Insight - The future of Australian finance in China

This insight by David Landers, General Manager, East Asian Growth Markets, appeared in Business Spectator in January 2015.

Australia’s free trade agreement with China offers our financial services sector an unprecedented opening to the capital markets of what may soon be the world’s largest economy.

Yet even as China opens its financial sector to the forces of global competition, Australian banks, insurers, investment managers and securities firms need to move fast to secure any new opportunities.

They should heed the words of the great Canadian ice hockey player Wayne Gretzky, who once said: “I skate to where the puck is gonna be, not where it has been."

At the moment, the puck is moving fast.

China’s economic model is changing from one focused on export development to one that seeks new sources of growth through domestic consumption and more open markets.

As a result, China’s President Xi Jinping is moving to open up China’s capital markets by allowing private banking, loosening restrictions on the capital account, and making exchange and interest rates more market sensitive.

A good illustration of China’s move to liberalise its capital account was the establishment last year of a new trading link between the Hong Kong and Shanghai stock exchanges, the Hong Kong Shanghai Stock Connect.

The timing of these market openings could not be better for Australia given the promise of the China-Australia Free Trade Agreement, ChAFTA, signed last November in Canberra.

The FTA will provide new access to China’s financial services market for Australia’s banks, insurers and securities firms as well as fund managers.

It offers more than China has given to any other FTA partner and allows, for instance, up to 49 per cent Australian ownership in joint ventures.

At the same time, an agreement to establish an RMB trading hub in Sydney will make transactions between Chinese and Australian firms that much simpler.

A key aspect of the ChAFTA is that it will allow Australian financial institutions, including superannuation funds, to invest RMB in China’s onshore securities markets.

Australia is just the fourth country in Asia to be granted access to the RMB Qualified Foreign Institutional Investor program; and only 12 countries worldwide enjoy this right.

That will give millions of superannuation holders in Australia access, through their funds, to the dynamic shares of China’s firms.

Australia has developed a competitive advantage in wealth management that rivals all other global centres of finance. That’s a critical opening for our fund managers.

In its Positioning for Prosperity report, Deloitte spotlights wealth management as one of the ‘fantastic five’ industries which will have a major impact on Australia’s future prosperity.

Our funds management sector has decades of accumulated expertise that can be used to help Chinese savers and retirees invest more productively.

The Australian funds management sector is the third largest manager of funds internationally and manages the largest pool of funds in Asia.

We can use these strengths to position Australia as a major provider of financial services to China, helping its savers and retirees invest their wealth more effectively.

The number of people aged 60 and over in China is forecast to increase from 180 million today, to 487 million by 2050 -- more than a third of the entire population.

Apart from the immediate benefits of the ChAFTA, China’s planned market reforms suggest a much broader set of opportunities for Australia’s financial services firms.

International capital outflows from China, for instance, are trending from institutional to private.

In May this year, China’s “cabinet” announced its intention to launch a new program allowing qualified individual Chinese investors to invest in overseas capital markets.

This is important because, under the ChAFTA, Australian brokerage and advisory firms will be able to provide financial advice and portfolio management services to these Chinese investors, as well as trading accounts in securities.

This could result in a changed mix of China’s international financial assets that would include more actively invested private wealth assets and savings in higher-yielding assets.

ChAFTA will help Australian superannuation funds to provide alternatives to the limited range of options currently available to Chinese investors, which includes such things as below-inflation bank accounts or real estate.

Shanghai could be a future testing ground for a free trade zone allowing qualified individuals to open capital accounts, albeit slowly and tightly regulated.

The impact of China’s financial deregulation is already being felt in the retail banking sector, where newcomer Yu’e Bao (owned by Alibaba) began to accept deposits from the Chinese public, placed in an “on-line investment fund”.

In under a year, Yu’e Bao has attracted more than 80 million customers, and with US$93 billion under management by mid-2014, it is one of the largest money markets in the world.

This illustrates the willingness of Chinese regulators to allow new players into a tightly controlled sector and shows the strong demand for financial products that offer higher returns.

Through the ChAFTA, Australian banks will gain easier access to China’s domestic market by having waiting periods for local currency licences reduced to one year from three and by being allowed to expand their branches more easily.

Domestic financial services reform in China, a free trade agreement which grants new market access to Australian firms, and new RMB clearing bank arrangements put the Australian financial services industry in a very competitive position.

In a fast changing environment, however, the industry will need to keep its eye on the puck to secure any new opportunities as they emerge.