China’s Finance World Opens Up to Foreigners, Sort Of

(Bloomberg) -- Despite rising trade tensions globally and a domestic crackdown on private enterprise, China has steadily opened its massive market to foreign banks, insurers, asset managers and payment companies. Wall Street giants such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. are leading the chase after billions of dollars in potential profits. Regulators also have been making it easier for foreigners to buy Chinese stocks and bonds -- something many fund managers are required to do now that major index compilers are including such assets in their gauges. It’s all coming to the growing dismay of some U.S. politicians, who balk at more capital flowing to their biggest geopolitical and economic rival. 

1. What’s the lure?

China’s $58 trillion financial services industry. Even a sliver can be lucrative. Bloomberg Intelligence forecast in 2020 that foreign commercial bank assets in China could rise 9.3% a year through 2025. Even then it’d only be 1.2% of the total market, up a tick from 1.1% -- illustrating how huge the market is. This year, the analysts saw foreign banks on track to claim 1.1% of China banking profits in 2025 and 2030, or about $7 billion. If U.S.-China relations sour further, though, those forecasts could slip as some players retreat and others put expansion plans on hold.

2. What are the barriers?

Much is political. In Washington there’s bipartisan support for a tougher line on national security grounds. President Joe Biden has expanded his predecessor’s move to bar U.S. investments in companies identified as having links to China’s military. The U.S. is also implementing rules that could force some Chinese companies to delist in New York over auditing issues. On its side, although China has reiterated that the opening up will proceed, President Xi Jinping’s regulatory crackdown on Big Tech and other sectors this year in pursuit of “common prosperity” has created uncertainty and raised risks. The lengthy and often opaque application process also can be a deterrent: Goldman waited 10 months for approval to take over its securities joint venture; Visa Inc. has been waiting since 2015 for a green light. Cracking a market dominated by government-controlled rivals that have longstanding relationships with clients is also a costly challenge.

3. What’s in it for China?

The benefits may be twofold: U.S. politicians accuse China of being a one-sided beneficiary of global commerce, so opening up makes trade seem more balanced. And Chinese leaders have long described the moves as a useful way to improve the competitiveness of the domestic financial firms -- without threatening their dominance -- as well as to allocate capital more efficiently and attract foreign investment. Central bank governor Yi Gang has described the moves as “prudent, cautious, gradualist.”

4. When did this start?

China began allowing full foreign ownership of securities and mutual fund firms, life insurers and futures-trading houses in 2020, after clearing the way for full takeovers of local banks by foreigners the year before. Foreign firms can now also be lead underwriters for all types of bonds and control wealth-management firms. As of Nov. 1, 2021, qualified foreign investors can trade key commodity and stock market derivatives. The Shanghai-London Stock Connect officially kicked off in 2019, allowing companies listed on one bourse to trade shares on the other. Hong Kong investors have been able to trade on the Shanghai and Shenzhen exchanges in China for years using similar ties.

5. How’s it going?

In fits and starts. JPMorgan in August became the first Wall Street firm to get approval to take full ownership of a securities venture in China, just ahead of Goldman. Both were seeking a freer hand to set strategy and expand. Western banks have been on a hiring spree and are ramping up their ambitions in asset and wealth management. Goldman is seeking to double its staff in China, to 600. Credit Suisse said it would triple its workforce in the country. Yet not everyone is expanding. In a surprise about-face in March, Vanguard Group Inc. dropped its bid to set up a mutual fund company and said it would focus on a joint venture robo-adviser with Ant Group Co. instead. Citigroup Inc. a month later announced it would exit retail banking in China even as seeks to set up a wholly owned investment-banking business. As of late 2021, only four companies had taken advantage of the Shanghai-London Connect.

6. What about stocks and bonds?

They’re being slowly added to widely followed global benchmarks, including stock indexes by MSCI Inc. and FTSE Russell and, for bonds, the Bloomberg Barclays Global Aggregate Index, JPMorgan’s GBI-EM indexes and FTSE Russell’s flagship World Government Bond Index. That is expected to draw hundreds of billions of dollars more in purchases from funds that track those gauges, since the fund managers have to buy the underlying securities. But there also have been moves in the U.S. to force American investors to curb their China exposure.

7. How’s that going?

Bumpy. Index providers moved to delete Chinese companies affected by the U.S. executive order on military ties. FTSE Russell began adding Chinese bonds to its benchmark index in October 2021, but extended to three years the time frame to grow their weighting to the planned 5.25% (around that of the U.K.’s). Two of the four issues regarding market access that MSCI cited in 2019 when it said it wouldn’t add any more yuan-denominated shares remain unresolved. Market turbulence in recent years, including major stock sell offs, has periodically cooled interest. Some investors worry about being unable to repatriate their money due to China’s capital controls. (The government has long kept a tight grip on money flowing in and out so as to preserve the value of its currency, the yuan.)

The Reference Shelf

• Bloomberg Businessweek looks at how China tries to keep its financial system from crashing.
• The bankers leading Wall Street’s biggest-ever China bet.
• Bloomberg Opinion’s John Authers sees plenty for global investors to worry about in China, and Shuli Ren homes in on the government’s crackdown on the private sector.
• China also looks to deepen its foreign-exchange markets.
• Bloomberg Economics on China’s financial sector in 2025, and the new risks to growth.

©2021 Bloomberg L.P.

With assistance from Bloomberg