How Much Access to China Do Foreign Financial Sector Investors Have?

One of the main reasons why foreigners involved in the financial sector are sometimes reluctant when it comes to exploring opportunities in China is represented by the fact that due to legislative uncertainties, the landscape for tends to be perceived as unpredictable. In other words, investors need to know that they presence in China is both wanted and appreciated, something authorities are able to do through legislative and administrative measures.

And, indeed, there are promising signs ahead.

Back in 2017, there was a pledge by China to become more flexibility in terms of what foreign financial sector players are allowed to do and in April of 2018, there were indeed observable results, with foreign companies receiving the permission to apply for majority stakes in mutual fund as well as security projects and the probability that by 2020, they can even retain full control. One month later, it was decided that foreign companies will be allowed to control insurance businesses. Aside from that, existing caps ended up being lifted in mid-summer of 2018, for example caps on ownership when it comes to the banking and debt management sector (20% for an institution and 25% for a group).

How much money is on the table?

Well, China’s financial sector is estimated to amount to approximately $40 trillion, most likely more. Based on estimates which one could consider reasonably optimistic but still realistic, foreign financial service companies will most likely be generating over $30 billion in terms of profits by 2030.

While several large companies have expressed interest (UBS Group AG, Allianz SE, Nomura and JPMorgan, for example) and are in various stages of the bureaucratic process, many entities remain reluctant for two main reasons:

1. Existing trade tensions with the United States, with fears pertaining to the possibility that in retaliation to measures such as US tariffs being imposed on Chinese products and services, China might retaliate by reengining on its promises and once again making the landscape for financial sector companies less than appealing. However, in light of the fact that China would have more gain to lose by going with such an approach as well as the fact that it continues to express a willingness to open up to anything related to foreign trade, trade tension-related fears might subside if assurance given by Chinese authorities is matched by legislative and administrative action
2. Blazing trails in the financial sector can be not only cumbersome but downright dangerous, which is why so many entities are still choosing to sit on the sidelines and see what happens to the existing applications. If the process when it comes to the companies that have expressed interest thus far goes smoothly, there are likely to be reverberations across the entire sector, prompting currently undecided players to take decisive action

While the second reason was to be expected and definitely doesn’t come as a surprise, the first has indeed caught many off-guard. Whenever multi-jurisdiction issues are unfolding, the unexpected should be expected and the current trade situation between China and the United States does not represent an exception.

Escalation on either side, even if not through measures related strictly to financial companies, is likely to be accompanies by a (temporary or longer-term) loss of interest when it comes to financial sector companies that were ready to enhance their presence in China. Perhaps more so than with other industry, one can clearly observe the tendency of most financial sector companies to postpone decisions until there is political, economic and also legislative clarity.

The same way, however, any kind of easing or positive development is likely to increase the interest of financial sector entities with respect to their China presence. While things are difficult to predict in the world of geopolitics, those following these developments can only hope the latter will end up being closer to reality.