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Homework before heading to China
2004-04-06
Business Weekly
China has been gradually opening up the financial market since it entered the World Trade Organization (WTO) more than two years ago.
But to have quick and comprehensive access to this ever-changing market, foreign companies still have a lot of research to do.
An analysis on the following issues is a crucial first step prior to their entry to the Chinese market -- the competitive edge of the financial multinationals in China, new products and services that are needed the most here, becoming more localized and choosing local partners.
First, Chinese partners are the basis of competition for newcomers.
For example, though Chinese banks have to catch up to foreign banks in expertise and management, they undoubtedly have more advantage in local network and client resources.
Such is badly needed during the business expansion of multinational banks and Chinese partnerships will save them from building the infrastructure.
In choosing partners, however, most foreign parties prefer ones with good political contacts, international experience and capital strength, which bring them both good local resources and more common ground in international business. But under the present market condition in China, it is hard to find local companies with all three advantages.
Besides, to market their own products, foreign companies should classify their target customers and market orientation and focus on financial innovation to explore the market potential.
To do that, they will need to study the local environment and understand the local culture, legal system and investment rationale.
Whether these foreign companies can become localized will also, to a large extent, decide their investment success.
What sectors in China's financial industry need foreign participation the most? The answer is exactly where the opportunities for foreign companies exist.
Agricultural insurance, for instance, is an underdeveloped business in China.
It has been applied in many countries under the WTO framework as a subsidy substitute to support agricultural development, but few Chinese companies have expertise in this area.
Financial products that span securities, insurance and banking businesses are other sectors that foreign financial companies can help.
Though China still practises a segregated regulatory scheme of the three financial industries, there has been a trend of integration that will ultimately enable cross-industry products and investments among the three.
The increasing number of financial conglomerates in China is a good example. Foreign institutions have accumulated experience in this area. Their participation will push financial innovation to develop.
Of course, the Chinese market is still very different from overseas markets and regulations on new product development is comparatively stricter. When the market has a tempting profiting potential for foreign companies, it also requires prudent risk and returns assessments in advance.
Among all the financial businesses, insurance has maintained a leading position in the pace of opening-up.
By the end of 2003, altogether 37 foreign insurance companies from 13 countries and regions launched 62 insurance branches in China. They received insurance premiums of 4.65 billion yuan (US$561.5 million) during 2003, up 44.5 per cent on a year-on-year basis.
In some major Chinese cities, foreign insurers have acquired a considerable market share, like 15 per cent in Guangzhou in the south.
More insurance joint ventures are being established and some domestic industrial companies are also taking part in the business.
Authorities are also giving foreign insurers wider business scope and less geographical limits.
Foreign non-life insurers were allowed to set up wholly-owned subsidiaries in China in 2003 and the cities opened for foreign insurers were expanded to 15.
However, foreign life insurance firms are still mainly prohibited to launch such wholly-owned business in China. Most of the foreign firms entering the market last year were from agricultural insurance, pension and reinsurance businesses.
In the banking sector, altogether 62 foreign banks had established 191 operational institutions here by the end of 2003, with total assets of US$46.6 billion, which accounted for only 1.4 per cent of the overall bank assets in China. Their outstanding foreign exchange loans took up 13 per cent of the market share.
Meanwhile, 84 of them have acquired licence for renminbi business. Starting from last December, foreign banks were also allowed to do renminbi business with Chinese corporations in cities that already opened up.
More players are also investing in Chinese shareholding banks, including HSBC's participation in Shanghai Bank and Citibank's purchase of stakes in the listed Shanghai Pudong Development Bank.
As China formally kicked off the Big Four State-owned banks shareholding reorganization this year and aimed to first list two of them -- Bank of China and China Construction Bank, foreign financial institutions are also expected to become strategic investors of these Chinese banking giants.
However, foreign banks still have to tackle many challenges to fit into the new environment of the changing Chinese market.
Some of them have reversed the trend to withdraw from China over the past few years, under mounting pressure of liquidity and risk control.
The China Banking Regulatory Commission has also tightened regulation on foreign banks over the past year and recently came up with new rules on risk monitoring.
In the securities business, opening-up has been at a much slower pace.
By the end of 2003, only two securities joint ventures were launched, one between Xiangcai Securities and CLSA and another between Changjiang Securities and BNP Paribas.
Such joint ventures have limited business scales, as they are unable to do A-share brokering and proprietary investments, which has held back foreign companies from entering the market.
The low liquidity in the stock market and the split share structure of listed firms has also reduced foreign enthusiasm for the market.
Asset management business, however, seems to be more attractive to foreign investors. Altogether eight fund management joint ventures have been in business over the past two years.
By the end of last year, they had launched 15 fund IPOs (initial public offering), with an issuing scale of 25 billion yuan (US$3 billion), which contributed 20 per cent for the total mutual fund IPO scale in China during the year.
Such joint ventures will get more customers if China further loosens foreign exchange control under the capital account and allows qualified domestic investors to use foreign exchange to trade overseas investment products.
Ba Shusong is deputy director with the Financial Research Institute of the Development and Research Centre of the State Council.
Hua Zhongwei is a financial expert with the Central University of Finance and Economics.
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