China's financial service providers, brace for impact!
Updated 14:37, 09-Nov-2019
Chen Jiahe

Editor's Note: Chen Jiahe is the chief strategist at Cinda Securities. The article reflects the author's opinions, and not necessarily the views of CGTN.

On November 7, China's State Council released a guideline on better using foreign investment. The document highlighted the country's determination to further open up, especially its financial market.

For example, according to the guideline, the country will remove restrictions on the business scope of foreign-invested banks, securities companies, fund companies and other financial institutions. 

This is in line with the country's recent efforts to lift restrictions on international investors in the financial sectors. However, here comes the question: Will the arrival of more international investors dampen their Chinese counterparts' chances of success?

For some financial industries, such as banking and insurance industries, Chinese local competitors do not have much to worry about. Take the banking industry for example. China has the world's largest banks, such as Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CBC). These banks are not only the largest in terms of their size, their financial statements are also much healthier, compared with their counterparts in Europe and North America.

At a time when Deutsche Bank is burdened by its heavy positions on financial derivatives and banks in North America are still recovering from the huge loss that they suffered in the 2008 global financial crisis, Chinese banks have few positions on derivatives and their cash reserves are ample.

Although the housing prices in Chinese cities are very high, there is almost no financial derivative that is built upon the mortgages. The strict regulations of China's financial authorities have helped maintain the country's financial health.

For some other financial industries, however, the competition from international companies can be very intense. Take the mutual fund management industry for example. The largest mutual fund managers in China, such as Southern Asset Management and China Asset Management, are only managing funds of hundreds of billions of RMB.

While this may sound like a lot, it is much smaller when compared with the global giants in the fund management industry. Global leading mutual fund management companies usually manage trillions of USD.

For example, Fidelity Investments, which is one of the most famous mutual fund management companies in the world, is now managing around 2.5 trillion U.S. dollars of mutual funds.

China's State Council Information Office holds a press conference on foreign investments in Beijing, China, October 29, 2019. /VCG Photo

China's State Council Information Office holds a press conference on foreign investments in Beijing, China, October 29, 2019. /VCG Photo

The gap between Chinese securities companies and their global competitors is also large. The leading Chinese securities companies still rely heavily on the incomes generated from trading commission fees.

In contrast, global leading securities companies are now having more and more incomes generated from high-value-added segments, such as financial advising, investment banking and asset management. These segments rely heavily on technological inputs and human resource.

However, the existing gap between China's financial service providers and their global competitors does not mean the global market participants are unbeatable.

Those familiar with the history of the global financial market can spot numerous financial crises that were caused by unqualified financial service providers. The 2008 global financial crisis was caused by irresponsible and greedy derivative underwriters and traders. The financial crises caused by Long-Term Capital Management and Amaranth Advisors were the results of a simple investment rule being broken: don't overuse your leverage.

In my career as a security analyst, I had the chance to talk with many global investors and discuss the investment opportunities with them. I found out that they do have superior knowledge and experience of the global markets. However, their understanding of China is much less sufficient compared with their understanding of the global markets. 

These weaker understandings are due to a couple of reasons. First, many people can neither read nor speak Chinese, while almost all the information passing around in China is either written or spoken in Chinese.

Second, China has its highly distinctive culture. This means the business environment here is different from a typical Western style business environment.

However, the superiority in the understanding of the local market does not mean the Chinese financial service providers can relax on their natural advantage. International competitors are super sophisticated with their understanding of the nature of businesses, the valuation of assets and the accuracy of investment decision makings.

At a time when China's economy is opening quickly towards the global market, financial service providers in China must brace for the impact.

(If you want to contribute and have specific expertise, please contact us at