Updated 1041 GMT (1841 HKT) January 14, 2022
A version of this story appeared in CNN’s Meanwhile in China newsletter, a three-times-a-week update exploring what you need to know about the country’s rise and how it impacts the world. Sign up here.
Hong Kong (CNN Business)For many companies, doing business in China is getting trickier by the day. But Western banks and asset managers are more than willing to up their bets on the world’s second biggest economy, convinced that the opportunities remain too good to pass up.Major banks in recent weeks have inked deals to expand their footprint in China — or are otherwise attempting to take greater control of their businesses there — after years of being forced to enter the market via joint ventures. That’s despite fraught geopolitics, a slowing economy and an increasingly hostile environment for private business.Late last month, HSBC (HBCYF) received approval from Chinese regulators to take full control of its life insurance joint venture, which was created in 2009 in equal partnership with a Chinese company under rules that were rolled back in 2020. The bank said the move underscored its “commitment to expanding business in China.”
The British banking giant is also seeking a greater stake in HSBC Qianhai, its joint securities venture in China, according to Reuters, which cited an anonymous source. HSBC declined to comment to CNN Business.
Expansion despite uncertainty
The significant inroads for these banks are coming about two decades after China joined the World Trade Organization and promised to open up its financial sector.While progress was slow for a while, the country in 2019 announced that it would entirely remove foreign ownership limits for financial firms the following year, shortly after Chinese President Xi Jinping and former US President Donald Trump agreed to restart trade talks.The enthusiasm from global banks and asset managers also comes with risks, as there is growing uncertainty about China’s political and regulatory climate — as well as Beijing’s rising tensions with other countries.
China’s ‘revolution’ cost investors $3 trillion. So why aren’t they running scared?In late 2020, Beijing launched an unprecedented regulatory squeeze on private enterprise, worried that such firms had become too powerful. The ensuing crackdown has extended to major Chinese financial players like Ant Group, which was forced to overhaul its business and hew to strict regulations governing bank operations.”There is a sense, broadly, that Xi may moderate some of his more aggressive rhetoric after this year’s 20th Party Congress, having assured his political position,” said Craig Singleton, an adjunct China fellow at the Foundation for the Defense of Democracies, referring to the widespread expectation that Xi will use an important political gathering to cement a historic third term in office. “The biggest risk, however, is that he does the opposite.”A number of Western businesses have been swept up in controversy in China as geopolitical tensions worsen, especially over allegations of human rights violations in the country’s western region of Xinjiang.In recent weeks, Walmart (WMT) and Intel (INTC) met public backlash in China over allegations that they were trying to avoid importing products sourced from Xinjiang. And last year, H&M, Nike (NKE) Adidas (ADDDF) and other Western retailers were threatened with a boycott in China because of the stand they had taken against the alleged use of forced labor to produce cotton in Xinjiang.
Pressure at home
Western companies are also facing pressures at home. Billionaire investor George Soros called BlackRock (BLK)’s China investment a “tragic mistake” that could lose money for its clients and imperil US national security. Some American politicians also called on Wall Street to stop “enabling Communist China” and take a tougher stance against Beijing.The squeeze has continued in recent weeks. Last month, US President Joe Biden signed the Uyghur Forced Labor Prevention Act, a law that bans imports from Xinjiang over concerns about forced labor. It sent a clear message that his administration and Congress are looking to ratchet up the pressure on Beijing.
Doing business in China is difficult. A clash over human rights is making it harderChina’s decision to let more foreign firms into the country is “aimed at shoring up collateral damage in the international community,” according to Capri, who added that allowing Western companies to take larger stakes in China also gives Beijing “leverage” over Washington and Brussels.”This will increase tensions between the big financial firms in the US and Europe, and their home governments,” he said.The moneymaking potential in China seems to outweigh any political headaches, though.”While China is facing huge economic headwinds, the country has defied bearish predictions in the past,” Singleton said, adding that Western banks have continued to generate billions of dollars in revenue from China, even with the recent regulatory crackdown.”In other words, Western banks are playing the long game under the guise of portfolio diversification,” he added.
And even as Beijing tightens its grip over parts of its economy, there are reasons why the country is eager to open its financial industry to foreign investors.The government wants to utilize global expertise as it builds a strong and diverse financial service industry, which it needs to manage its looming demographic crisis. A rapidly aging population and shrinking workforce have increased the burden on the country’s inadequate pension system, and put tremendous pressure on the government to provide enough financial resources for the elderly.
Time is running out for China to prepare its economy for a ‘great demographic unknown’China’s strict adherence to its “zero Covid” strategy and slow, self-isolation from much of the world hasn’t been enough to throw the country off course, either. Last year, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, repeatedly talked about the importance of opening up the financial service industry and drawing on global capital and financial expertise.”One of the Chinese Communist Party’s key attributes has been its adaptability and its pragmatism,” Singleton said.
He added that China understands it needs to maintain access to foreign markets, technology and capital, necessitating those continued partnerships with Western firms.”In other words, the CCP must integrate to survive, which means that it cannot completely eschew existing global norms or systems even as it tries to alter them to suit Beijing’s needs,” Singleton said.