U.S. Banks Could Gain Access to China
In what could be a sharp break from previous policy, China is considering letting foreign investment banks operate independently on the mainland.
The shift would allow Wall Street firms to function in China’s domestic market without being accompanied by a local partner, which is something that United States investment banks have been waiting for, for a very long time. Until now, they were forced to sign joint ventures with local Chinese companies.
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By allowing U.S. investment banks onshore, China would be adding a new slate of buyers for their growing pile of corporate debt. There is $7.48 trillion worth of financial assets on mainland China, from stock in Shanghai and Shezen to bonds across the country. (Source: “China Weighs Giving Wall Street Investment Banks Greater Mainland Access,” The Wall Street Journal, November 6, 2016.)
China’s corporate bonds total 145% of its gross domestic product (GDP), making it a huge amount of money for Wall Street to get its hands on. And with the central bank losing its grip on the economy, increasing demand for Chinese assets might be the only answer left.
However, U.S. investment banks would face high bars to success even if they were given access to mainland China. Chinese banks are by no means small potatoes. They are expanding aggressively in the entire region, looking to emulate the success of Western investment banks.
According data provider Dealogic, Chinese banks had 10% of Asian investment banking revenue in 2006 (once Japan and Australia were removed from the calculations). Today, they have 61% of the market.
Chinese banks have exploited nativist tendencies in China to take hold of the domestic market, ingratiating themselves with companies that prefer to do business with other Chinese firms. U.S. banks will find it hard to break that stranglehold, particularly since their brands are lesser known. Their share of the region’s investment banking revenues fell from 43% in 2000 to 14% this year.
Another report, from McKinsey & Co., Inc., shows that foreign banks have only five percent of China’s domestic investment banking business. Bear in mind that U.S. banks ramped up spending to capture market share during this time, but it just didn’t happen.
Now there is hope that gaining access to mainland China will change the fortunes of foreign investment banks. However, the deal is far from final. Details would need to be sorted out with Chinese financial regulators, not to mention that the deal would have to be ratified by the U.S. Senate.
