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Trading Technology

05:20 PM
Paul Allen
Paul Allen
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Firms Ready to Dive Into China's Financial Markets

The opening of the huge Chinese financial services sector to foreign-based institutions presents a gamut of opportunities -- whether in retail and corporate banking, investment banking or asset management -- for North American and European firms.

Why It's Important: China enjoyed more than a tenfold increase in its gross domestic product from 1979 to 2005, at an average annual rate of 9.7 percent, making it the second-largest economy in the world on a purchasing-power parity basis. And with a population of more than 1.3 billion, even partial success in the market could mean substantial rewards.

Where the Industry Is Now: Historically, China's Big Four state-owned banks controlled more than half of the total assets of financial institutions in China. At the end of 2005, the assets of foreign banks accounted for just 2 percent of the total, according to a Celent report, "Corporate Banking in China." Since China's entry into the WTO in 2001, however, it has progressively lifted restrictions on foreign banks, many of which entered the market via joint ventures or by taking equity stakes in domestic players. On Dec. 11, 2006, all constraints on foreign banks were removed. Prior to the December announcement, Citigroup, HSBC, Standard Chartered and ABN AMRO had announced intentions to locally incorporate their Chinese operations.

In the asset management arena, a number of foreign fund managers are licensed to act as qualified foreign institutional investors, allowing them to invest in Chinese securities. On the flip side, the qualified domestic institutional investor (QDII) program allows for domestic funds to be invested offshore, presenting program participants with a chance to tap the rapidly expanding domestic savings pool. The first batch of QDII institutions, announced June 30, includes four mainland banks plus HSBC and Bank of East Asia. In addition, in December, Nasdaq and the NYSE were given the green light to open formal business offices in China.

Focus in 2007: Competition for market share will heat up between foreign and domestic banks. A priority for foreign institutions will be to expand their client bases and grow their physical presences in China. Similarly, more asset managers will seek access to the QDII program. Banks will have the rare opportunity to tap the latest technology and investing strategies without having to worry about legacy infrastructures and corporate hierarchies in this large greenfield market.

Industry Leaders: With historic ties to the region, HSBC has been in the vanguard of foreign players operating in China. Citigroup also has built a significant presence, with a 20 percent stake in Guangdong Development Bank, 11 percent of Jinan City Commercial Bank and 5 percent of Shanghai Pudong Development Bank. Bank of America, Royal Bank of Scotland, Goldman Sachs, Standard Chartered, ING and Deutsche Bank also have taken stakes in local operators. Similarly, asset managers -- including Merrill Lynch Investment Managers, France's Crédit Agricole Asset Management and Switzerland-based Pictet Asset Management -- have set up joint ventures with local firms.

Technology Providers: Several global software vendors -- including Temenos, Misys and Reuters -- sell systems to local banks, says Celent senior analyst Wenli Yuan. Misys Banking Systems, for example, has sold products to Bank of Beijing, the Agricultural Bank of China and Dah Sing Bank.

The Price Tag: Buying shares of domestic banks has been a popular mode of entry to the market. According to Celent's report, 21 foreign firms have acquired stakes in 20 domestic banks, representing a total investment of more than $16.5 billion. Goldman Sachs' 9 percent share in the Industrial and Commercial Bank of China cost $3.8 billion, while Citigroup paid $3.1 billion for its stake in Guangdong Development Bank. Without the impediment of legacy technology, firms may be able to quickly implement new technology platforms that can set the stage for rapid growth in China.

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