Competition's good, not the knell for FS

Foreign players will play a bigger role in the Chinese financial services or FS market in the foreseeable future. That seems to be the consensus view of market experts.

They foresee intense competition. But Chinese players need not feel intimidated; rather, they should treat this as an opportunity to reform their business structures, models and operations, they said.

The Chinese central regulators have been firm in their resolve to create a more open financial market, in order to provide more stimulus and vibrancy to the economy.

New financial products and ideas will be introduced in sectors like banking, securities and asset management. For the Chinese FS industry, which has long been criticized for its mild competition, it might be more of an opportunity than a possible challenge.

For a very long time, Chinese securities firms earned most of their income from traditional brokerage and underwriting businesses. Their business structures were similar. Lower prices was the only way they competed with each other.

The Matthew Effect in the Chinese securities industry has been increasingly evident. That is, the leading 10 firms take up the majority 70 percent of the net income, while those ranking between 50 and 80 account for only 5 percent of the profits earned in the industry.

The scenario in the Chinese banking industry is not very different. Although the major four State-owned commercial banks boast high ranks in the Fortune 500 list, thanks to skyrocketing revenues, their profit-making ability still needs improvement.

Although a large number of commercial banks have set up their investment banking departments, progress has been quite slow. While attempts were made to explore the asset management businesses, past experience showed they were somehow shortsighted.

While several Chinese banks claimed to reach further into the international markets, most of their international services are still bank loans. With the internationalization of the renminbi, the time has come for the introduction of comprehensive cross-border FS, experts said.

Mature markets present a different story. German heavyweight Deutsche Bank cut its investment banking wing in July due to fierce competition. Boutique securities firms have continued to improve upon their stellar performance.

For instance, US boutique investment bank Lazard, which specializes in mergers and acquisitions, and Charles Schwab, which excels in digitalized FS, have not only gained industry attention but posted convincing financial results.

Intense competition in mature markets has forced industry leaders to come up with more innovative businesses. In August last year, industry giant JP Morgan announced it will charge zero commission on stock-trading or exchange-traded funds if the transactions are effected through its newly launched mobile app YouInvest. Asset management and digitalization have become the company's new focus areas.

It's possible big-name securities firms may go in for mergers in the Chinese industry in the next decade or so, but there is no strong evidence that boutique securities firms might bring in disruptive change to the Chinese industry in the near future.

Hopefully, with the solid presence of foreign institutions, we can see a fundamental reform in China's financial services industry.

Concerns were expressed in certain quarters that Chinese players, a large number of whom are at their very early stage of development, might be eliminated from the market due to stiff competition from foreign giants.

But Henry Wang, director of APAC product management for China Financial Institution at S&P Global, said such worries may be misplaced, given the shining examples of local success stories in the home appliances and automobile industries.

In those industries, local players competed well, or even outcompeted, foreign brands in the China market. In fact, Chinese brands such as Haier, Gree and Geely found high acceptance even among consumers worldwide.

If intense competition could produce local corporate stars in home appliance and auto industries, the same could happen in FS as well, he said.

(China Daily Global 08/05/2019 page8)