Adapting To Local Conditions

China appears desirable to foreign financial institutions, enticing them to buy out their joint venture partners, but regulations have slowed market opening.

China’s capital markets present an irresistible proposition for foreign investment banks, in large part due to the markets’ sheer size. The country’s financial services market is estimated to be worth $45 trillion.

Momentum seemed to be carrying things in a clear direction: Opening China’s markets to foreign financial institutions was an explicit condition of the country’s joining the World Trade Organization (WTO) in 2001. But the pace of progress since acceptance into the WTO has been somewhat slow, as the result of Chinese regulations stipulating that these firms must participate via joint ventures (JVs) with mainland partners.

That stricture was lifted in 2020, and since then the pace has sped considerably as foreign players have increased equity stakes in their JVs to assume full ownership. Most recently, HSBC raised its holding in Shenzhen-based JV Qianhai Securities to 90% from 51%, having bought out its government-owned partner.

The British bank’s move comes at a time of less-than-auspicious circumstances for China’s economy, thanks to mass Covid-19 related shutdowns that threaten to crimp economic growth; ripples from property-sector fallout led by troubled developer China Evergrande; the aftertaste of the “financial revolution” of 2020, which saw the reining-in of large corporations such as Alibaba and Tencent; and political tensions with the West, arguably at an all-time high.

On the latter point, it’s worth contemplating the delisting of Chinese oil giant CNOOC’s US shares from the New York Stock Exchange in October of last year following the company’s addition to a US government economic blacklist. The symbolism of CNOOC’s wildly successful 28.1 billion renminbi ($4.4 billion) offering on the Shanghai market, which sailed through in April—shares rose 28% when free to trade—will not be lost on the many China naysayers who caution against foreign adventurism in China’s financial markets on fears of tit-for-tat regulatory action.

But perhaps the best interpretation of the risks or rewards facing foreign banks is that China will take a pragmatic stance and view the banks’ presence as an opportunity to learn best practices, acquire intellectual know-how and enrich domestic markets in the process.

Against this volatile backdrop, HSBC’s upping stakes serves to clearly demonstrate the prize that China’s capital markets represent to foreign financial firms. The foreign financial fiems, who are playing the long game.

“The further opening-up of the financial markets, together with the continued expansion of Chinese corporations, can only mean greater demand for innovative investment banking products and services,” says Clarence T’ao, co-founder of GoImpact Capital Partners in Hong Kong and former CEO of BNP Paribas China. “China’s domestic economy is expected to play a greater role in China’s economic development in the years to come, therefore providing ample opportunities for both domestic and foreign financial institutions.”

Goldman Sachs, JPMorgan Chase and Morgan Stanley are in the process of increasing ownership of what used to be securities industry JVs, with Goldman set to be the first to achieve 100% ownership, in its Goldman Sachs Gao Hua JV, once regulatory approval comes through.

Meanwhile, new entrants have established wholly owned ventures from scratch, including Nomura Orient, BlackRock and DBS Securities, which have recently set up majority controlled or wholly owned companies to establish a footprint in China’s investment banking and fund management markets.

The opening up of China’s markets to foreign financial institutions is rooted in a two-way dynamic: It will facilitate international investors’ access to China’s vast capital markets while at the same time boosting China’s financing and investment environment—not least via the introduction of best practices, particularly in deal execution—and deepening links between corporate China and the international financial markets.

China’s capital markets appeal because of their low correlation with prevailing economic and monetary conditions in the West. This was graphically illustrated in the primary debt, equity and loan markets in the first quarter of this year. International investment banks endured a quasi-catastrophic quarter: ECM and syndicated loan volumes fell almost 40% apiece.

But Chinese firms—CNOOC being a prime recent example—discovered that they can raise vast sums domestically against a backdrop of burgeoning liquidity. That explains Chinese institutions taking nine out of the top 10 spots in the Refinitiv investment banking fees table in the first quarter—and CITIC Group holding a leading position in DCM and ECM league tables.


In graphic contrast to the prevailing monetary tightening in the US, policy rate and reserve requirement easing beckon in the second half of this year in China. Small wonder that foreign investment banks want a slice of this action as a hedge against dismal conditions in their home markets, as well as for future profit growth.

Cross-border business may be the crucial advantage for foreign financial firms in terms of equity and debt underwriting—they can tap Western capital and the powerful ESG-aligned bid in public and private placement format—and regarding M&A. And they can offer expertise in asset management, mutual fund offerings and custodial services.

M&A advisory offers a clear opportunity for foreign investment banks to shine in China’s capital markets. For example, last year, Goldman Sachs and JPMorgan surged in the Refinitiv M&A China advisory league tables, bagging third place and eighth place respectively, a surge from 25th and 32nd the year before, with JPM topping the cross-border outbound M&A league table and Goldman at the top of the inbound table.

Cross-border competitive advantage was also on display when, in March, Deutsche Bank (China) became the first EU bank to set up connectivity with the Beijing branch of China Securities Depository and Clearing Corporation to allow Qualified Foreign Institutional Investor (QFII) access to the newest exchange established in China—the Beijing Stock Exchange, which caters to innovative small and midsize enterprises. The bank can facilitate access to foreign capital for these companies and help them tell their story to the deep QFII overseas investor base.

The nod to Deutsche follows its obtaining approval in December last year to provide domestic fund custody services for securities investment funds in China, following in the footsteps of Standard Chartered and Citi who won their custody service licenses in October 2018 and July 2021 respectively. China’s custodian market for such funds is estimated to be worth around $3.1 trillion.

 “We are proud to have a full set of licenses and comprehensive product capability onshore—for instance, as one of only two foreign banks with a Type A bond underwriting license—and we are constantly exploring new opportunities in cross-border solutions, wealth management and ESG,” says Rose Zhu, Beijing-based Deutsche Bank China chief country officer.

Sustainability is the overwhelmingly significant theme that will drive China’s corporate finance environment in the coming years. China is in the process of employing the Common Ground green taxonomy, which aligns with the EU’s taxonomy. The stringency laid out therein will profoundly alter China’s corporate landscape and the funding opportunities for Chinese companies, particularly those looking to access international capital via the debt, equity and loan markets.

Among the foreign banking players, Credit Agricole has established itself as a leading presence in China’s green finance market in recent years, positioning itself at the center of China’s green zeitgeist by co-chairing the Green Investment Principles of the Belt and Road Initiative. “As a global leader in sustainable finance, Credit Agricole CIB supported our Chinese clients in formulating their sustainability road map and executing relevant transitions, including the issuance of green bonds, sustainability bonds, social bonds, Covid-19 bonds, blue bonds and green ABS,” says Antoine Rose, head of Sustainable Banking for Asia-Pacific and the Middle East at Credit Agricole CIB in Hong Kong. “Our abilities to connect clients to international markets via our extensive network are key differentiators that set us apart from local banking peers.”