Why Now Is a Much Better Time for Global Players to Compete in China Than a Decade Ago?
/ SOURCE : yicai
Why Now Is a Much Better Time for Global Players to Compete in China Than a Decade Ago?

(Yicai Global) Dec. 3 -- To promote and support the development of the financial sectors, China has been opening up the market by relaxing shareholding limits to foreign players in the financial sector. In July 2019, the PBOC announced that the 51% shareholding cap for foreign ownership of joint-venture brokers, fund management companies (FMCs), and futures companies would be cancelled by 2020, one year earlier than originally planned. 

The wave of entries into China has continued with great momentum in the recent years. For example, 22 global asset managers have set up private fund management (PFM) companies in China as of September 30, 2019. Meanwhile, many firms have been actively converting their FMC JVs into majority ownerships. Some firms have even been considering Bank Wealth Management Subsidiaries (WMSs) as another plausible structure. 

Moreover, things have not been confined to the asset management space. The fundamental changes happening in capital markets are providing additional opportunities for global players to compete in the wealth management and securities spaces. 

In this article, we want to collate all the material developments in the last few years to provide global players with a big picture of the changing dynamics in the China market, thereby explaining why the current period is much better for global players to compete in China than it was a decade ago.

More Favorable Market Environment

China is an exciting market for foreign financial services firms, given its vast size and strong growth compared to other leading global economies. Today, China has already become the second largest economy in the world, with the second largest stock market globally with a market capitalization of RMB 43.5 trillion (USD 6.3 trillion) as of year-end 2018. In its broadest definition (i.e. including shadow banking investments), China's asset management market was equivalent to RMB 111 trillion (USD 16.2 trillion) in 2019 H1. 

To further support its economic development, China is speeding up the development of its capital markets by various forward-looking initiatives and by opening up the market for foreign participation.

Rising and More Sophisticated Demand by Domestic Investors 

The demand from domestic investors is huge and is expected to continue to grow. The investable wealth of retail clients is forecasted to grow from RMB 167 trillion(USD 24.3 trillion) today to RMB 280 trillion(USD 40.7 trillion) by 2023. Meanwhile,the balance sheet of institutional clients(including only insurance, basic pension,NSSF, corporate annuities and commercial pension products) is expected to more than double from RMB 24 trillion (USD 3.5 trillion)to RMB 59 trillion (USD 8.6 trillion) over the same period. 

At the meantime, onshore wealth management and pension and insurance markets continued to grow and are expected to translate into a huge demand for outsourced investment management. 

Increasing participation by foreign investors in China

Over the last decade, some global investors have already recognized China as an important market for investments, given the enormous market size and strong macroeconomic growth, thereby actively overweighting China in their global asset allocation portfolios. The demand is now amplified as global indices have started to include onshore Chinese assets into the benchmark, triggering further investment demand from passive investors. It is expected that this will translate into an estimated inflow of close to USD 100 billion into the China market in 2019. 

Advancement of the Local Capital Market

In the past, the real economy in China raised funding mainly through indirect sources such as bank deposit or shadow banking channels. However, these avenues have been posing enormous hidden credit risks to the financial system and have so become increasingly unsustainable amid slower economic growth. Hence, policymakers have been proactively driving the development of local capital markets. For example, the Science and Technology Innovation Board (STAR) was established to allow different types of companies to raise funds, and to create trading opportunities for investors of varying risk appetites.

At the same time, it is expected that the capital market trading environment will improve and converge towards global standards, as Chinese policymakers recently proposed various policies and reforms to increase the width, depth and transparency of local capital markets. These policies include the introduction of more new derivative products for onshore markets, a stricter set of share suspension criteria, and measures to vitalize stock trading activities.

Continued Development of Offshore RMB Assets

With the blueprint of RMB internationalization from trade settlement currency to investment currency to a final goal as reserve currency, the RMB has become a more international currency compared to a decade ago.

While there have been setbacks on advancing the RMB as a settlement currency given the association with the trade war and the slow relaxation of controls with regard to foreign exchange, substantial progress for the RMB as an investment currency has been observed. For example, various RMB financial products have begun to prosper in Hong Kong, not only RMB bonds, but also various types of RMB securities (i.e. securities traded in RMB) listed on the Hong Kong Stock Exchange including ETFs, REITs and equities. Policy relaxations are also driving the development of offshore RMB risk management instruments. For instance, the HKEX first introduced bond derivatives in 2017, serving as an interest-rate-hedging tool given the demand for RMB bond investments from channels such as the Bond Connect schemes.

Emerging Business Opportunities

Asset Management: In Search of 'Quasi-fixed Income' Substitutes

Many of "quasi" managers will begin to transform themselves into "professional" managers. Banks are actively setting up Bank Wealth Management Subsidiaries (WMSs) to replace legacy bank WMPs, with WMSs focusing on standard assets, such as equities, rather than shadow banking assets. Meanwhile, securities asset managers (Sec AMs) are actively building up their actively managed Collective Asset Management Plans. Trust companies that were historically "channel vehicles" for shadow banking-based investment products are transforming into Family Trusts. Cumulatively, the overall AUM of the market is projected to reach RMB 170-205 trillion (USD 25-30 trillion) by 2023. 

Wealth Management: Elevating From Product Distribution to Broader Advisory

Foreign wealth managers may be able to create opportunities that entice clients with more professionally managed investment solutions. For example, according to our recent survey, the "Second Generation" of target families tend to seek discretionary wealth management solutions so that they can free themselves from managing inherited wealth and so pursue their personal interests. Foreign wealth managers can also leverage on their global expertise to bring in higher-end private banking solutions, such as wealth and inheritance planning. 

Securities: Derivative Innovation and Global-standard Securities Services

Global investment banks can then competein the sales and trading space by focusingon more innovative derivative products andvarious structured solutions. We believe that the influx of global asset managers will lead to the demand for more complicated financial products. Equally, we anticipate that the market will have a strong need for custody and security services alternatives that are more aligned to global standards, as foreign player participation increases, and the local institutional customer segment grows.

Critical Strategic Agenda for Global Players in China

While the market environment in China has become a lot more reasonable for global players than a decade ago, the heavy local competition and different market structure (e.g. separate entities and licensing for securities versus banking) still presents enormous challenges for global players aspiring to deepen their presence in China. 

For players with vastly different backgrounds and stages of development in China, we believe it is imperative to do the following: calibrate an appropriate overall China ambition; design business propositions in conjunction with keeping license application considerations in the mind; consider a series of organic, inorganic and partnership avenues for growth; and lastly, develop future-proved infrastructure that is most suited for China's unique but evolving market structure. 

We remain excited about the prospects of the China market for global players and hope that this article is a useful introduction for all global players to shape their ambitions. 

This article is excerpted from Oliver Wyman's recent report titled China (Re)Entry For Globals: Starting the new chapter.

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Keywords: Investment , China