Joseph Mariathasan reports on the ‘Big Bang’ in China’s financial services industry
I remember walking into a Shanghai brokerage in 1997, ragged lines of plastic chairs in front of a wall of flickering share prices, solitary figures sitting glazed and transfixed, timing when to make their next transaction or reverse an old one, often on the same day. Capitalism had returned to China, although both Marx and Adam Smith would have been turning in their graves (in opposite directions, one would have supposed), whilst Mao may have managed a quiet chuckle. It is not surprising the government has been keen on setting up long-term savings institutions such as life insurance companies and mutual fund companies. China needs institutional investors to move investment away from the day traders sitting in Shanghai brokerages and focus on investing for the long term.
The introduction of stock exchanges in Shanghai and Shenzhen was intended as part of the process of transforming China from a centrally planned command economy, with all the distortions and inefficiencies that entailed, into the fastest growing major economy in the world, even after adjustment for biased statistics.
The transition from the ‘iron rice bowl’, whereby the State provided and guaranteed employment, education, healthcare and housing (albeit at minimum levels) to one where market mechanisms and the ‘invisible hand’ of Adam Smith decide on the allocation of resources has transformed China’s economy. It unleashed the power of the country’s manufacturing capacity to the world at large, exporting deflation and the creative destruction of many of the developed world’s cherished industries, as they wilt under the competition of China’s immense and cheap labour force.
But China’s decades of having a one-child policy does, however, mean that not only is China catching up and competing in manufacturing, it has caught up with the West in terms of an ageing population and an increasing dependency ratio. The final chapter of a one-child policy means a worker has two parents and four grandparents to look after. Pensions and savings in China, have become as important a subject as in the developed nations.
Addressing the issues of an ageing population is one of China’s key challenges. We are in the midst of a financial revolution in China that should have a major and hopefully positive impact on the issues of pensions and long-term savings. It will also open up many more opportunities for foreign financial firms willing to adopt a long-term strategy to developing a footprint in China, as well as creating new sources of attractive investment opportunities for pension funds in Europe and elsewhere.
What China will be seeing over the next 20 years is a transformative policy shift in all areas of finance following on from its agricultural reform, and its property reforms. This is resulting in the opening of numerous sectors alongside a gradual liberalisation of the renminbi and of the capital account.
These changes have created a natural and robust underlying demand across all financial products with new markets, new users and high growth rates that had not previously been realised due to financial repression, restricted capital flows and a previously stultified financial system. It is in many senses analogous to the UK’s ‘Big Bang’ financial reformation in 1996. Many have argued that focusing on short-term stimulus misses the far more important trend of a swathe of coordinated reforms that will utterly transform the country’s financial system.
The most recent development in the ongoing transformation of the financial sector is the news that absolute control of multiple mainland asset management platforms will be an option for foreign parties, according to draft regulations released by the China Banking Regulation Commission. The China-focused consultancy Z-Ben Advisors reports that foreign entities may now be permitted to own a controlling stake in mainland trust companies, a dramatic change from the previous ownership limit of less than 20%. As it points out, the trust license offers immediate access to institutional and high net worth money, and is an ideal entry point for those who want to establish a substantial and far-reaching China footprint.
Crucially, these trust-specific reforms are the thin edge of the wedge. Z-Ben believes FMCs, brokerages and the whole spectrum of mainland asset management will be available for foreign ownership within the next three years. The UK’s Big Bang transformed the country’s financial services industry from a heavily protected sector, closed to outsiders, into a global powerhouse. Now it is China’s turn.
Joseph Mariathasan is contributing editor at IPE
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