The world watched last year as Chinese markets plunged. Speculation ran rife as the West argued whether this was a correction, an evolution or the beginning of the end.
Meanwhile, in China, securities and futures firms remained largely unruffled. State-owned, and backed by over US$3 trillion[1] in foreign exchange reserves, these institutions have been looking outward for a long time. The domestic market, large as it is, is not big enough for the number of brokers (over 100 securities and over 200 futures[2]) saturating it. The government has started a domestic M&A process, but overseas expansion is needed as well to create a market – and firms – that can stand toe-to-toe with their foreign counterparts.
The market is also pushing them abroad. China's outbound foreign direct investment (ODI) continues to grow – from US$12 billion in 2005 to more than US$118 billion[3] in 2015 – as it consolidates its position as the world’s second largest economy (GDP US$11 trillion[4] in 2015). Chinese retail investors, who make up a stunning 80% of the market, are hungry for overseas investments to help manage their risk. They want big, global firms to help them manage their wealth around the world, but that are based in China.
This retail focus poses problems. Chinese brokers, as they internationalise, will need to shed their retail orientation as they will be doing business with counterparties that are institutional in nature and international in outlook. They will need foreign expertise to build their businesses into firms that can service the more sophisticated institutional global markets.
We are already seeing this happening in Hong Kong, where ten or so Chinese brokerage firms have positioned themselves well in the last few years – such as the marquee CLSA/CITIC Securities deal in 2013, the Guangdong Securities acquisition by Sinolink Securities in 2014, Tanrich's acquisition by Southwest Securities in 2014 and the Taifook Securities acquisition by Haitong Securities in 2009; or even the high profile Huatai Securities IPO in 2015 on the Hong Kong Stock Exchange for US$4.5 billion.
The Chinese government is unlikely to ever put a state-owned enterprise in a position where it is not under its direct control. So this path of acquisition will continue to grow internationally, with deals such as GF Futures' 2013 purchase of the Natixis commodity brokerage and the recent purchase by China Construction Bank of a majority stake in Metdist Trading in London to become the second Chinese company to gain access to the 138-year old London Metal Exchange's trading floor. In this way, Chinese firms get exchange memberships, expertise and manpower, while still maintaining 100% control.
Hong Kong, to date the testing ground for overseas deals like this, might be losing its preferred vendor role. China watchers speculate that the government may change regulation to push Shanghai further into this role. Either way, the lines that once separated Hong Kong from China are blurring more all the time. Chinese sights are now set further afield.
In this global 'game of thrones', whose lunch is most likely to be eaten? Today’s dominant players out of Europe and the US are still hurting from the 2008 crisis and the weight of regulation and subdued markets. The Asian superbrokers, while doing well in their regions, are likely to be too fragmented to beat the incumbents at their own game. And the Japanese, while large and sophisticated enough, do not have this global outlook. It will be an interesting few years indeed, particularly when the time comes to internationalise the renminbi (RMB), which the IMF has foreshadowed by adding the currency to their special drawing rights (SDR) basket.
It’s worth noting in this light that, as the Chinese industry consolidates, the stronger players that emerge will not necessarily see each other as competitors. All are state-controlled and, as such, do not have the same pressures or mandates as their foreign counterparts. One can only speculate how this will unfold when the newly-formed behemoths finally come head-to-head with the US and European giants.
To see how the world will react to these changes, we might do well to look at the tourism industry. As Chinese tourists began to venture abroad almost 20 years ago, tourism bodies grappled with how best to service the new influx of interest. Would the Chinese adapt to the global stage or would global markets adapt to the Chinese? Of course, the world adapted, and fundamentally changed its practices in response to the huge financial incentives this new market brought with it.
The same is likely to happen to the finance industry – regulations and markets will adapt to China and it will drastically change the way business is done in the West. Despite some ever-present political posturing, the capitalist West will accept and welcome the Chinese, just as they have done before.
