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Laura He

 

China is still the ultimate prize that Western banks can't resist

 

For many companies, doing business in China is getting trickier by the day. But Western banks and asset managers are more than willing to up their bets on the world's second biggest economy, convinced that the opportunities remain too good to pass up.

 

Major banks in recent weeks have inked deals to expand their footprint in China — or are otherwise attempting to take greater control of their businesses there — after years of being forced to enter the market via joint ventures.

Late last month, HSBC received approval from Chinese regulators to take full control of its life insurance joint venture, which was created in 2009 in equal partnership with a Chinese company, under rules that were rolled back in 2020. The bank said the move underscored its "commitment to expanding business in China."

The British banking giant is also seeking a greater stake in HSBC Qianhai, its joint securities venture in China, according to Reuters, which cited an anonymous source. HSBC declined to comment to CNN Business. 

HSBC isn't the only one. The state-owned China Securities Journal reported Wednesday that Deutsche Bank wants to establish its own wealth management joint venture in the country. The German bank declined to comment.

"The sheer size of China's virtually untapped equity and bond market is irresistible to the world's large financial institutions, especially since Beijing is finally allowing them to operate wholly owned mutual funds," said Alex Capri, a research fellow at the Hinrich Foundation.

 

China is the world's second biggest market for stocks and bonds. But it's largely untapped by foreign investors: International holdings account for about 5% of the $14 trillion stock market, and less than 4% of the $17 trillion onshore bond market, according to stock exchange and central bank data.

 

That started to change last year, after BlackRock — the world's largest asset manager — in June became the first global firm to gain approval for a wholly owned Chinese mutual fund business. Two months later, BlackRock launched its first mutual fund in the country, and quickly raised $1 billion from more than 111,000 investors.

Then, in August, JP Morgan became the first US bank to gain full ownership of its securities unit. CEO Jamie Dimon (pictured above) said back then that China represents "one of the largest opportunities in the world" for the firm. 

In October, Goldman Sachs received the green light to fully take over its securities venture. And Morgan Stanley followed suit with a victory of its own in December, when its Chinese partner said the American bank planned to boost its stake in a brokerage venture to 94%.

More are coming. Earlier this week, China's securities regulator said it accepted an application from BNP Paribas to establish a securities firm, bringing the company a step closer to broadening its presence in the country.

"China represents a significant growth opportunity for global financial service companies," said Brendan Ahern, chief investment officer for KraneShares, an asset management firm focused on China stocks and bonds.

"Developed markets such as the United States and Europe are highly competitive and mature which have led to fee compression and diminishing opportunities," he added, but "China's markets are relatively young in comparison."

 

Expansion despite uncertainty

 

The significant inroads for these banks are coming about two decades after China joined the World Trade Organization and promised to open up its financial sector.

 

While progress was slow for a while, the country in 2019 announced that it would entirely remove foreign ownership limits for financial firms the following year, shortly after Chinese President Xi Jinping and former US President Donald Trump agreed to restart trade talks.

The enthusiasm from global banks and asset managers also comes with risks, as there is growing uncertainty about China's political and regulatory climate — as well as Beijing's rising tensions with other countries.

 

In late 2020, Beijing launched an unprecedented regulatory squeeze on private enterprise, worried that such firms had become too powerful. The ensuing crackdown has extended to major Chinese financial players like Ant Group, which was forced to overhaul its business and hew to strict regulations governing bank operations.

"There is a sense, broadly, that Xi may moderate some of his more aggressive rhetoric after this year's 20th Party Congress, having assured his political position," said Craig Singleton, an adjunct China fellow at the Foundation for the Defense of Democracies, referring to the widespread expectation that Xi will use an important political gathering to cement a historic third term in office. "The biggest risk, however, is that he does the opposite."

A number of Western businesses have been swept up in controversy in China as geopolitical tensions worsen, especially over allegations of human rights violations in the country's western region of Xinjiang. 

In recent weeks, Walmart and Intel met public backlash in China over allegations that they were trying to avoid importing products sourced from Xinjiang. And last year, H&M, Nike Adidas and other Western retailers were threatened with a boycott in China because of the stand they had taken against the alleged use of forced labor to produce cotton in Xinjiang.

 

Pressure at home

 

Western companies are also facing pressures at home. Billionaire investor George Soros called BlackRock's China investment a "tragic mistake" that could lose money for its clients and imperil US national security. Some American politicians also called on Wall Street to stop "enabling Communist China" and take a tougher stance against Beijing.

 

The squeeze has continued in recent weeks. Last month, US President Joe Biden signed the Uyghur Forced Labor Prevention Act, a law that bans imports from Xinjiang over concerns about forced labor. It sent a clear message that his administration and Congress are looking to ratchet up the pressure on Beijing.

 

China's decision to let more foreign firms into the country is "aimed at shoring up collateral damage in the international community," according to Capri, who added that allowing Western companies to take larger stakes in China also gives Beijing "leverage" over Washington and Brussels.

"This will increase tensions between the big financial firms in the US and Europe, and their home governments," he said.

The moneymaking potential in China seems to outweigh any political headaches, though.

"While China is facing huge economic headwinds, the country has defied bearish predictions in the past," Singleton said, adding that Western banks have continued to generate billions of dollars in revenue from China, even with the recent regulatory crackdown.

"In other words, Western banks are playing the long game under the guise of portfolio diversification," he added.

 

China's motive

 

And even as Beijing tightens its grip over parts of its economy, there are reasons why the country is eager to open its financial industry to foreign investors.

 

The government wants to utilize global expertise as it builds a strong and diverse financial service industry, which it needs to manage its looming demographic crisis. A rapidly aging population and shrinking workforce have increased the burden on the country's inadequate pension system, and put tremendous pressure on the government to provide enough financial resources for the elderly.

 

China's strict adherence to its "zero Covid" strategy and slow self-isolation from much of the world hasn't been enough to throw the country off course, either. Last year, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, repeatedly talked about the importance of opening up the financial service industry and drawing on global capital and financial expertise.

"One of the Chinese Communist Party's (CCP) key attributes has been its adaptability and its pragmatism," Singleton said. 

He added that China understands it needs to maintain access to foreign markets, technology and capital, necessitating those continued partnerships with Western firms.

"In other words, the CCP must integrate to survive, which means that it cannot completely eschew existing global norms or systems even as it tries to alter them to suit Beijing's needs," Singleton said.

Year of the Tiger

A breeder carries tiger cubs at the Yunnan Safari Park on January 13 in Kunming, Yunnan province. Seven cubs from three tiger families at the safari park will make their official debut to tourists at the Chinese Spring Festival, also known as Lunar New Year, to welcome the Year of the Tiger. This year the festival falls on February 1.

Woman stuck in blind date's house by sudden lockdown

It was supposed to be a quick get-to-know-you — but a snap Covid lockdown forced a Chinese woman to stay with her blind date at his house for days on end.

The 30-year-old woman, identified only by her surname Wang, went to meet her blind date for a home-cooked dinner on January 6 in her hometown of Zhengzhou, a city in central China grappling with a coronavirus outbreak.

"I'm getting old now, my family introduced me to 10 matches," she said in a video on social media. "The fifth date wanted to show off his cooking skills and invited me over to his house for dinner."

Just when Wang was about to go home after the meal, she found out the whole neighborhood had gone into a swift lockdown, she said. China regularly seals off communities with Covid-19 cases as part of its stringent zero-Covid strategy to stamp out local outbreaks.

Unable to leave, Wang was stuck at her date's house for days. She posted videos of her unexpected co-living experience on social media, showing her date cooking meals for her, sweeping the floor and working on his laptop — which quickly went viral online.

Wang had returned to Zhengzhou from the southern city of Guangzhou recently ahead of the Lunar New Year, and spent a week meeting potential suitors her family had set up for her, she told state-run news outlet The Paper on Tuesday.

"During quarantine, I feel that apart from him being reticent like a wooden mannequin, everything else about him is pretty good. He cooks, cleans the house and works. Although his cooking isn't very good, he's still willing to spend time in the kitchen, I think that's great," she told The Paper.

In Wang's videos, her date is seen serving stir-fry meals such as tomato and scrambled eggs — a popular dish in China.

Wang said in a post Monday that she had hidden her original video from her account after it went viral. "Right now I'm still at the man's house. He's an inarticulate, honest person and he doesn't talk much. After my video became trending (on Weibo), some friends started calling him — I think it has affected his life. That's why I removed it," she said.

"Thanks everyone for your attention ... I hope the pandemic will end soon and that single girls can find a relationship soon."

Around Asia

• A New Zealand resident thought he had water stuck in his ear for three days. It was a cockroach.
• KFC Australia and McDonald's Japan are running low on fresh chicken and french fries, both citing snarled supply chains for the shortages.
• Australia's biggest casino operator, Crown Resorts, said on Thursday its board was likely to back a $6.46 billion buyout proposal from US private equity firm Blackstone unless a higher offer emerged.