China is revamping its fledgling financial sector by trying to create some blockbuster domestic groups that will be strong enough to compete against the foreign giants.

 

The trend, which is likely to lead to companies with structures similar to those of the Western full-service behemoths, will test China's risk-control ability and prompt overseas investors to lobby harder for a market presence before the playing field is leveled, analysts said.

 

Chinese banks, mutual funds, brokers and insurers, formerly prohibited from crossing business categories, have received unprecedented government support since last year to diversify into other sectors, making mergers and acquisitions the new buzzwords.

 

"Helping domestic firms get bigger is now the theme," said Wu Zhiguo, a Guohai Securities Co analyst. "As foreign investors are given wider access, regulators believe domestic players are not strong enough to compete and need help."

 

The worries were highlighted last year by the government's moves to let three of its biggest banks set up fund ventures and pledged to expand the program to more joint-stock lenders this year.

 

Sources also have said regulators are studying a plan to allow insurers to buy into money management firms, while the government is drafting rules to permit banks to establish insurance ventures.

 

Apart from spurring cross-industry developments, regulators are backing up existing Chinese financial firms by other means, granting them loans and helping them lock in acquisition targets.

 

CITIC Group, which controls banking, trust and insurance subsidiaries, last year had its listed brokerage house CITIC Securities Co take a 60 percent stake in a new broker restructured from debt-ridden Huaxia Securities Co.

 

Ping An Insurance (Group) Co, whose businesses cover insurance, securities and banking, last year won government approval to invest in overseas assets and relocate its banking arm to Shanghai to tap China's growing wealth.

 

The nation's No. 2 life insurer also is working on a new insurance unit with London-based partner HSBC Holdings Plc and is currently involved in bids for a controlling stake in Guangdong Development Bank.

 

China Merchants Bank, under control of China Merchants Holdings, is waiting for regulatory approval to take a stake in its sister company, China Merchants Fund Management, and it is also considering an investment in an insurance venture.

 

"China is forming Western-style universal banks and has an urgent need to upgrade risk-control systems to prevent misconduct," said Nelson Ying, chief technology officer at Hong Kong's Tai Fook Securities Group.

 

"Overseas companies may find chances to join the wave with their expertise, but failing to acquire a controlling stake is their biggest concern."

 

China currently caps foreign investments in its financial firms such as banks and brokers at 25 percent on a combined basis and 20 percent for a single suitor.

 

Lobbying for larger stakes has grown stronger this year as a group led by Citigroup Inc is pursuing a bid to buy 85 percent of Guangdong Development Bank while investment banks such as Morgan Stanley and Credit Suisse are considering controlling holdings in Chinese brokers.

 

(Shanghai Daily March 16, 2006)