| HSBC Shanghai: first mover | ||||||
For financial institutions from Europe, the US and Japan, China is the last great frontier. Though the country’s membership of the World Trade Organization, which came into effect last month, will bring major changes across the economic board, the revolution is likely to be most radical in banking, share markets, insurance and allied services.
As well as foreign banks taking equity stakes in their Chinese counterparts, the way is open for insurance firms, pension funds, financial managers, lawyers and accountants – so long as they can work with national partners in the joint ventures that form the model for foreign companies in the Chinese market. The sheer size of China and the government’s commitment to high growth mean that revenue forecasts quickly jump into the top league. GMAC, the financial services arm of General Motors, for example, talks of the country becoming one of its top 10 markets five years after it starts operations there this year.
But Chinese officials make it plain that they expect a two-way street. The country’s major banks, which have gained experience in Hong Kong before gearing up operations in the US and Europe, plan to establish themselves as significant international players. Big state companies that once automatically listed abroad will now increasingly expect foreign investors to come to them at home. The second-biggest mobile operator, China United Telecommunications, is for example hoping to stage China’s biggest share offering later in the year.
The frequently opaque nature of doing business in China, with its overlapping layers of business, official and political interests, will make the going complicated, however clear the WTO rules appear to be on paper. There is, however, no doubting the sense of excitement felt by banks, insurance companies and fund managers at prospects for the coming years.
In banking, HSBC opened proceedings at the end of last year when its Hong Kong subsidiary took an 8% stake in the Bank of Shanghai. At Rmb517 million ($66 million) the deal did not represent a major investment, but it made the London-based group the first beneficiary of China’s pledge to open up its banking sector. In the past, Beijing has allowed such organizations as the International Finance Corporation (IFC) and the Asian Development Bank to hold equity in its banks, but the WTO pact inaugurates a completely new state of affairs.
Foreign banks will be permitted to carry on business in Chinese currency for local companies at the end of 2003, and for consumers by 2006. With only a tiny slice of the Chinese loan business at present, international banks see what is now the world’s sixth biggest economy as offering prospects unmatched anywhere else, particularly if the government can meet its high growth targets for the coming years.
The way in will be through minority equity stakes, with the Bank of Communications and the China Construction Bank likely to follow the example of the Bank of Shanghai. Chinese banks welcome this as a means of gathering expertise from western and Japanese investors – and a way of ensuring that they retain control,
Alongside the banks, foreign pension fund managers and insurers were among those watching the protracted WTO negotiations most closely. China’s pensions system is in for a major shake-up. In the past, it has been paid for out of cashflow. Now the government wants to switch to a funded system. With 1.4 billion people, that would be a big enough proposition in itself. But the dual effect of the one-child policy and lengthening life expectancy provides an additional challenge as an imbalance grows between young and old.
Hong Kong consultant Stuart Leckie of Hewitt Associates, who has closely studied the prospects, estimates that pension fund assets in China could reach $1 trillion by 2020. That, he notes, would produce “tremendous opportunities” for expertise in pension management from abroad.
China is also seriously underinsured. In the past, it was tough for foreign companies to get operating licences but the combination of the WTO agreement and economic development – in particular, the growth of the urban middle class – will change that in the next few years. Just after China became a full WTO member, 14 operating licences were issued to foreign insurance companies, bringing the total to 19.
The market for insurance firms is also impressive. If the government presses ahead with plans to take apart the Maoist system of cradle-to-grave welfare care, the opportunities in such areas as health will expand even further. Sy Sternberg, chairman of New York Life Insurance, which received a Chinese licence on the day Beijing joined the World Trade Organization, says his company has not capped its investment in China at any level. It has set up a $187 million joint venture with China’s biggest household appliance manufacturer, Haier, which has expertise in selling to households across the country.
“The real challenge will be to have a good business plan, get the marketing right and control costs,” says Leckie. Again, the shortage of local experience is going to favour foreign operators as the insurance net widens out, and the newcomers offer consumers a more varied range of options. China Life, the biggest life assurer, is already being pushed into offering unit-linked products by its falling market share and rivalry from a Shanghai firm that has pioneered more aggressive policies.
Among the early success stories is the UK’s Prudential, which has been interested in China for a decade during which it built up relationships with decision-makers, and offered sponsorship in education, training and culture. Five representative offices were set up and in 1999 Prudential was invited to apply for a 50-50 joint venture life assurance licence. In conjunction with Chinese financial services conglomerate CITIC it formed a joint company to work in the southern city of Guangzhou in October 2000. This employs 3,000 agents and sold policies worth Rmb100 million in the first year.
