The Taiwan Banker

When China joined the World Trade Organization in 2001, it promised to remove most market barriers to foreign participation in its financial sector by 2006. In hindsight, that goal was unrealistic. Beijing sees the financial sector as strategic and will not allow foreign firms to dominate it as they do other industries. More than a decade passed. On the eve of the U.S.-China trade war in 2018, foreign banks had less than a 2% share of the China market, down from 2.4% in 2007, according to KPMG. If the trade war's original intent was to serve as a blunt instrument to pry open China's markets, it has had some success in the financial sector. Trade tensions with the U.S. have inflicted economic pain on China and created uncertainty about its business environment. China's leaders have responded by accelerating long-stalled financial reform measures. In July 2019, Chinese Premier Li Keqiang said that China would end limits on foreign ownership in its financial sector in 2020, a year earlier than originally planned. Li and his colleagues realize that well capitalized foreign banks remain eager to tap China's US$45 trillion financial sector: better late than never. Among the most notable reforms are in the payments segment. In the past year Beijing has approved the U.S. digital wallet PayPal to operate in China as well as the credit-card giants American Express and Mastercard. Amex is now moving to begin China operations. Visa's application is pending. U.S. payments firms see opportunity in China despite the dominance of local firms. State-owned UnionPay has a virtual monopoly over bank cards in its home market. In China's US$27 trillion mobile payments market, the fintech giants Alipay and WeChat hold a 55% and 39% market share respectively, according to Beijing-based research firm Analysys. Even if just 6% of the China mobile payments market is up for grabs, it's still worth US$1.62 trillion, enough to pique the interest of foreign payments firms. PayPal and Amex are likely betting on China's mobile payments sector to continue its expeditious growth, a strong possibility given a booming e-commerce sector. Consultancy Frost & Sullivan predicts the Chinese mobile payments services market will reach almost US$97 trillion by 2023. Unsurprisingly, Beijing required both PayPal and Amex to form joint ventures with local partners as a condition of market access. PayPal took a 70% stake in the Chinese state-owned online payments provider GoPay through one of the U.S. firm's local subsidiaries, Yinbaobao. Amex set up a JV with the Chinese fintech LianLian in 2012 that allows LianLian to license Amex's Serve system for mobile payments. Amex is also moving to partner with Tencent-owned WeChat Pay. In June, Tencent said that WeChat Pay would support Amex RMB credit cards. "Our cooperation is conducive to the more open and international development of China's payment and bank card clearing services," Chen Qiru, vice president of Tencent Financial Technology, said in a statement. Amex also plans to cooperate with WeChat Pay's rivals Alipay and UnionPay as well as China's largest state-owned banks. British fintech sensation TransferWise recently inked a deal of its own with Alipay that allows TransferWise's 7 million customers to pay Alipay users in renminbi from 17 currencies. China is the world's second-largest remittance market after India and received US$70.3 billion in remittances in 2019, according to the World Bank. The agreement permits a maximum of five transfers monthly, each up to RMB 31,000. The annual limit is RMB 500,000. Among foreign banks, Switzerland's UBS has been among the most eager to take advantage of China's financial reform efforts, which is consistent with its longstanding interest in the China market. Among foreign lenders, UBS was the first to hold a maximum 49% stake in a Chinese fund management company (in 2005), make a direct investment in a fully-licensed Chinese securities firm (in 2006) and gain majority control of a securities joint venture in China (in 2018). UBS now wants to capitalize on Beijing's expected loosening of restrictions on foreign ownership of digital banks. In January, Beijing signaled that foreign lenders already doing business in China would be allowed to set up independent online banks. The Swiss lender plans to use China as a base to build a larger regional wealth management business. If UBS wins a digital banking license in China, it expects its Asia-Pacific customer base could grow from 30,000 to 200,000 in two years' time. Beware the clouds of financial war Ironically, now that China is finally opening its financial sector to foreign investment, there is a financial war brewing between Beijing and Washington. If it heats up, foreign banks and other financial institutions may find themselves caught in the crossfire. In August, the U.S. sanctioned Hong Kong chief executive Carrie Lam and 10 other officials for their role in undermining Hong Kong's autonomy, which includes imposing draconian national security legislation on the former British colony and postponing legislative elections for a year. The sanctions prohibit the individuals from accessing their U.S. assets and transacting with U.S. persons. Banks operating in Hong Kong will have to comply with the sanctions or risk being cut off from the U.S. financial system. The sanctions on Hong Kong officials could be a harbinger of a wider targeting of China amid decoupling of the U.S. and Chinese economies. Banks need to be careful. In 2012, HSBC ran afoul of sanctions the U.S. had placed on Iran, as well as Cuba, Libya, Sudan and Burma. It paid US$665 million in civil penalties. China's state-owned Bank of Kunlun, which financed oil shipments with Iran, did not get off so lightly. Washington cut off Bank of Kunlun from the U.S. financial system, squelching its cross-border business. Souring U.S.-China relations could force banks to choose between the U.S. and China. No matter how much JPMorgan, Bank of America or Citibank want to expand their China business, they won't do so if the regulatory risks are too high. Although it is Swiss and not American, UBS would probably choose the U.S. over China as well. At the same time, foreign banks must consider the optics of increasing their China presence with the U.S.-China relationship at a post-normalization nadir. "It is at the very least awkward for US and foreign banks wanting to take advantage of market opening in China,” Michael Hirson, practice head of China and Northeast Asia at the Eurasia Group consultancy, told CNBC. Nevertheless, Beijing is pushing ahead with financial reform, betting that in the long-term the allure of the massive China market will endure. In July, Beijing made good on its promise to scrap remaining foreign ownership limits in the financial sector following the lifing of such caps on securities firms as part of the phase-one trade deal signed with the U.S. in January. Foreigners now will be able to take full ownership of Chinese insurers, futures and mutual fund companies as well as control wealth management firms, pension fund managers and inter-dealer brokers. Further, Beijing promised to take a maximum of 90 days to decide on applications from digital payment providers. Many foreign financial firms are moving to take advantage of the loosening of foreign ownership restrictions, particularly in the securities segment. Among the firms approved to take majority stakes in joint ventures are Credit Suisse, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Nomura and UBS. Daiwa Securities and DBS have applied for majority stakes, while Citigroup and Societe Generale are mulling a fully-owned brokerage. In asset management, BlackRock and Neuberger Berman have applied to set up wholly foreign-owned mutual fund companies, while Fidelity, Schroders, Vanguard, Fidelity, Van Eck Associates, and Schroders have told Chinese regulators that they plan to apply for the requisite licenses. Former Chongqing mayor Huang Qifan, now vice president of the China Center for International Economic Exchanges, reckons that foreign financial firms could invest up to US$1.1 trillion of assets in China over the next few years.