China Is About to Give Global Finance the Chance of a Lifetime

(Bloomberg) -- China’s $42 trillion financial sector is set to open up to the world like never before.

To deliver on longstanding pledges and help stave off the threat of tariffs from U.S. President Donald Trump, Chinese officials have set a June 30 deadline to ease ownership and business restrictions for banks, securities firms, asset managers and life insurers.

Securities firms like Goldman Sachs Group Inc. and UBS Group AG have an opportunity to boost their share five fold as they take more direct control of joint ventures, projections by Bloomberg Intelligence show. Insurers including AIA Group Ltd. are set to cash in on their already healthy presence, while banks like HSBC Holdings Plc and Citigroup Inc. face a steeper road ahead to build market share, but will reap juicy profits as they do so.

Much as World Trade Organization entry in 2001 revolutionized the manufacturing industry, opening the financial sector could transform how capital is allocated and wealth managed across China. The charts below show the state of play and estimates on how that’ll change.

Earnings at foreign banks are set to grow by more than 10 times by 2030. Even so, they’ll remain bit players. The broader impact will come as their entry improves lending standards and chips away at a system that’s geared heavily in favor of bloated state-owned enterprises, to which banks channel loans betting that Beijing will bail them out if needed.

"A more open and competitive financial sector should deliver more growth bang for each unit of credit buck -- critically important if China is to make headway on deleveraging," according to Bloomberg Economics Chief Asia Economist Tom Orlik.

HSBC, Bank of East Asia Ltd., Standard Chartered Plc and Citigroup are currently the biggest foreign banks in China. HSBC, with more than 7,000 staff in the mainland according to its website, aims to have 5,000 in Guangdong province alone by 2020, former HSBC Chief Executive Officer Stuart Gulliver said in December.

Foreign-backed securities ventures’ profits are forecast to almost quadruple as their share increases five fold by 2030. UBS has already submitted an application to acquire a majority stake in its Chinese venture, becoming the first global bank to take advantage of the latest commitment to open up. Goldman Sachs -- which has been quietly laying the groundwork for a beefed up onshore business -- plans to significantly increase both headcount and the amount of capital it deploys once it can get control.

Life insurance is the one corner of China’s vast financial sector where foreign firms have done pretty well, with market share by premiums advancing for six straight years. The best performers in the years ahead are likely to be those that already have one foot in the door.

"The biggest driver of life insurers’ market share advancement could come from existing players such as AIA and bank-affiliated insurers such as ICBC-Axa, and BoCommLife, as they deploy more resources to ramp up their business," said Steven Lam, Bloomberg Intelligence insurance analyst in Hong Kong. "New entrants’ contribution to the mix may come after 2020."

As part of the opening measures, China pledged to lift foreign ownership in mutual fund management and futures firms to 51 percent by June and remove any limit in three years. Given the massive investment pool, if foreign firms can squeeze just a 6 percent share by 2030, that would give them $1.8 trillion in assets under management.

China’s big financial opening won’t be without risks and setbacks. The heavy hand of the state will need to recede before foreigners jump in with confidence. Capital account opening -- with all the volatility that can entail -- will need to resume so investors know they can get their cash out, not just in. Yet in an economy as vast as China, even single-digit market shares will offer sizable profits, meaning the world’s financial landscape will never be the same again -- just as manufacturing has been transformed since China’s WTO entry.

"The direction of policy is clearly the right one, but making rapid progress could be tough to do," says Orlik. "Foreign firms will tread carefully as they approach a Chinese market that’s big, complex, and dominated by connected state-owned players."

--With assistance from Zhang Dingmin Jun Luo Cathy Chan Francis Wing Fu Chan Steven Lam Sharnie Wong and Tom Orlik (Economist)

To contact the reporters on this story: Malcolm Scott in Hong Kong at mscott23@bloomberg.net, Hannah Dormido in Hong Kong at hdormido@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Yue Qiu at yqiu47@bloomberg.net, Jeffrey Black, Marcus Wright

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