Analysis: China is still the ultimate prize that Western banks can’t resist
“The sheer size of China’s virtually untapped equity and bond market is irresistible to the world’s large financial institutions, especially since Beijing is finally allowing them to operate wholly owned mutual funds,” said Alex Capri, a research fellow at the Hinrich Foundation.
China is the world’s second biggest market for stocks and bonds. But it’s largely untapped by foreign investors: International holdings account for about 5% of the $14 trillion stock market, and less than 4% of the $17 trillion onshore bond market, according to stock exchange and central bank data.
“China represents a significant growth opportunity for global financial service companies,” said Brendan Ahern, chief investment officer for KraneShares, an asset management firm focused on China stocks and bonds.
“Developed markets such as the United States and Europe are highly competitive and mature which have led to fee compression and diminishing opportunities,” he added. But “China’s markets are relatively young in comparison.”
Expansion despite uncertainty
The significant inroads for these banks are coming about two decades after China joined the World Trade Organization and promised to open up its financial sector.
The enthusiasm from global banks and asset managers also comes with risks, as there is growing uncertainty about China’s political and regulatory climate — as well as Beijing’s rising tensions with other countries.
“There is a sense, broadly, that Xi may moderate some of his more aggressive rhetoric after this year’s 20th Party Congress, having assured his political position,” said Craig Singleton, an adjunct China fellow at the Foundation for the Defense of Democracies, referring to the widespread expectation that Xi will use an important political gathering to cement a historic third term in office. “The biggest risk, however, is that he does the opposite.”
A number of Western businesses have been swept up in controversy in China as geopolitical tensions worsen, especially over allegations of human rights violations in the country’s western region of Xinjiang.
Pressure at home
China’s decision to let more foreign firms into the country is “aimed at shoring up collateral damage in the international community,” according to Capri, who added that allowing Western companies to take larger stakes in China also gives Beijing “leverage” over Washington and Brussels.
“This will increase tensions between the big financial firms in the US and Europe, and their home governments,” he said.
The moneymaking potential in China seems to outweigh any political headaches, though.
“While China is facing huge economic headwinds, the country has defied bearish predictions in the past,” Singleton said, adding that Western banks have continued to generate billions of dollars in revenue from China, even with the recent regulatory crackdown.
“In other words, Western banks are playing the long game under the guise of portfolio diversification,” he added.
And even as Beijing tightens its grip over parts of its economy, there are reasons why the country is eager to open its financial industry to foreign investors.
China’s strict adherence to its “zero Covid” strategy and slow, self-isolation from much of the world hasn’t been enough to throw the country off course, either. Last year, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, repeatedly talked about the importance of opening up the financial service industry and drawing on global capital and financial expertise.
“One of the Chinese Communist Party’s key attributes has been its adaptability and its pragmatism,” Singleton said.
He added that China understands it needs to maintain access to foreign markets, technology and capital, necessitating those continued partnerships with Western firms.
“In other words, the CCP must integrate to survive, which means that it cannot completely eschew existing global norms or systems even as it tries to alter them to suit Beijing’s needs,” Singleton said.
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