Chinese President Xi Jinping knows exactly how to flatter U.S. President Donald Trump. Right after the Chinese leg of Trump's Asian tour, China announced it would liberalize foreign investors' access to ownership of companies in its financial sector. This news comes not just at the right time for U.S. banks, but also for a particular couple of U.K. institutions.
Foreign companies will be allowed to own majority stakes in Chinese companies in the futures, securities and insurance markets immediately, with full ownership permitted in three years, according to the country's finance minister.
Previously, foreign companies were restricted to owning minority stakes in Chinese banks and financial asset management companies. For insurance joint ventures, the foreign ownership ceiling will be raised to 51% after three years and to 100% after five years.
China sees its financial services sector as a strategic one, so this measure is very important. The country also has a vibrant investor community, even though some critics liken Chinese investors more to gamblers than to long-term investors.
With its growing middle class and increased appetite for saving, the country has huge untapped potential for Western banks and asset management companies. Using the experience of Central and Eastern Europe (CEE) after the fall of communism as a guide, first movers will have a huge advantage.
Western banks and asset managers that opened branches and bought local companies in CEE countries gained market shares in rapidly expanding, under-banked economies that they are holding onto even now. China could be the next opportunity for them to do so, but it will be way more challenging.
Unlike CEE countries in the 1990s, China already is quite a sophisticated market, so Western banks will need to rely on more than their brands to succeed. Those with local knowledge will have the upper hand.
For example, mobile banking use has surged in China, with penetration reaching 78% this year from just 3% in 2011, according to the J.D. Power 2017 China Retail Banking Satisfaction Study. Chinese retail customers use mobile banking 25 times a year on average, and mobile banking usage in China is much higher than in the U.S., where it is at 30%, or Canada, with 44%, the study found.
So, Western banks and asset managers will need to find ways to tap into this market rather than rely on brick-and-mortar business. The ones in the best position to do so are those that are already on the ground, and here two U.K. banks stand out: Standard Chartered (SCBFF) , the oldest foreign bank in China, and HSBC (HSBC) , Europe's biggest bank by assets.
These two banks already have an established presence in China, and the removal of ownership restrictions could help them compete more efficiently with local rivals, as from now on they could buy out local firms. On the other hand, this liberalization of ownership also increases the risks for these two institutions, as greater exposure to a slowing Chinese economy is not necessarily a smooth journey.
Overall, however, this is welcome news for the two British banks amid uncertainty for the future role of London as a global financial hub after Brexit. Gaining ground in the world's second-largest economy could offset some of that uncertainty.
But investors looking at the two banks should be aware that their exposure to emerging markets is not without controversy. British regulators are looking into whether HSBC and Standard Chartered facilitated money laundering due to possible ties to South Africa's politically powerful Gupta family.
Both banks, as well as the Gupta family, have denied any wrongdoing. However, the controversy highlights the risks of doing business in emerging markets.