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The Chinese government has been promising to open up its financial markets ever since Bill Clinton was in the White House. Yet over the course of the past two decades, foreign investors and corporate entities looking to enter China’s thriving finance sector have been continually met with fierce regulatory roadblocks.
With the threat of a US trade war looming, it seems President Xi Jinping is finally ready to lift those roadblocks and deliver on a generation of promises for market liberalisation.
The People’s Bank of China unveiled a sweeping set of reforms in April that will open China’s trust, leasing, car and consumer finance industries to foreign investors by the end of 2018. The foreign investment ceiling for Chinese securities, futures, fund management companies and life insurance joint ventures is also going to be lifted from 49% to 51%, and foreign ownership limits will no longer be imposed on the asset investment and wealth management operations of commercial banks doing business in China.
This is huge for anyone looking to exploit the massive potential of Chinese financial markets, and plenty of institutions are already heeding the government’s call. JPMorgan made a move to re-enter the country’s securities market by purchasing a controlling joint venture stake at the start of May, and so has UBS – while G-SIBs Goldman Sachs and Morgan Stanley are reportedly investigating new points of entry, too.
Yet while overseas incumbents are merely working to embolden their historically hollow presence in China, it’s fintechs both domestic and foreign that ultimately stand to gain the most from increased liberalisation.
China’s unique technological ecosystem has created enormous opportunity for vendors in recent years. The country’s tech-savvy population is woefully underserved by weak incumbent banks, and China’s relatively new credit registry has left hundreds of millions without coverage or sufficient credit to borrow from traditional lenders. That’s why both demand and uptake for accessible fintech solutions has been sky-high.
China finished first in the EY FinTech Adoption Index 2017, with 69% of consumers using at least two fintech services on a regular basis. Pair that alongside the increasing spending power of consumers, and it’s hardly surprising Chinese vendors account for a third of the globe’s 27 fintech unicorns.
Until April, the market space being occupied by those unicorns was tightly closed to foreign competitors. Yet analyst Paul Schulte argues regulators have concluded China’s fintech dominance now needs sizeable foreign investment to continue along its forward trajectory.
“China wants a keen sense of competition in the space to maintain a cutting edge,” he says.
“The allowance of full ownership is a good thing to guarantee greater levels of competition.”
New entries may indeed be key to sustaining momentum – particularly in the wake of recent measures designed to calm the sector’s explosive growth. From sweeping restrictions on P2P lenders to a ban on initial coin offerings, the Chinese government intentionally exterminated weak players in 2017 and placed an extra regulatory burden on several of China’s best performing vendors – consequently preventing them from listing internationally.
By leveraging new foreign investment opportunities and joint partnerships with overseas fintechs, regulators seem to hope existing Chinese players will make more gains than losses as a result of new foreign entries. Demand for partnerships already exists, with last year’s Global FinTech Survey by PwC China claiming 68% of financial institutions are expecting to increase fintech partnerships in the next three-to-five years.
More important still, China’s large pool of venture capital firms should now be able to pump more money into the development of joint ventures and foreign products. Chinese fintech investment reached $1.33bn last year, and analysts at KPMG are expecting a sizeable increase over the course of 2018.
To help foreign fintechs attract the attention of those Chinese investors, initiatives like the BGTA’s UK-China FinTech Alliance have launched this year to provide a single entry point for market participants interested in expediting commercial agreements between foreign startups, corporates and Chinese organisations.
With the right funding, guidance and regulatory freedom, the odds of success for foreign fintechs in China have undeniably skyrocketed in 2018. But Zennon Kapron, founder of research and consultancy firm Kapronasia, points out firms hoping to gain a foothold in China will still need to work incredibly hard to earn their keep.
“Foreign fintechs have struggled to crack China for a very long time – and I think part of the reason is they try to come in with a plan that works in other markets, but find that plan doesn’t work in China,” he says.
“The challenge then becomes: how can they compete in that space by offering something different? If foreign fintechs can meet that challenge, there is going to be opportunity for them in China.”
The A-Z of financial technology solutions