Even as the trade war was crimping the flow of goods between the U.S. and China, the Chinese government was opening doors in another arena, inviting in more foreign banks, insurance providers and other financial services companies.
China has also been making it easier for foreigners to buy its stocks and bonds — something many fund managers are required to do now that major index compilers are including Chinese assets in their gauges — to the growing dismay of some U.S. politicians. The take-up is gathering pace but the going has been tough, even before the economic disruption and increased political tension caused by the coronavirus pandemic.
What’s the change?
In 2020 China began allowing full foreign ownership of more financial services companies. Ownership caps for securities and mutual fund firms, life insurers and futures-trading houses came off in stages during the year. Regulators in 2019 had cleared the way for full takeovers of local banks by foreigners, a year after easing caps in that category. Foreign companies now also can be lead underwriters for all types of bonds and control wealth-management firms. The Shanghai-London Stock Connect officially kicked off in 2019, allowing companies listed on one bourse to trade shares on the other. (As 2021 began, however, only four companies had taken advantage of it.) The Shanghai and Shenzhen exchanges were linked earlier with the one in Hong Kong, a semi-autonomous part of China.
What’s the lure?
China’s more than $50 trillion financial services industry. Even a sliver can be lucrative. Not long ago Bloomberg Intelligence estimated that foreign banks and securities firms could be raking in profits of more than $9 billion a year in China by 2030. The pandemic and an increasingly fraught U.S.-China relationship have clouded that forecast. But even so, in late September BI forecast that foreign commercial bank assets in China could rise 9.3% a year through 2025 to 1.2% of the total market. That’d be up from 1.1% in 2020 — illustrating how huge the market is. Similarly, the analysts saw foreign banks on track to claim 1.5% of China banking profits in 2025, up from 1.1% in 2019, helped by the looser rules and greater access. If relations sour further, though, those shares could slip as some players retreat and others put expansion plans on hold.
What barriers remain?
Much is political. In Washington there is strong bipartisan support for a tougher line on China on national security grounds. In November, then-President Donald Trump barred American investments in companies identified by the U.S. Defense Department as having links to China’s military, and lawmakers were laying the groundwork for rules that could eventually force some Chinese companies to delist in the U.S. over auditing issues. Attitudes could harden further as the global economy struggles to recover from the pandemic-induced slump, although China’s President Xi Jinping said in November that opening up was a fundamental policy that won’t change. There are also plenty of hidden barriers, including the challenge of cracking a market dominated by government-controlled rivals that have longstanding relationships with clients. The lengthy and often opaque application process also can be a deterrence. Visa, for example, has been waiting since 2015. In a surprise about-face in March, Vanguard Group Inc. dropped its bid to set up a mutual fund company in China and said it would focus on a joint venture robo-adviser platform with Ant Group Co. instead.
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 – starting in October 2021 – 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.
How’s that going?
Bumpy. Index providers including MSCI, FTSE Russell and S&P Dow Jones Indices have moved to delete companies affected by Trump’s order regarding military ties. Chinese sovereign bonds won inclusion into FTSE Russell’s benchmark bond index in September, after an initial rejection. In 2019 MSCI said it wouldn’t add any more yuan-denominated shares until China fixed long-standing concerns over market access. And not every opening is met with enthusiasm: Foreign investors had bought only a third of the total allotment at the time regulators scrapped the quota system for Chinese stocks and bonds in September. Market turbulence in recent years, including major stock sell-offs, has dampened interest. Some investors also 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.)
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 the 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.”
