China is still the ultimate prize that Western banks can’t resist

late last month, HSBC (HBCYF) It won approval from Chinese regulators to take full control of its life insurance joint venture, which was set up in 2009 in equal partnership with a Chinese company under rules that were retracted in 2020. The bank said that this step confirmed the ‘Commitment to expand business in China.’
The British banking giant is also seeking to acquire a larger stake in HSBC Qianhai, its joint venture securities venture in China, according to Reuters, which cited an anonymous source. HSBC declined to comment on CNN Business.

“The sheer size of China’s virtually untapped stock and bond market is irresistible to the world’s major financial institutions, especially as Beijing finally allows them to operate wholly owned mutual funds,” said Alex Capri, research fellow at the Heinrich Foundation.

China is the second largest stock and bond market in the world. but it largely untapped by foreigners Investors: International holdings account for about 5% of the $14 trillion stock market, and less than 4% of the $17 trillion domestic bond market, according to stock exchange and central bank data.

That started to change last year, then Black stone (BLK) The world’s largest asset manager in June became the first global company to gain approval for a wholly owned Chinese investment fund project. Two months later, BlackRock launched its first mutual fund in the country, and quickly raised $1 billion from more than 111,000 investors.
Then, in August, JP Morgan (JPM) It became the first US bank to take full ownership of its own securities unit. CEO Jamie Dimon said at the time that China represented “one of the biggest opportunities in the world” for the company.
in October, Goldman Sachs (p)She got the green light to take over her entire stock project. And Morgan Stanley (MSPR) It followed suit with its victory in December, when its Chinese partner said the US bank planned to increase its stake in a brokerage venture to 94%.
More are coming. Earlier this week, China’s securities regulator said it accepted an application from BNP Paribas (BNPQF) To establish a securities company, which makes the company one step closer to expanding its presence in the state.

“China represents a significant growth opportunity for global financial services companies,” said Brendan Ahern, chief investment officer at KraneShares, an asset manager focused on Chinese stocks and bonds.

He added that “developed markets such as the United States and Europe are highly competitive and mature which has led to tariff pressure and diminished opportunities.” But “China’s market is relatively new by comparison.”

Expansion despite uncertainty

The big successes of these banks come nearly two decades after China joined the World Trade Organization and promised to open up its financial sector.

While progress has been slow for some time, the country announced in 2019 that it would completely remove limits on foreign ownership of financial firms the following year, shortly after Chinese President Xi Jinping and former US President Donald Trump have agreed to resume trade talks.

Enthusiasm from global banks and asset managers comes with risk, as uncertainty grows about the political and regulatory climate in China – as well as heightened tensions in Beijing with other countries.

In late 2020, Beijing unleashed unprecedented regulatory pressure on private companies, fearing that they would become too powerful. The ensuing crackdown extended to major Chinese financial players such as Ant Group, which was forced to reform its business and adhere to strict regulations governing banks’ operations.

“There is a feeling, broadly speaking, that Xi may temper some of his more aggressive rhetoric after this year’s 20th party congress, after he affirmed his political stance,” said Craig Singleton, an associate China fellow at the Foundation for Defense of Democracies. to prevailing expectations that Xi will use an important political gathering to cement a historic third term in office. “But the biggest danger is that it does the opposite.”

A number of Western companies have been drawn into controversy in China as geopolitical tensions simmer, particularly over allegations of human rights abuses in the country’s western region of Xinjiang.

In recent weeks, Walmart (WMT) And Intel Corporation (INTC) They met with a public backlash in China over allegations that they were trying to avoid importing products from Xinjiang. And last year, H&M, nike (From) Adidas (ADDDF) and other Western retailers are boycotting China because of the stance they have taken against the alleged use of forced labor to produce cotton in Xinjiang.

pressure at home

Western companies are also facing pressure at home. Call Billionaire Investor George Soros Black stone (BLK)China’s investment in a “tragic mistake” could lose money to its clients and endanger the national security of the United States. Some US politicians have also called on Wall Street to stop “enabling communist China” and take a tougher stance against Beijing.
The pressure has continued in recent weeks. Last month, US President Joe Biden signed the Uyghur Prevention of Forced Labor Act, a law that bans imports from Xinjiang due to concerns about forced labor. He has sent a clear message that his administration and Congress are looking to increase pressure on Beijing.
Doing business in China is difficult.  The clash over human rights makes it more difficult

Capri said China’s decision to allow more foreign companies into the country is “aimed at bolstering collateral damage in the international community,” adding that allowing Western companies to acquire larger stakes in China also gives Beijing “leverage” over Washington and Brussels. .

“This will increase tensions between the major financial firms in the United States and Europe, and their governments,” he said.

However, the potential for making money in China appears to outweigh any political problems.

“While China faces huge economic headwinds, it has defied bearish expectations in the past,” Singleton said, adding that Western banks continued to generate billions of dollars in revenue from China, even with recent regulatory actions.

“In other words, Western banks are playing a long game under the guise of portfolio diversification,” he added.

China motive

Even as Beijing tightens its grip on parts of its economy, there are reasons why the country is keen to open its financial industry to foreign investors.

The government wants to draw on global expertise as it builds a strong and diversified financial services industry, which it needs to manage its looming demographic crisis. Rapidly aging population and shrinking workforce has led to an increase Burden on the country’s inadequate pension system, and put enormous pressure on the government to provide adequate financial resources to the elderly.
Time is running out for China to prepare its economy for

China’s strict adherence to its “zero COVID” strategy and its slow self-isolation from much of the world have not been enough to derail the country. Last year, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, He repeatedly spoke about the importance of opening up to the financial services industry and leveraging global capital and financial expertise.

“One of the main features of the Chinese Communist Party is its adaptability and pragmatism,” Singleton said.

He added that China recognizes that it needs to maintain access to foreign markets, technology and capital, which necessitates those ongoing partnerships with Western companies.

“In other words, the Chinese Communist Party must be integrated to survive, which means that it cannot completely avoid existing global norms or systems even as it tries to change them to suit Beijing’s needs,” Singleton said.


Leave a Comment