Tony Alexander

Economic Commentaries

Financial Services Opportunities

Wednesday July 31st 2013

David Thomas of Think Global Consulting writes more about how China’s rise is creating huge opportunities in the financial services sector.

David Thomas, CEO, Think Global Consulting writes the second half of a two part article on opportunities in the financial services sector. This section concentrates RMB internationalisation then funds management.

The story of the internationalisation of the RMB is strongly supported by the data. Since the expansion of the Renminbi trade settlement program in June 2010, the number of RMB denominated trade settlements has grown to 14% of China’s volume of total trade in the third quarter of 2012. In addition, the number of RMB deposits in Hong Kong have substantially increased since 2009 for two main reasons – the increase in the proportion of trade settled in RMB, and the expectation in the market of RMB appreciation.

Countries with the appropriate financial architecture, a willingness to grow RMB liquidity and the vision to develop RMB-related financial products and services will be well positioned to benefit from the anticipated changes in financial markets arising from the internationalisation of the RMB. Australia’s position has recently been enhanced by two recent announcements arising from the Prime Minister’s successful visit to China in April 2013:

•           The announcement on 24th April 2013 by the Reserve Bank of Australia (RBA) to invest approximately 5% of the country’s foreign reserves in Chinese government securities, an investment worth at least A$1.6 billion and the first time that the RBA has invested directly in a sovereign bond market of an Asian country other than Japan.

•           The announcement on 9th April 2013 of an agreement between the People’s Bank of China and the Australian Government to launch direct trading on the China Foreign Exchange Trade System (CFETS) and the Australian foreign exchange market between the Australian Dollar and the Chinese Renminbi (CNY).

3. Funds Management Sector

In less than 15 years, from a standing start, China’s unit trust industry, has grown to USD2 trillion in size and, with a national average savings rate of over 50% (USD4 trillion per annum) this is only just the beginning.

Recent negotiations between the Hong Kong Securities & Futures Commission (HKSFC) and the China Securities Regulatory Commission (CSRC) regarding the mutual recognition of unit trusts in each other’s jurisdictions will allow them to be sold to retail investors in both markets in the future. This is a potential “game-changer” for the funds management Industry, specifically those based in Hong Kong. This treaty will increase both the depth and breadth of RMB related financial activity, which will also be crucial in the process of the internationalisation of the RMB. Currently, 200 funds (approx.) will qualify for this recognition scheme, around 10% of HKSFC authorised funds.

The mutual recognition scheme will offer an opportunity for fund managers around the world to take advantage of the lower costs of establishing a fund in Hong Kong, simpler regulatory and legal issues and the ability to allow direct investment into China’s A Shares. In addition, it will open up a myriad of opportunities for financial advisers.

As some Hong Kong funds will need to be denominated in RMB, the new products offered will be unfamiliar to many, and there will be an increasing demand on financial advisers to provide accurate information on the products, returns, portfolios in order to make informed decisions. This scheme has the potential to place Hong Kong as the dominant international location for fund establishment in the Asia-Pacific, a regional “funds management hub”.  This should be of great interest to Australian fund management companies who can seek to take advantage of the mutual recognition arrangements between ASIC and the HKSFC.

With such opportunities and development at the forefront of China’s modernisation, the scale and enormity of the change in the financial services industry will be significant. Although China’s gradual step-by-step approach to change may appear unbearably slow, the sheer size and scale of the opportunity will propel industry growth well beyond that of the Western world at present. Australia’s presence and industry participation in China will play a crucial role in its reputation and strength in the region as a major financial services player.