What to watch as China opens its US$45 trillion financial sector

Shanghai

CHINA'S big bang opening of its US$45 trillion financial industry begins in earnest in 2020 - a step-by-step affair that is unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party-ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group, JPMorgan Chase & Co and BlackRock to expand their footprint in China and compete for a slice of its growing wealth.

Chinese President Xi Jinping is seeking to cushion the world's second-largest economy against the steepest slowdown since the early 1990s after a crackdown on risky lending squeezed corporate funding and a trade dispute with the United States hit exports.

Not only will foreign firms bring with them fresh capital, policymakers expect they will force entrenched domestic players to sharpen their operations and become more responsive to the market.

China is at a stage where regulators and the government are comfortable that local business can handle the threat of foreign competition, according to Paul Schulte, the Singapore-based founder of Schulte Research and former head of Asia strategy for Nomura Holdings.

Firms like Goldman and JPMorgan "are looking to expand, merge, buy, grow in the next cycle - not this one", he added.

Foreign financial firms may plough seven trillion yuan (S$1.4 trillion) to eight trillion yuan of assets onshore in the next few years, Huang Qifan, vice-president at China Center for International Economic Exchanges and former mayor of Chongqing, said this month.

For the global powerhouses, the opportunities are immense barring a major economic slowdown or change of course.

Up for grabs is an estimated US$9 billion in annual profits by 2030 in the commercial banking and securities sectors alone, according to Bloomberg Intelligence forecasts.

Here is a chronological guide to what steps await, what is at stake, and who is rushing in.

Insurance

To kick off the new year, foreign insurers can apply to set up 100 per cent-owned units offering life insurance, a segment that accounts for three-quarters of the Chinese insurance market.

Joint ventures - of which ICBC-AXA Assurance is the biggest - brought in 8 per cent of the sector's total premiums last year, but have not been growing as fast as domestic competitors, according to Fitch Ratings.

Local firms dominate the market with their vast distribution networks and millions of agents, led by China Life Insurance and Ping An Insurance (Group).

Among those poised to expand their presence is German insurer Allianz, which in 2018 got the green light to set up the first entirely foreign-owned insurance holding company.

Others including Cigna Corp and Standard Life Aberdeen have indicated no intention to seek control, with Cigna calling its partnership with China Merchants Bank a "winning formula".

"There's no best approach clearly in sight" for fully foreign-owned life insurers, said Jimi Zhou, a partner of consulting at PwC China. "The pie is big enough, but it depends on how you want to eat it."

Futures

Also on the first day of the year, overseas firms will be allowed to set up their own entities to trade futures in a crowded market where nearly 150 local players had combined profits of only 3.4 billion yuan in the first half.

Foreign interest has so far been limited by restrictions in China on making unhedged bets against the market and quotas imposed on index and commodity futures.

That could change quickly should authorities push forward with a broad swath of changes in the derivatives space.

Overseas companies currently have a tiny presence in China's futures market. JPMorgan owns 49 per cent of a joint venture, while UBS Group controls a futures subsidiary through its onshore securities outfit.

Asset management

Asset management is a hotter ticket. Foreigners will be able to apply for licences to start wholly owned mutual fund management firms in April, or buy out local funds.

"Mutual funds asset growth in China could outpace the world over the next decade," said Sharnie Wong, a senior analyst at Bloomberg Intelligence.

"Investment banking and securities revenue could rise as the country's capital markets develop. Foreign players must navigate challenges including competition for talent and regulatory hurdles," he said.

The stakes are high with households sitting on about 90 trillion yuan in investable assets. But the competition is cut-throat.

Hedge funds already in business in China have found it difficult to amass assets that gravitate to local high-flyers.

Three years after the market was opened, BlackRock, Man Group and 20 other firms licensed to run so-called private securities funds for high-net-worth individuals manage just 0.2 per cent of China's 2.5 trillion yuan in hedge fund assets.

The competition may be easier to pick off in the broader mass market, where the domestic industry is trying to shift away from guaranteed-return products, mostly offered by state-backed banks.

Outstanding wealth products issued by Chinese lenders stood at 22 trillion yuan as at June 30, making them the nation's biggest asset managers.

Brokerage and investment banking

A seismic shift will begin towards the end of 2020 after global investment banks are allowed to operate on their own from Dec 1.

While some have been doing business in China for over a decade, serving as dealmakers for the nation's corporate titans across the globe, taking full control will allow Wall Street firms to dictate expansion plans and navigate away from culture clashes with local partners.

They will meet fragmented competition as China's 131 brokers are comparative minnows with combined assets equal to what Goldman Sachs sits on by itself.

Still, a recent push by regulators to forge local investment banking giants means the competitive landscape in China's US$21 trillion equity and bond markets may become more challenging.

For China, the opening is as much a chance to reform financial markets and strengthen local champions as it is an opportunity to address US complaints about the Asian nation being a one-sided beneficiary of trade.

With the world's two largest economies now moving closer to signing the first phase of a trade deal, the slow dismantling of restrictions is set to continue apace.

Addressing more than a dozen delegates including former US Treasury Secretary Hank Paulson and Credit Suisse CEO Tidjane Thiam in Beijing in November, President Xi was clear though that the liberalisation of financial services would continue on China's terms. The nation will remain vigilant to ensure it preserves its "financial sovereignty", he said. BLOOMBERG