China has developed such a track record with respect to being let’s say opaque over its multi-millennia history that this inevitably gave birth to myths which are no longer relevant when it comes to 2020 realities. One such “brokerage myth” revolves around China not wanting foreigners to own Chinese assets and yes, there is some truth behind it.
More specifically, China didn’t want Western mega-corporations to control large Chinese businesses rather than not wanting Average Joe investors to gain exposure to Chinese assets, so right off the bat, this is the nuance we need to understand. But even when it comes to the “mega-corporation” dimension, China has gradually allowed increased foreign ownership of even large businesses. For example, at this point, life insurance companies are being allowed (in stages) to be 100% foreign-owned and the same principle is valid when it comes to the futures and mutual fund dimensions. The same way, ownership caps for the banking sector were “sweetened” in 2018 and as of 2019, the trail was paved for full ownership.
Again, quite a bit has changed over the years.
Yet another example is represented by the fact that foreign entities can now be lead underwriters for bonds and be anything from wealth managers to pension fund managers as well as inter-dealer brokers. The results are already becoming crystal-clear in many industries, such as:
- The asset management space, with players such as Fidelity, Vanguard, BlackRock and Van Eck Associates applying for licenses which will grant them the right to fully own Chinese companies
- The banking sector, with UBS, HSBC, JPMorgan and Nomura having been approved as majority holders in local JVs and entities such as Goldman Sachs, Credit Suisse and Morgan Stanley applying as well
- The insurance sector, with Allianz receiving the official okay to become the first insurance company in China owned 100% by a foreign entity
- The rating agency space, with S&P Global Ratings as well as Moody’s and Fitch Ratings entering the onshore rating scene
… the list could go on and on.
However, it is worth pointing out that difficulties continue to persist, with many let’s call them hidden barriers still acting as a deterrent for foreign (especially Western) companies that are interested in establishing a more pronounced local presence. As a bit of a textbook example to that effect, Visa and MasterCard have been waiting to be approved after filling in the proverbial paperwork since… well, 2015. In light of the fact that China pledged to make decisions on electronic payment service-related applications within 90 days as of this point, this is likely to change but still, the Visa and MasterCard situations represent textbook examples of hidden barriers which make establishing a firm presence in China difficult.
Furthermore, geopolitical risks remain, with the trade situation between China and the United States in the spotlight. Even if progress has been made in this respect, “volatility” is the operative word and foreign entities understand all too well that they are only a “paradigm shift” legislative step away from having their plans turned upside down.
Still, even with the cons that are inevitably involved, few large players can say no to the prospect of receiving a pie of China’s $45 trillion financial services sector, with estimates by entities such as Bloomberg Intelligence pointing to a potential profitability level for foreign financial services operators north of $9 billion by 2030.
Let’s just say that if you are interested in Chinese assets and are shopping around for the right broker, there are a wide range of options at your disposal, from full-service brokers who offer anything from simply fulfilling orders to consulting and financial data to so-called discount brokers, who don’t put much in the way of bells and whistles on the table but offer low prices that are difficult to refuse.
At the end of the day, no matter which brokerage company you end up doing business with, whether foreign or domestic, it is vital to understand that no, China is most definitely not a Western nation, with all consequences derived from that. Consequences which tend to revolve around (greatly) increased volatility compared to the West and severely inadequate predictability.
Please note that we are not referring to asset price volatility in this instance, that is a topic for another article, but rather volatility related to the legislative status of the financial services sector. Even if you are working with a foreign company which has an excellent track record abroad, you can be one domestic legislative change away from having to go back to the proverbial drawing board and that is a risk you need to take into consideration.
How have foreign investors been reacting to the new(er) landscape thus far?
Let’s just say the reactions have been… mixed.
On the one hand, it is now an established fact that Chinese stocks and bonds are being added to a wide range of indexes, for example FTSE Russell and MSCI stock indexes or Bloomberg Barclays Global Aggregate Index as well as the GBI-EM indexes by JPMorgan for bonds. This resulted in, of course, billions of dollars in additional purchases.
However, in light of for example the Chinese stock market under-performing as well as in light of issues such as potential difficulties with respect to repatriating capital, foreign investors haven’t exactly been flocking to these Chinese assets. For example, in September of last year, when the quota system was eliminated for stocks as well as bonds, only 1/3 of the issuance ended up finding buyers. At the risk of repeating ourselves to the point of sounding like a broken record: “volatility” is the operative word, with potentially generation-defining wealth lying ahead for those able and willing to navigate these oftentimes turbulent waters. Should you or your organization be in need of assistance with accomplishing just that, the ChinaFund.com team is at your disposal.