BNP Paribas, Goldman Sachs, JP Morgan, Credit Suisse and BlackRock are among leading institutions flocking to Shanghai to set up offices as China opens up its financial sector. Over the past three years Beijing has relaxed restrictions on foreign ownership of insurance, securities, banking, and asset management companies, so these banks and funds are hiring and set to target wealth management and other services
(ATF) As China recovers rapidly from the Covid-19 pandemic and pushes ahead with opening up its financial services sector, big banks and global firms have gone on a hiring spree with an eye toward the nation’s $54 trillion financial market.
With billions of dollars in profits at stake, they are looking past increasing political tension between the West and China over everything from human rights violations in Xinjiang to the crackdown on political dissent in Hong Kong.
BlackRock, the world’s largest asset manager with over $9 trillion under management, said on Friday it was granted a licence from the China Securities Regulatory Commission to start a wholly-owned mutual fund business in China.
The approval comes a month after BlackRock was given the nod to pursue a joint venture asset management business along with China Construction Bank and Singapore’s Temasek. Together, the two entities give BlackRock an edge to reach more investors in China, as it competes with a slew of global institutions going after China’s growing asset pool.
The string of approvals are a positive sign for other asset managers including Fidelity International Ltd and Neuberger Berman Group LLC, which are still waiting for permission for their fully controlled operations in the country.
These firms are joining a long list of foreign financial firms, including BNP Paribas, Goldman Sachs, JP Morgan, and Credit Suisse, that are ramping up their investment and talent hunt in the increasingly affluent country after an unexpected delay last year due to the coronavirus outbreak.
Last month, officials in Shanghai’s Lujiazui financial trade zone said they welcomed French banking group BNP Paribas and Interactive Brokers Group from the US, who are setting up brokerage firms in the city.
The French banking group is look to strengthen its capabilities to better serve local customers in mainland China, CG Lai, the chief executive of BNP Paribas China, said in a statement.
BNP Paribas, the largest commercial bank in Europe, was among the first foreign banks that set up an office in the Lujiazui financial district back in late 1990s. The Paris-based company previously had a securities joint venture in China but pulled out in 2007.
Meanwhile, Interactive Brokers’ subsidiary in China will be 100% foreign-owned, a statement by the Lujiazui Administration Bureau said.
Interactive Brokers plans to begin with offering its core securities brokerage services in China, and gradually expand to other services such as margin trading, options and derivatives, Lin Xiaoru, who heads the group’s Shanghai office, said.
Lujiazui, which as offices of 10 of the world’s 16 largest banks and nine of the world’s top ten asset management companies, recently received new players such as JP Morgan Chase & Co’s securities and mutual fund ventures, and BlackRock’s wholly-owned mutual fund company.
These firms had waited with frustration for almost a decade for China to provide a more level playing field. Previously, China’s laws required foreign firms do local securities business through joint ventures with Chinese partners, who kept controlling stakes. That put US and European firms in the uncomfortable position of risking their capital without the final say on strategy or deals.
But China’s financial landscape has changed over the past few years.
Beijing has relaxed restrictions on foreign ownership of insurance, securities, banking, and asset management companies since 2018. This means foreign banks can take a controlling 51% stake in a Chinese joint venture, and could eventually own 100%.
Unlike in China’s previous round of opening up, newly formed foreign brokerages are able to obtain quite complete securities permits, such as licences for brokerage, investment consulting, proprietary business, asset management, and underwriting and sponsorship. Joint ventures have always hoped for a “full-range” service licence.
The rationale is that the entry of foreign players would result in a “catfish effect” that encourages weaker players at home to innovate and improve their services.
The disruption from the coronavirus outbreak last year didn’t stop Beijing’s push to fully liberalise foreign ownership of the financial firms. According to a timetable revealed in October 2019, foreign futures firms, fund managers, and securities brokerages, could own up to 100% of their ventures in China, effective from January 1, April 1 and December 1 in 2020, respectively.
Goldman hiring spree
Goldman Sachs wasted no time in taking advantage of that policy.
In December last year, Goldman Sachs signed an agreement to buy the 49% of Goldman Sachs Gao Hua it doesn’t already own. It’s now awaiting a go-ahead from regulators to complete the deal, racing to become the first Wall Street bank with 100% ownership of its securities joint venture.
Goldman Sachs has been on an unprecedented hiring spree in mainland China and Hong Kong in the first four months of the year, a report from Bloomberg said.
The bank is in the process of hiring 320 staff, including 70 to focus on investment banking coverage, and plans to add another 100 employees through the rest of 2021, the report said, citing a person familiar with the matter.
JPMorgan Chase & Co is also moving closer to full ownership of its securities venture after boosting its stake to 71% in October. The company relocated Mark Leung, its China investment banking head, to Shanghai from Hong Kong in 2018 as chief executive officer for the onshore business.
JPMorgan has also taken 100% of a futures venture in China, and has signed an agreement to take full ownership of a fund management venture.
Citigroup is pushing to set up new investment banking and trading operations and plans to submit applications for licences before June.
Up till now, China counts nine foreign-owned securities firms, and the number is expected to grow. China’s largest securities firm, CITIC Securities, expects that 11 foreign firms will obtain controlling ownership in securities ventures in China this year.
“Foreign investment banks have competitive advantages in asset management, institutional services, trading services, as well as wealth management services for high-net-worth people. Their international perspective, standardised trading and settlement systems, and ‘full-range’ products will be brought into play as China opens the A-share market with rules that are more aligned with international practices,” analysts from CITIC Securities said.
Local laws, customs
On the other hand, China’s homegrown brokerages are more knowledgeable about the local laws and regulations, and understand better Chinese customers’ demand, they said.
Chinese brokerages benefit from well-established distribution channels – 120,000 local branches in total – as well as a large customer base of 178 million retail clients, CITIC Securities said.
Challenges remain for foreign brokers. Up to now, business and revenues have restricted development and prevented them from taking part in some lucrative businesses. Figures from financial data provider Wind show that in 2018 each joint venture brokerage accounted for less than 0.5% on the sector’s total revenue, while CITIC Securities accounted for as much as 10%, and Haitong Securities and Guotai Junan Securities each accounted for about 6%.
Still, foreign players are keen to tap China’s relatively nascent securities market due to its huge potential. Data from the Securities Association of China said foreign-invested securities firms together achieved a 64.6% year-over-year net profit increase in the first three quarters of 2020 thanks to China’s opening-up.
High net-worth individuals
The country’s burgeoning wealth makes asset management a priority, too. High-net-worth people in China still have relatively few investment options.
The number of China’s high-net-worth people, each having liquid financial assets worth at least 10 million yuan ($1.6 million), has grown 13% annually in the past three years and reached 2.62 million as of 2020 year-end, according to a report published by China Merchants Bank and Bain & Company last month.
Should China continue its reform pace, Goldman Sachs estimated last year its private bankers would be able to grow the assets they manage at an average percentage rate in the mid-teens over the next five years, which would potentially double onshore revenue.
Also joining the race to capture China’s rich are Credit Suisse and HSBC.
BlackRock has been on the lookout to fill various positions in legal, compliance, IT and marketing since the end of last year, and has expanded its team in China to over 70 employees.
Credit Suisse has hired a number of bankers from rivals to focus on clients in Greater China, Bloomberg reported recently, citing an internal memo.
The Swiss bank has doubled its staff level to more than 100 across the Asia-Pacific region this year over the past two months, despite the bank being hit from its ties to collapsed family office Archegos Capital Management and supply chain financier Greensill Capital.
Meanwhile, HSBC, which made two-thirds of its profit in Asia in the first quarter, is on track to create more than 1,000 frontline roles in its wealth management business in the region by the end of this year, according to a South China Morning Post report earlier this month.
The London-based banking group said in February that it planned to invest $3.5 billion and hire more than 5,000 people in its wealth operations over the next five years. That is part of a $6 billion investment in Asia as it pivots to areas where it generates the bulk of its revenue.
Despite being accused locally as an “accomplice” of US political scheme in the arrest of Huawei’s chief finance officer Meng Wanzhou, HSBC has outlined China as one of the “key drivers” of its future growth. Some 400 of the people HSBC plans to hire this year will be added to the bank’s staff in Hong Kong.
Goldman Sachs, Citigroup, Deutsche Bank and the Swiss bank UBS all told Reuters recently they plan to boost staff numbers in the former British colony, which is expected to remain a gateway to mainland China. Indeed, business has been booming since a new security law was imposed and protests ended last year. Companies raised more money through Hong Kong listings in the first five months of this year than they did in the same period of the last four years combined, according to Refinitiv data accessed by Reuters.
Citigroup, which has 4,000 employees in Hong Kong, said it plans to bulk up its staff by 1,500 in 2021. And Goldman expected its hiring in Hong Kong to be up 20% this year.