The recent drop in China’s GDP growth has raised concerns with many who hoped the country’s economy would underpin a global financial recovery. For China’s government, the speed at which it becomes a ‘new entrant’ in the global financial markets needs to be balanced by its necessity to protect the region’s economic stability.
China’s finance industry is tightly regulated, and has historically been dominated by its large, state-owned banks. The government recognizes the need to reform its financial markets in order to trade effectively, and competitively, within the global economy. Also, as part of its World Trade Organisation accession agreement, China is obliged to open up its markets. However, the speed and approach of market liberalization is not straightforward.
The last 18 months have seen lots of development in Chinese reform; China’s direct trading of its Yuan with Japan’s Yen, removing the need for transactions to be converted first with the US dollar, is seen as a clear step forward in internationalizing the Chinese currency. Additionally, since June, Chinese banks have had greater flexibility in the interest rates they can offer their customers. Previously, Chinese interest rate policy set by The People’s Bank of China restricted what was available to Chinese savers. This change to policy is contributing to the current growth in wealth management products, as retail investors seek higher returns than were previously available through the tightly controlled state banks’ products. Tapping into this demand has resulted in Chinese banks’ sales of wealth management products soaring, although there are fears that this rapid uptake of higher yield products could cause significant instability as savers transfer from ordinary deposits without a true appreciation of the risks.
Western companies are taking advantage of the opportunities afforded by this change in policy. Witness the recently announced joint venture between SDIC Trust Company of China, GFI Group Inc., and Thomson Reuters, that will create a foreign exchange and money broker for the domestic Chinese financial markets.
Chinese Banks themselves are broadening their reach further. Commodities markets, specifically oil trading, are one of the areas where Chinese banks have taken the plunge and joined international exchanges, supported by the beginning of opening of trading desks outside of China.
For China to succeed in the global market, loosening internal controls will not be enough. Continuing to grant greater market access to foreign banks will be vital for lasting development.
Thus far, reform is also enabling growth for foreign banks. Until recently, foreign banks’ business was linked to lengthy Government process and regulation, often resulting in allegations of an unfair advantage for local Chinese banks. Although only representing 2% of revenues in the Chinese banking industry, according to a recent report by PriceWaterhouseCoopers, foreign bank revenues are expected to grow sharply. This growth is expected to come from an increase in foreign corporates seeking funding to support expansion in China, as well as an increased demand for derivatives-based investment products. As these foreign banks begin competing with their Chinese equivalents, focus will be on how well the state banks and the state can respond to the competition.
Part of that response should be on achieving greater integration and regulatory alignment with foreign markets, particularly those in the US and the EU. Mature, established Western markets can provide “best practice” examples for things such as transparency and risk management that help make markets successful and stable. For IPC, its Chinese customers are demonstrating increased desire to adopt the same leading-edge communications technologies and network infrastructures that are proving business benefits to their future trading partners, and competitors, elsewhere within the global capital markets. Achieving a similar, ‘connected’ position will prove invaluable in delivering a competitive customer service.
The steps being taken by the Chinese government to reform its finance industry are clearly having an effect, both within China’s domestic banking industry as well as with those trying to trade with it. It is clear that the liberalization of the Chinese market will be a long, complicated process, and one which will is likely to trigger further economic volatility where stability would be much preferred.