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- ICI Comment Letters
U.S. Interests in Reform of China’s Financial Services Sector
Before the Committee on Financial Services
U.S. House of Representatives
Paul Schott Stevens
President and CEO
nvestment Company Institute
June 6, 2007
Chairman Frank, Ranking Member Bachus, members of the Committee, the Investment Company Institute (ICI), the national association of U.S. investment companies, commends the Committee on Financial Services for holding this important hearing to examine U.S. interests in the reform of China’s financial services sector.
ICI members include 8,781 open-end investment companies or “mutual funds,” 665 closed-end funds, 428 exchange-traded funds, and 4 sponsors of unit investment trusts. Mutual fund members of the ICI have total assets of approximately $10.917 trillion, representing 98 percent of all assets of US mutual funds. These funds serve approximately 93.9 million shareholders in more than 53.8 million households.
The ICI supports active engagement with China as the most constructive means of ensuring that our two nations effectively address common economic challenges. We commend Congressional leaders for taking the time to meet with the Chinese delegation during the recently completed meetings of the U.S.-China Strategic Economic Dialogue (SED). We also recognize the significant efforts of Secretary Paulson and Vice Premier Wu Yi to resolve the issues that have complicated the U.S.-China economic relationship. The recent SED meetings have resulted in important but incremental progress in opening China’s financial services sector, and much more remains to be done.
The primary goals of ICI members with respect to China’s financial services sector are related to the retirement challenges facing both the United States and China. First, Chinese financial markets need to be more accessible to American investors. Diversification plays a significant role in retirement savings, and the opening of China’s financial markets will create opportunities for American workers to participate in the benefits of China’s growth through fund investments. Second, the opening of Chinese financial markets to increased foreign participation will improve the access of Chinese workers to the kinds of retirement savings vehicles that we have in the United States and will also improve the efficiency of those markets through increased competition and the introduction of global best practices.
Against that backdrop, three aspects of China’s evolving financial services sector are specifically pertinent to the mutual fund industry that we represent: (1) raising the ceiling on foreign ownership of Chinese asset management firms; (2) liberalizing the rules on foreign portfolio investment in Chinese markets; and (3) liberalizing local portfolio content restrictions in China. I address them in turn below.
The first priority, allowing foreign entities to own a majority, controlling interest in Chinese asset management firms, is a significant concern for us. As with other financial sectors, China currently restricts foreign ownership of asset management companies, which makes it difficult for foreign firms to run their businesses as they would prefer. Increased participation of U.S. asset managers in the Chinese market would help introduce world-class expertise and best practices with regard to products and services, risk management, internal controls, and corporate governance. In addition, the competition brought by foreign institutions would accelerate the adoption of such techniques and methodologies by domestic financial institutions.
Foreign Portfolio Investment
The second priority is liberalization of China’s rules on portfolio investment in its markets by foreign investors, including U.S. mutual funds. At present, China severely restricts outside investments in its securities markets, and foreign investors that do receive the limited licenses and investment quotas have to contend with complex requirements and bureaucratic hurdles that may disproportionately affect regulated entities such as mutual funds. At the conclusion of the May SED meetings, the Chinese government agreed to raise the quota on foreign portfolio investment from $10 billion to $30 billion. This is an important harbinger, and we encourage the Chinese to continue to make their markets more accessible.
Local Portfolio Content
The third priority is a liberalization of domestic portfolio content restrictions for Chinese investors. China’s restrictions on foreign investments by Chinese investors are quite stringent, despite some recent liberalization. If China were to further loosen restrictions, its domestic mutual funds, pension funds, and other institutions would be able to pursue portfolio diversification through international investment, which in turn would create advisory and management opportunities for U.S. asset managers.
There is a nascent and growing mutual fund industry in China. If permitted to grow, that industry could provide Chinese workers with more and better savings and investment options while providing them access to global asset management expertise, which will help the aging Chinese population prepare for retirement. We hope that Congress will work with us to pursue these priorities in reforming China’s financial services sector to benefit U.S. investors and the U.S. asset management sector while also increasing options and opportunities for Chinese workers who are looking for better ways to save and invest.