“The sheer size of China’s virtually untapped stock and bond market is irresistible to the world’s major financial institutions, especially since Beijing is finally allowing them to operate entire mutual funds,” said Alex Capri, a research fellow at the Hinrich Foundation.
China is the second largest market for stocks and bonds in the world. But it is largely untapped by foreign Investors: International holdings account for about 5% of the $14 trillion stock market, and less than 4% of the $17 trillion onshore bond market, according to data from the exchange and central bank.
“China represents a significant growth opportunity for global financial services firms,” said Brendan Ahern, chief investment officer of KraneShares, an asset manager focused on Chinese stocks and bonds.
“Developed markets such as the United States and Europe are highly competitive and mature, which has resulted in fee compression and diminishing opportunities,” he added. But “the Chinese markets are relatively young by comparison.”
Expansion despite uncertainty
The significant breakthrough for these banks comes about two decades after China joined the World Trade Organization and pledged to open up its financial sector.
The enthusiasm of global banks and asset managers also carries risks, as there is growing uncertainty about China’s political and regulatory environment, as well as Beijing’s mounting tensions with other countries.
“There is a general sense that after this year’s 20th party congress, Xi will moderate some of his more aggressive rhetoric after securing his political position,” said Craig Singleton, a deputy China fellow at the Foundation for the Defense of Democracies, citing widespread expectation that Xi will use a key political meeting to cement a historic third term in office. “The biggest risk, however, is that he will do the opposite.”
A number of Western companies have been embroiled in controversy in China as geopolitical tensions worsen, especially over allegations of human rights abuses in the country’s western region of Xinjiang.
Busy at home
China’s decision to let more foreign companies into the country is “aimed at increasing collateral damage in the international community,” Capri said, adding that allowing Western companies to take larger stakes in China would also increase Beijing. gives a “leverage effect” on Washington and Brussels .
“This will increase tensions between the major financial firms in the US and Europe, and their own governments,” he said.
However, the potential to make money in China seems to outweigh any political concerns.
“While China faces massive economic headwinds, the country has defied bearish forecasts in the past,” Singleton said, adding that Western banks have continued to generate billions of dollars in revenue from China, even with the recent regulatory crackdown.
“In other words, Western banks are playing the long game under the guise of portfolio diversification,” he added.
And even as Beijing tightens its grip on parts of its economy, there are reasons why the country is eager to open up its financial sector to foreign investors.
China’s strict adherence to its “zero Covid” strategy and slow, self-isolation of much of the world has also not been enough to throw the country off course. Last year, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said, spoke repeatedly about the importance of opening up financial services and leveraging global capital and financial expertise.
“One of the most important characteristics of the Chinese Communist Party is its adaptability and its pragmatism,” Singleton said.
He added that China understands that it must maintain access to foreign markets, technology and capital, necessitating continued partnerships with Western companies.
“In other words, the CCP must integrate to survive, meaning it cannot completely shun existing global standards or systems, even as it tries to adapt them to Beijing’s needs,” Singleton said.