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Research blog

 

November 10, 2017 

​Enter The Dragon – China’s Financial Sector

China’s finance-sector opening would be great news if you could make money. Beijing’s decision isn’t the win for overseas banks it might appear and far less of one than it would have been a decade ago

A Historic Step

China took a major step toward the long-awaited opening of its financial system, by removing foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers. The new rules will give global financial companies unprecedented access to the world’s second-largest economy.

For foreign investors watching China’s rough-and-tumble financial markets from afar, it can sometimes seem like every week brings another mini-crisis. Recent sharp selloffs in stocks, bonds and commodities are raising fears of a repeat of past crashes—and raising the question, If markets are going haywire, how healthy can the country’s economy be? According to recent estimates, China’s economy is poised to grow at 6.8% (up from 6.5%) for 2017.

Foreign banks held 2.9 trillion yuan ($436 billion) of assets in China at the end of 2016, accounting for 1.26 percent of the nation’s total banking assets, the lowest share since 2003, according to the China Banking Regulatory Commission.

My Two Cents

Is this good news good? Many will agree that if this had happened a decade ago, China would have seen substantial investor interest as the financial sector was smaller, less competitive and less saddled with bad debt that could prove politically difficult to dispose of.

The fundamental problem is that China’s finance sector, while impressively large, is no longer a very profitable place to be. Competition in the banking, securities and insurance markets is intense.

It hardly seems a coincidence that China is letting in more foreign capital just when some of its banks could arguably do with a recapitalization. Even if they take full control of their China ventures, international financial companies will face multiple challenges –the biggest of which will be the competition from government-controlled rivals, who currently dominate the nation’s financial system and have longstanding relationships with giant state-owned companies that drive much of China’s economic activity.

Overseas firms will calculate the risk-reward margin carefully and I expect more growth ahead as the scale of the market is something that can’t be ignored.

Small Slice

Foreugn share of total bank assets in China dropped to record low in 2016

 

Source: China Banking regulatory Commission - Bloomberg