Shanghaied? MNC Banks in China (Again)

♠ Posted by Emmanuel in , at 5/14/2009 08:10:00 AM
The list of barriers to multinational financial services providers operating in China are plentiful. In this new Wall Street Journal article, highlighted are well-known restrictions on trading shares of common stock among non-Chinese, currency convertibility, and restrictions on inward and outward capital mobility. In this day and age where the "Washington Consensus" triad of liberalization, privatization, and deregulation has become much derided, you can probably argue that this is a good thing and find agreement. However, the issue is also one of trade in fair market access among MNC banks wishing to tap into the China market. If you will recall, one of the reasons why Bush tapped former Goldman Sachs honcho as Treasury secretary was to use his accumulated familiarity with PRC elites to "crack open" this important sector.

There still remain high hurdles to MNC banks doing business in China. Something that has gone unmentioned in the article are high capital requirements. Sometime ago, some commentators were saying that a US case against China regarding excessive barriers to this kind of services trade was bound to happen. In what follows, the WSJ's James Areddy notes that China's goal to establish Shanghai as a regional financial center alike Hong Kong or Singapore is causing a number of legislative--and perhaps more importantly, attitudinal--changes. While the process is slow, the burghers of Beijing may indeed be warming up to foreign financial services providers. Hu-ever said central planning was dead?
The list of frustrations about China's shortcomings as a base for foreign banks and investment firms is long. But many of those companies are increasingly enthusiastic about the profits they are making here. China, excluding Hong Kong, was the fourth-most-profitable country last year for HSBC Holdings PLC's unit that trades local currencies, bonds and derivatives for large corporate customers. That business churned out $353 million in pretax profits, up 137%, offsetting losses in consumer banking. HSBC hasn't disclosed its first-quarter results in China.

At Citigroup Inc., net income in China jumped 95% in 2008 to the equivalent of $191 million, helped by a 20% rise in commercial foreign-exchange transactions. The surge was a sharp contrast to the New York bank's overall net loss of $27.68 billion last year. The results show that financial-sector profits in China aren't just wishful thinking anymore. The banking industry's woes in the U.S. and elsewhere accentuate the growing importance of developing markets like China and India, even though those countries generate small slices of the revenue and profits at the foreign banks doing business there.

In China, the growth also underscores how Beijing is offering foreign banks, fund managers and other firms more leeway to pursue business despite tight overall restrictions in the country's financial system. For example, China strongly controls its currency's exchange rate and capital flows across its borders, which can crimp the role of foreigners. Still, J.P. Morgan Chase & Co. says it handles about 25% of China's U.S.-bound dollar transfers, which is similar to its clearing volume elsewhere. "Having a controlled currency doesn't mean there are no opportunities to make money," says Lisa Robins, head of China treasury services for J.P. Morgan in Beijing. "Our China business is growing and profitable."

Foreigners also face limits on direct stock-market investment in China. Nevertheless, global money-management firms operated 32 joint ventures last year that controlled almost half the local mutual-fund industry's $290 billion in assets, generating average management fees of $52 million each, according to Shanghai market-research firm Z-Ben Advisors Ltd.

And even though foreigners technically can't trade commodity futures in China, some of the world's biggest trading houses have found indirect ways to trade through local brokers. Non-Chinese firms are emerging as influential players on the country's four exchanges, including in soybean futures. "They are trading large volumes," says one bank analyst who follows the sector.

In recent weeks, China has added vigor to a long-running effort to position Shanghai as a global finance and shipping hub. It has pledged pro-market rule changes, new products, technological advances and lower taxes. Despite the global recession, the moves reflect the belief that China's growing economic might will translate into more money to manage in Shanghai.

The central government is determined to draw global banks, brokerages and other firms to Shanghai over the coming decade, promoting the city as a peer of Hong Kong, London and New York -- and as preferable to Chinese cities like Beijing, Tianjin and Shenzhen. "It is of both long-term and strategic importance," said Liu Tienan, a vice chairman of the National Development and Reform Commission, China's planning agency.