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Financial Sector in China - Opportunities
China has a young financial services & professional services sector that is expanding at explosive rates to meet the demands of a fast growing and increasingly wealthy nation.
China is formulating its 12th Five Year Plan (2011-2015), which we expect will herald a major transformation of China's economic structure away from export led growth to one stimulating greater domestic consumption to create a more balanced economy. This rebalancing of the economy is expected to open further business opportunities in the services sector.
Opportunities
There are opportunities for companies in banking, fund management, securities, insurance, private equity, accountancy, legal and maritime services sectors. The debt and derivatives markets are also opening to foreign participation.
Banking
China’s financial services sector is dominated by the banking system which supplies around 85% of finance to Chinese companies. Whilst dominant the Chinese banking sector is still struggling to effectively serve the SME sector and rural markets. Banks have been encouraged to increase their coverage in rural areas. Standard Chartered and HSBC are now well established in this market segment.
In attempts to further spur the country’s consumption, the government has approved the establishment of three (bank backed) consumer financing companies. Further licenses are likely to be granted in this potentially lucrative sector. China’s high net worth individuals are attaching importance to personal finance or wealth management products and seeking varied products.
Financing low carbon projects has become a hot area of growth and an area where China has limited experience. Suppliers of banking software and financial information may also find opportunities, particularly with smaller second tier banks.
Insurance
China’s insurance market is small but growing at a rapid pace with premium income rising nearly 20% per annum. Roughly half (53) of the insurance companies in China are sino-foreign joint ventures accounting for 5% of total assets and 4% of premium income. With the car insurance market not fully open to foreign firms insurance companies have a smaller market share of the life and property and casualty markets.
Private Equity
China’s economic growth has created a steady flow of investment opportunities and this is expected to fuel interest as more global private equity funds look to deploy capital in the region.
In 2009, there were 542 equity investments in China, including 114 private equity investments and 428 venture capital investments amounting to US$22.4 billion. The manufacturing, IT, internet and energy sectors attracted the most investments.
China is encouraging the growth of Renminbi denominated funds which give investors better access to the domestic market (and swifter approvals). US funds tend to be the largest foreign players although several UK houses are present in the market.
Securities
While the top 20 domestic securities firms enjoy a 90% market share and market access barriers remain high, China’s developing securities sector is slowly liberalizing and offers opportunities for participants. Recent reforms have included the launch of pilot margin trading, short selling, Index futures and ChiNext, China’s NASDAQ/AIM style market.
Securities firms can take advantage of China’s strong interest in domestic listings by securing a 33% stake in a securities brokerage joint-venture. JV brokerages can undertake business in underwriting and sponsoring of equity shares & bonds; broking of foreign investment shares and broking & proprietary trading of bonds.
We expect renewed interest in London listings following the UK's agreement for Chinese firms to conduct direct listings, dual listings and issue depositary receipts in London. This brings opportunities for UK legal firms, corporate advisers, investment banks
And accountants to advise Chinese companies interested in dual or secondary listings on the LSE's Main Board or listing on AIM or PLUS markets.
It is expected that the Shanghai Stock Exchange’s International Board will launch during 2011. Once launched UK-based accountants, investment banks, legal firms and advisers are well-placed to advise multi-national companies that wish to list.
Fund Management
The rate of wealth creation in China during the past decade has been unprecedented. China’s growing middle class are looking for experienced professional advisors to invest their wealth in China’s domestic markets. Currently 103 Foreign players trade in the Chinese securities market through the QFII (Qualified Foreign Institutional Investors) scheme, 18 of these are British, more than any other European nation.
Chinese institutions are also able to invest directly overseas through the QDII (Qualified Domestic Institutional Investors) scheme where some £42bn of investment quotas has been awarded. However, Chinese investors are less familiar with non-Asian markets. Top quartile fund Managers active in international markets are well placed to win investment mandates from Chinese institutions, including Sovereign Wealth Funds.
Legal & Professional services
There are approximately 14,525 legal firms in the PRC employing over 150,000 lawyers. Most firms are small employing 10 lawyers or fewer. Major firms tend to be based in the big cities of Beijing and Shanghai with a smaller but growing number in other rapidly expanding cities of China.
There is a growing top tier of larger firms who employ 100+ staff. These firms are also increasingly interested in developing international alliances and business. In terms of employing lawyers and partners, China’s largest five domestic law firms were Dacheng, King & Wood, De Heng, Grandall and Jun He in 2009. The five largest international law firms in 2009 were Baker & McKenzie, Freshfields, Gide Loyrett Nouel, DLA Piper and Jones Day. (Source: ALB 2009)
The core business of the PRC law firms is, with few exceptions, litigation and criminal cases.
But a growing top tier of firms specialize in dealing with foreign-related business or global business, and collaboration with international law firms is a tremendous growth area.
Outbound Mergers & Acquisitions (M&A) – rather than inbound volumes – has been at the centre of the recent market rebound. The outbound activity will continue once the financial markets in the world return to “normal”.
Opportunities in the PRC market for law firms include Corporate Finance, M&A, compliance, Banking regulatory reform, Infrastructure Projects, Construction, Commercial Contract Law, Dispute Resolution, intellectual property and overseas listings.
The “Big four” professional services firms dominate the advisory services space in China. Audit work for listed firms remains a steady income stream and outbound M&A work is picking up after the lows of 2008&9.
The developing maritime services sector also offers opportunities for UK legal, banking, insurance, education and ship broking companies.
Debt markets
China’s bond markets are in their infancy and remain fragmented in terms of regulation but they are growing rapidly and will be an important component in the building of China’s capital markets. In 2009 around £40bn worth of corporate debt was issued on the interbank market. Around £3.3bn of corporate bonds were issued on the smaller exchange traded bond market.
New regulations are being developed to permit foreign firms to issue Renminbi denominated financial bonds in China and foreign access to the financial bond markets is improving with both HSBC and Standard Chartered banks now able to underwrite Renminbi financial bonds in China. Work is also in hand to develop a framework for high yield bonds for SMEs.
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