As China’s financial markets open up, the risks and rewards are huge for wealth managers
Liberalisation of Chinese financial markets began long before the COVID-19 pandemic, with regulatory authorities taking gradual steps to increase access to the mainland. Jack Chiswell writes
With the scrapping of ownership limits on securities and fund management firms in 2020, there has been a scramble to establish mainland subsidiaries. However, as geopolitical tensions rise, there are reasons for wealth managers to be cautious of China; the world’s second-largest economy.
A number of international financial institutions have had ventures approved by the China Securities Regulatory Commission to provide asset management and brokerage services from within mainland China. J.P. Morgan, Standard Chartered, and Schroders are just a handful of recent examples.
Although licensing schemes have allowed foreign investors access to China’s stock markets since as early as 2003, approvals for large financial institutions to provide investment products within the region and for global investors have been limited until recent years.
In 2020, a major breakthrough lifted the limitations on the ratio of foreign shareholding in securities and fund management firms, allowing them to set up wholly owned units on the Chinese mainland. Unsurprisingly, such developments have attracted firms looking for a slice of China’s growing financial sector, which is valued at $30 trillion in liquid assets according to GlobalData’s Wealth Markets Analytics.
The increasingly open Chinese financial markets mean many opportunities for Western firms. As well as the ability to offer a greater range of Chinese investment products to global investors, this opens the Chinese retail market up to the sale of firms’ existing financial products. This could create an immensely valuable revenue stream as both overseas and domestic Chinese investment grows with the country’s wealth.
Further, the accreditation of large international funds and brokerages in China opens the market for a more sophisticated range of financial products, previously unavailable, as bigger players enhance competition in the market. As the range of Chinese investment opportunities increases globally, wealth managers will be able to service client demand for Chinese assets more easily through in-house or external solutions. This could be a significant draw to clients as they look to diversify their portfolios and achieve greater returns.
Yet there are risks involved in heavy investment in the region. With its recent crackdown on local tech giants, China has shown that it is not afraid of radical regulatory changes. In such a changeable environment, firms might want to think twice about significant capital investment while regulations settle. Conflict between Washington and Beijing complicates this dynamic as tensions continue to rise. Foreign subsidiaries in China might risk being caught in the crossfire.
For now, further integration of China within the global financial system seems likely. Despite the competitive edge this can provide to wealth and asset managers, ensuring geopolitical risks are balanced with the potential returns will remain crucial to an effective strategy within the region. China is no one-way bet for wealth managers, meaning effective management of the risks is key.
Main image: Shenzhen stock market Credit: zhu difeng via Shutterstock