China growth proving irresistible for financial services: amid the doom and gloom of global financial markets those with enough hope and foresight are seeing red of a different kind—the potential beacon of opportunity for financial services in China

Australian Banking & Finance, Dec 1, 2008 by Tina Wing Kee

The Financial Services Institute of Australasia (Finsia) gathering for the Australia--China Financial Services Summit last month provided insight into the opportunities and challenges for Australian firms looking to enter the behemoth Chinese market.

"Notwithstanding the global turmoil, Australia's future as a regional financial services hub will increasingly depend on heightened understanding and closer links between China and Australia," Finsia chief executive officer, Martin Fahy, said.

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Australia's trade relations with China are at an all time high and trade in financial services is becoming a key part of Australian services exports to China--following on from the success of education and tourism exports, according to Fahy.

He points to China's "rolling agenda" of regulatory changes that are opening up the market and presenting opportunities for the financial services sector.

And despite the sensitivities in trade negotiations with regard to financial services, Fahy is hopeful that there will be wider multilateral agreements, or bilateral agreements at least, that will facilitate the export of Australian financial services into China.

The sheer size of the Chinese market is a tempting enough but as a high savings nation, financial services firms will be looking to tap into an extraordinarily large deposit base.

Add to this the desire of the burgeoning middle class population to access financial products--and you've got an almost irresistible market.

Further, the Chinese industry is keen to access the expertise of other financial services markets in terms of brand, marketing, products, technology, service and other "software" to the "hardware" of physical branches and infrastructure, according to Fahy.

ANZ banks on China

Of the Australian banks, ANZ has taken a lead position in China.

ANZ has had a continuous presence in Mainland China since 1986 when a representative office was established in Beijing.

Now ANZ aims to become a top four foreign bank in Greater China.

"While ANZ's Asia Pacific business contributed seven per cent of group net profit in 2007, we plan to deliver 20 per cent of group net profit after tax from the region by 2012," ANZ North East Asia chief executive officer, Alistair Bulloch, said at the summit.

"And capturing the opportunity in Greater China will play an important role in that growth aspiration."

The figures are enough to excite most, but especially the financial services industry.

Bulloch highlights a "double benefit" of China's high GDP growth--contributing to nearly 30 per cent of total global growth in 2007--and a financial services sector growing at about 2.5 times the growth in GDP.

"The financial market is becoming a much more significant part of China's economy," Bulloch said.

He added that the banking market is forecast to grow about 12 per cent a year for the next four years, with Greater China set to account lot two-thirds of Asia's US$580 billion banking wallet by 2012.

Segmentation of the Chinese market is critical, according to Bulloch, and considering the country's massive population it's not surprising that ANZ are segmenting and targeting only profitable pools of the market.

"There are very profitable niches in there, and there are very large and grey niches," Bulloch said. "To be successful, you must be very clear about where you will and where you won't do business.

"We have clear strengths in areas such as trade, foreign exchange, commodities derivatives, and structured and project finance--our growth will focus on leveraging these core strengths."

And while Chinese banking regulation limits foreign ownership of Chinese banks to 20 per cent, ANZ are leveraging local partnerships to ensure their position "when barriers come down and markets open up".

Bulloch refers to ANZ's strategic partnership with Shanghai Rural Commercial Bank--of which they own a 19.9 per cent stake--as a "win-win situation for all".

"It operates in a market where ANZ doesn't have the capability or ability to enter into that marketplace," Bulloch said.

Emerging market for funds management

From the establishment of the industry about 10 years ago and foreign participation from 2002, the Chinese funds management industry is enticing asset managers around the globe.

While foreign investors can own only 45 per cent of the equity in a funds management company presently, there are 25 Sino-Foreign joint venture companies that account for around 40 per cent of local market share.

Index funds manager, Vanguard Investments Australia has been testing the Chinese waters for the last five years with a fly-in, fly-out approach.

Principal and head of Asia and Japan, Trevor Chudleigh, said that while they had made qualitative gains, Vanguard were yet to earn revenue from the Chinese market.

"Five years really is a single step in a journey of a thousand miles," Chudleigh said.

He points to the current environment as a "more interesting, sophisticated market" for financial services firms looking into China compared to five years ago.