSBC Holdings Plc. (HBC) in the Chinese market, according to a Reuters report.

For long, China has administered conservatism with respect to its financial markets. However, in recent years, the financial industry is getting liberated. This new rule granting the foreign banks permission to sell mutual funds in their territory comes following the third round of the U.S.-China Strategic and Economic Dialogue.

As per the new rule, companies need to have a minimum registered capital of CNY20 million, instead of CNY5 million required earlier and a minimum of 10 fund professionals would be permitted to sell mutual funds.

Locally incorporated foreign commercial banks can also apply for licenses. However, certain criteria are required to be fulfilled. These include meeting the requirements the State Council and the banking regulator’s conditions on reserve requirement ratio as well as no administrative or criminal penalties in the past three years. In addition, a dedicated sales team for the mutual fund sales department must also be maintained.

In an effort to make the most of the thriving economy in China and a booming capital market, U.S. and U.K. banks are already making efforts to set up JVs in that country. Going forward, we believe that such liberalization of the China financial industry would open up opportunities for the foreign banks in its territory. It would also boost competition in that local market. For the foreign banks, such a rule is inspiring as they can increase their market share in China and boost their revenue base by leveraging on faster-growing economies.

Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. However, HSBC retains its Zacks #5 Rank, which translates into a short-term Strong Sell rating.

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