- Major banks in recent weeks have inked deals to expand their footprint in China
- largely untapped by foreign investors
- The significant inroads for these banks are coming about two decades after China joined the World Trade Organization
- Western companies are also facing pressures at home
- The government wants to utilize global expertise as it builds a strong and diverse financial service industry
For many companies, doing business in China is getting trickier by the day. But Western banks and asset managers are more than willing to up their bets on the world’s second biggest economy, convinced that the opportunities remain too good to pass up, reports CNN.
Stocks and bond market
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.
That started to change last year, after BlackRock (BLK) — the world’s largest asset manager — in June became the first global firm to gain approval for a wholly owned Chinese mutual fund business. 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) became the first US bank to gain full ownership of its securities unit. CEO Jamie Dimon said back then that China represents “one of the largest opportunities in the world” for the firm.
In October, Goldman Sachs (GS), received the green light to fully take over its securities venture. And Morgan Stanley (MSPRE) followed suit with a victory of its own in December, when its Chinese partner said the American bank planned to boost its stake in a brokerage venture to 94%..
“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.
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.
While progress was slow for a while, the country in 2019 announced that it would entirely remove foreign ownership limits for financial firms the following year, shortly after Chinese President Xi Jinping and former US President Donald Trump agreed to restart trade talks.
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.
In late 2020, Beijing launched an unprecedented regulatory squeeze on private enterprise, worried that such firms had become too powerful.
“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.
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.
In recent weeks, Walmart (WMT) and Intel (INTC) met public backlash in China over allegations that they were trying to avoid importing products sourced from Xinjiang. And last year, H&M, Nike (NKE) Adidas (ADDDF) and other Western retailers were threatened with a boycott in China because of the stand they had taken against the alleged use of forced labor to produce cotton in Xinjiang.
Pressure at home
Western companies are also facing pressures at home. Billionaire investor George Soros called BlackRock (BLK)’s China investment a “tragic mistake” that could lose money for its clients and imperil US national security. Some American politicians also called on Wall Street to stop “enabling Communist China” and take a tougher stance against Beijing.
The squeeze has continued in recent weeks. Last month, US President Joe Biden signed the Uyghur Forced Labor Prevention Act, a law that bans imports from Xinjiang over concerns about forced labor. It sent a clear message that his administration and Congress are looking to ratchet up the pressure on Beijing.
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.
China’s motive
The government wants to utilize global expertise as it builds a strong and diverse financial service industry, which it needs to manage its looming demographic crisis. A rapidly aging population and shrinking workforce have increased the burden on the country’s inadequate pension system, and put tremendous pressure on the government to provide enough financial resources for the elderly.
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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Source: CNN
