This article was first published by Ignites Asia on April 12, 2022, with the headline, Entering China: embracing opportunity at a time of extreme uncertainty.
After years of waiting, international financial companies are now enjoying straightforward access to mainland China, following reforms that allow banks and asset managers to own the entirety of their onshore business.
Decision-makers at these companies are no longer asking how they will get into China. Instead, they are now drawing up detailed plans to succeed in the world’s second largest economy.
China is a market that remains largely untapped by the foreign financial industry and presents opportunities in everything from wealth and asset management, trade finance to sustainability initiatives. But this newfound access comes at a time of extreme uncertainty, including regulatory pressure, the tumbling price of US-listed Chinese tech companies, a slowdown in the all-important property sector, and persistent Omicron breakout under China’s strict zero-COVID policy.
How are decision-makers reacting to this complex environment? An Oliver Wyman management survey of global financial firms finds that 78% of respondents are positive over the next five years, while only 56% are optimistic over a time horizon of the next 12 months.
Greater enthusiasm over the medium term reflects an understanding that a company is implementing a long-term strategy that will take several years to bear fruit. The challenge will be to realise these ambitions, while at the same time overcoming obstacles on the path to success.
The key difficulty will be creating a competitive advantage. Whereas established local competitors already have strong relationships with clients, global companies often highlight their differentiation in taking global expertise and translating it into an offering that is attractive to a domestic audience.
A strong brand in international markets can also carry weight in China. Some international companies have already successfully cracked the market, with popular funds delivering offshore strategies that local competitors cannot match. But global experience only partly explains their success, as strong onshore capabilities are needed to get a local client base interested in new products.
According to our management survey, the most important onshore capabilities include a local distribution network and product knowhow.
The successful new entrants will need to select their battlefields carefully, targeting clients most in favour of global offering and finding the right allies in the form of joint ventures, minority investment, partnership memorandum of understanding and so on. Developing human capital – a team of professionals who understand the local market – should therefore be an integral part of any entry strategy.
Despite local competition, the different levels of market maturity also entail challenges for international companies in internal decision-making and compliance.
From the same management survey, the managers in global headquarters are found to be more suspicious to China opportunities than those already sitting in the Asia region, especially regarding the different market practices and regulatory requirements.
For most global players entering China, the most time spent is probably on compliance issues in light of China’s evolving regulatory environment. Data security is at the forefront, as Beijing is leading the world in implementing privacy laws.
Complying with these new rules might require additional investment in IT infrastructure and compliance capabilities in both global and onshore offices. It also sets a higher bar to facilitate cross-border collaboration, which is usually a key proposition from international companies.
As a result, 57% of respondents said they would give more autonomy to onshore management regarding technology and infrastructure setup.
Finally, geopolitical uncertainty will remain a major issue. The conflict in Ukraine is only the latest in a string of developments that has impacted the financial industry in recent years – others include Brexit and trade tensions between China and the US.
Our survey finds that the biggest source of concern is future events that could trigger US sanctions against China, as well as a possible incident that could cause China to tighten its capital controls or prompt US investors to withdraw funds from China.
More than three quarters of the respondents said that geopolitical concerns had not changed their plans, but they are watching the risks closely and conducting what-if analysis on the potential impact. This is a sensible attitude to take, as being prepared for different scenarios will help mitigate the impact if and when an adverse event does occur.
Banks, asset managers and other financial businesses that succeed in China will be those companies that carefully steer around the pitfalls to build strong local operations. It is a long-term investment that could payoff for many years to come.