China experienced its first ‘modern’ industrial boom forty years ago when an influx of urban workers moved into higher-paying jobs in cities. Eventually, the Shanghai stock exchange was reopened in December 1990, which in turn led to the nation’s accession to the World Trade Organisation.
Skip forward to 2019 and the China/US trade deal spat is still ongoing and making headlines, as is the British Prime Minister’s decision to dismiss her Defence Secretary, Gavin Williamson, for allegedly disclosing plans to allow Chinese telecoms giant, Huawei, to help build the UK’s 5G network.
However, less talked about is China’s second industrial boom, underpinned by innovation.
As it opens its doors to foreign investors, China’s current Chinese president, Xi Jinping, is attempting to improve the country’s economic prospects with an on-going five-year anti-corruption campaign.
China still faces issues with its financial regulation but, under Jinping’s guidance, seems to be slowly finding its own ways of responsibly improving regulation, while it also tries to mitigate risk for economic stability.
Within the sphere of asset management and servicing, specifically, China is making steady progress, creating innovative financial technology to lead to economic stability.
Over the past 10 years, John Murphy, head of securities services for the Asia Pacific at J.P. Morgan, explains that China has demonstrated “a clear track record of continuous enhancement and improvement, and the door to China markets has continued to open with every development”.
Robert Tabet, head of Asia, Middle East and Africa at Clearstream, suggests that the government has “all the intention to make the entry and exit to the onshore market an easy experience for an investor and this is why we are confident that in the years ahead, Chinese markets will be on par with other markets in Asia and the most advanced markets in the world”.
Clearstream Banking and Schenzhen Securities Communication Co (SSCC) have opened direct connectivity for fund order routing of Mainland China-domiciled funds.
The link is established under the Mainland China-Hong Kong Mutual Recognition of Funds programme and allows Hong Kong and Chinese asset managers to distribute recognised funds in both jurisdictions.
Additionally, the link facilitates the direct processing of cross-border investment fund transactions between Mainland China, Hong Kong, and international market participants.
In addition, Standard Chartered Bank China has become the first foreign bank to be granted a domestic fund custody license by the China Securities Regulatory Commission.
With this license, Standard Chartered China will be able to directly participate in and provide custody-related services to investment products offered by domestic funds and asset managers in China.
With the continued expansion of China’s economy and its corresponding growth in personal wealth, there is a growing demand for more sophisticated investment products and professional services, according to Standard Chartered.
Elsewhere, Nomura has received approval from the China Securities Regulatory Commission (CSRC) to establish a joint venture in China.
According to Nomura, they will now make the necessary arrangements to set up the company once the procedural requirements have been completed.
The new company will initially focus on the wealth management business to provide high-net-worth individuals in China with services leveraging Nomura’s expertise in face-to-face consulting.
Custody
Sophia Chung, head of securities services at HSBC China, predicts that the future of Chinese custody involves an increased focus on investor protection and risk mitigation.
Chung also highlights that with the further enhancements of China’s financial markets and the continued economic cooperation with other markets, there will be “significant growth and opportunities on the cross-border custody business such as the mutual recognition of funds, stock connect and exchange-traded funds connect”.
Similarly, Murphy affirms: “As a global custodian supporting clients from many markets invest into China, the clearest trend we see is a thirst for knowledge and understanding around the differences and nuances of the channels that a client may use to gain access to China equities.”
He adds: “Financial innovation in the custody space is going at a very high speed and we expect in the years to come more sophistication to follow with the introduction of products like securities lending, repo, foreign exchange and rates hedging, collateral management and short selling.”
‘The Big Bang’
Indications of technological innovation trickle through every aspect of China’s financial services right now, as Murphy highlights: “China is, at its heart, an entrepreneurial culture and many organisations are embracing fintech and the opportunities it brings.”
“As China continues to adapt and evolve, it will utilise technologies such as distributed ledger technologies, artificial intelligence and application programme interfaces, though these will most likely appear as a gradual evolution rather than an overnight revolution. While the opportunities fintech offers may not yet be fully utilised, we believe they will come.”
One such opportunity J.P. Morgan China has taken is to launch an integrated payment solution to support corporates as they migrate their commerce activities onto digital platforms.
The payment solution offers J.P. Morgan China’s clients a single integrated interface that supports both online and offline transactions as well as facilitating payments from mobile channels such as ewallets.
According to J.P. Morgan, the solution also provides clients with consolidated reports on all transactions as well as insights on payment trends through analysis of data.
Like the rest of the world, China took advantage of the leading cryptocurrency, bitcoin. But in late 2017, in a sudden move, the government banned it.
China’s central bank ordered an immediate ban on initial coin offerings, the unregulated alternative to initial public offerings for tech-forward startups.
And shortly after that, Chinese cryptocurrency exchanges were ordered to stop trading, which Japan and South Korea took advantage of.
But despite this, Chung emphasises that the Chinese market will continue to open up to foreign investors. According to HSBC Research, foreign ownership will be increased from around 2 percent to 10 to 15 percent of the total fixed income market in the coming years.
Murphy indicates: “China will need to maintain its pace of change to meet the needs of local investors and market participants, international investors and international organisations setting up and operating in China.”
He adds: “The breadth of investment opportunities, the scale and importance of the markets and index inclusion will drive continued investment by institutional investors globally.”
Tabet states: “As for the opportunities, in the next couple of years new technologies like blockchain and artificial intelligence will be big differentiators for those who adopt them first and in a market like China, which is still in its infancy with foreign investors, this can be a big differentiator for the market leaders in the next five to 10 years.”
“We are at the beginning of a highway when it comes to the roles of the Chinese market development and sophistication.”
