China's financial institutions must prepare for global competition
Updated 21:25, 05-May-2019
Chen Jiahe
Editor's note: Chen Jiahe is the chief strategist at Cinda Securities. The article reflects the author's opinion, and not necessarily the views of CGTN.
Currently, China is doing something big: opening up its financial markets, such as the banking market, securities market, and asset management market. China's financial institutions are now facing direct competition from their global rivals. This is a historical event and China's financial institutions should seriously prepare themselves for the future.
For someone who understands China's financial market well, he or she should know that China's financial market is less open compared to China's real economy. Many Chinese products are popular in global markets, such as mobile phones, clothes and shoes, computers, and machinery.
However, China's financial companies are mainly local players.
For example, Chinese asset managers rarely sell their funds in either New York or London. China's insurers usually only deal with local clients. Chinese banks, although having huge amounts of assets, rarely do businesses in the global financial market. In contrast, global financial giants such as HSBC, Fidelity Investment and Alliance Insurance obtain a big chunk of their incomes from other countries rather than their own homelands.
The complexity and turmoil of global financial markets also far exceed what can be seen in China's domestic market. For example, in 1987, the U.S. stock market fell by 27 percent in one single day – a drop even greater than what the Chinese stock market would experience today.
Therefore, when the country is now opening up its financial markets, its local financial institutions should prepare themselves for the challenges that will come. There are many things that Chinese players can do. Recruiting experienced employees is one of the most important of them all.
The Shanghai Stock Exchange, January 14, 2019. /VCG Photo

The Shanghai Stock Exchange, January 14, 2019. /VCG Photo

When we are discussing the importance of human resource, the industry of finance is very different from many other industries. For many industries, the importance of human resource is not that great.
For example, in the mining industry, natural resource is the most important factor. In the machinery industry, factories and production tools are the most important factors. However, the financial industry requires none of the above; it is built heavily upon human resource.
The importance of human resource should not be simply understood as the quality of human resource. The stimulation of employees should also be considered with equal importance, if not more.
For anyone who knows well the history of the Silicon Valley, he or she should know that stock options played a vitally important role in the development of so many successful companies in this little piece of land. China's financial institutions should realize the importance of stimulating their key employees.
Apart from human resource, risk management is also vital to financial institutions.
In this regard, China's financial institutions should find more lessons rather than experiences from their global competitors. 
In 2008, Global Financial Crisis, the largest five U.S. investment banks went into turmoil because of poor risk management. The lessons of Amaranth Advisers and Long-Term Asset Management should teach China's asset managers a lot.
Almost all the lessons of global financial meltdowns point to one word: leverage. All of the three examples contain huge leverages. 
On the other hand, China's financial institutions have maintained leverages of very low levels in the past decade and kept themselves away from the financial turmoil. This is mainly because China's regulatory authorities have foreseen the potential hazard that can be caused by over-leveraging and have thus reduced the amount of leverages proactively.
Another challenge that lies ahead of China's financial institutions is the internationalization of their businesses. Currently, most of China's financial companies operate locally. They gain a very small amount of their income from the global market.
This status is lagging far behind the development of the Chinese economy. However, internationalization is not an easy task. It requires expertise in many fields such as legislation, business reputation and connection, global vision and experience, and language fluency. It will be a great challenge for Chinese financial companies who wish to internationalize themselves.
Although the internationalization is a very challenging task for China's financial institutions and they will certainly face great competition from their global competitors in the future, it is still a very worthwhile task, as there is no great nation in the world that can be classified as "great" without internationalized and strong financial institutions.
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