Big Banks Rushing for Piece of $43 Trillion China Market Amid Trade War

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Big Banks Rushing for Piece of $43 Trillion China Market Amid Trade War

In the midst of the severe trade battle between the United States and China, a mostly ignored trend is the endeavor by huge US banks to compete in China’s quickly rising financial industry. China has declared exact dates for the start of full foreign ownership of mainland-based financial services firms. Foreign ownership limitations on futures businesses, fund management firms, and securities firms will be eliminated on January 1, April 1, and December 1, respectively, according to the China Securities Regulatory Commission.

“China is very determined to reform its financial markets and knows that without the major American players, it is very difficult to talk about having a truly internationalized market,” observes Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, according to a detailed Bloomberg report. “It also makes sense for China to accommodate a very major source of lobbying funding, particularly given how little there is in the United States right now,” he said.

To that end, officials from JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS), as well as hedge fund and private equity companies The Blackstone Group (BX), and Citadel, recently met with top Chinese authorities in Beijing. However, a fresh wave of hostilities may cast doubt on their optimism. According to The Wall Street Journal, the US has slapped export restrictions on more than two dozen Chinese enterprises, accusing them of exploiting Muslim minority, as well as visa restrictions on Chinese officials.

Key Takeaways

  • China is opening its financial market to international institutions, including those from the United States.
  • Chinese policymakers regard this as critical to revamping the country’s banking industry.
  • US banks are rapidly expanding in China.
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Significance for Investors

China, the world’s most populous nation with roughly 1.4 billion people, has a banking system worth $43 trillion, according to Bloomberg. According to a study from the China Banking Association, total profits made by Chinese commercial banks in 2018 were approximately $267 billion, according to China Daily. According to FDIC statistics released by Reuters, the US banking industry earned $62.6 billion in profits in the second quarter of 2019.

The Chinese financial sector has been plagued by a variety of issues that officials think may be addressed by allowing top international firms with superior business practices to join the market. Among these difficulties include record-high corporate bond defaults, an increase in the amount of bad loans, huge accounting mistakes by publicly traded corporations, and erroneous filings by IPO hopefuls.

“Opening up is a method of putting pressure on financial system changes, particularly given the multiple conflicting interest groups,” said Li Haitao, dean’s distinguished chair professor of finance at Beijing’s Cheung Kong Graduate School of Business.

Meanwhile, as China’s middle and upper classes expand, the Chinese economy is becoming more consumer-driven, and demand for wealth management services is rising. Furthermore, even before the trade war, its trade surplus was shrinking.

According to Daniel Rosen, a partner at economic analysis company Rhodium Group, “to avoid balance of payments issues, Beijing has to attract equally substantial capital inflows, and is diving forward with financial sector liberalization with this long-term reality in mind.”

“Everyone is on board. “We’re not slowing down,” JPMorgan Chase CEO Jamie Dimon said earlier this year in a Bloomberg interview. His bank received clearance for a majority stake in a securities joint venture in China, with the intention of becoming the sole owner once authorities allow it.

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According to Reuters, Goldman Sachs has asked for majority ownership of its own joint venture in China, Goldman Sachs Gao Hua Securities, which offers investment banking services such as securities underwriting and M&A advising. Goldman already had operational control of the JV, but regulators restricted it to a 33% interest. UBS Group AG (UBS) and Morgan Stanley have also sought to assume full control of their own JVs, while HSBC Holdings Ltd. (HSBC) started a majority-owned JV in late 2017 as a consequence of its Hong Kong presence.

Looking Ahead

According to Bloomberg, the state-owned Industrial & Commercial Bank of China Ltd. (ICBC) is the world’s biggest bank by assets, with yearly earnings almost 33% larger than JPMorgan Chase. “In order to build up a substantial competitive presence in China, JPMorgan will need to be judicious about the areas in which they choose to be engaged,” says Benjamin Quinlan, CEO of financial services consultancy company Quinlan & Associates in Hong Kong. “I don’t believe they’ll ever compete with ICBC, given the sheer scale of ICBC’s resources,” he said.

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