While some details surrounding reforms are yet to be fleshed out, inbound FIs have greater clarity than ever around their regulatory standing in China. Those keen to take advantage of the opportunities on offer must act now to:
1. Find a strong value proposition for the Chinese market
Foreign FIs should begin by determining where they fit in the Chinese market and then craft a strategic entry strategy. They cannot typically compete on size against huge domestic institutions, but should instead differentiate through advanced expertise, specialty services or by carving out a niche within a specific geographic region or customer group.
International experience does give foreign companies an edge over traditional incumbents and state-owned banks, and they may also benefit from the (real or perceived) advantages of international branding, wider product knowledge, advanced risk management and service capabilities. They could further lead in trade finance, cash management, cross-border businesses, foreign exchange and derivatives trading.
Emphasizing such nuanced differences strengthens inbounds’ brand presence, enhances their share of revenue from the Chinese market, while concurrently creating new financial services experiences for clients.
2. Identify the appropriate entry and investment approach
While reforms have made it easier for foreign companies to broaden their Chinese presence, most will still find it challenging to compete against local institutions given their sheer size, industry influence, experience, and for state-owned bodies, government and financial backing. More effective entry approaches may be to:
- Collaborate within the financial ecosystem: Foreign institutions face competition not just from traditional local banks but bigtechs like Alibaba and Tencent increasingly embedded into the financial services system. Rather than attempting to compete, newcomers should seek to collaborate with these non-banks by joining their platforms to access millions of potential clients. And as ecosystems continue to mature and market dynamics evolve, it is important to continually scan the horizon for new potential partners and shift alliances accordingly.
- Invest in incumbents but manage associated acquisition risks: Acquiring a controlling stake in domestic institutions may be the quickest route to expansion but it is also expensive. As majority shareholding is costly, most foreign institutions would likely be limited to buying smaller city commercial or rural commercial banks. But these operate under specific conditions unique to their localized regions, with differing levels of market maturity, financial and consumer culture and risk characteristics. Enhanced due diligence can help financial investors identify the potential hidden risks of these acquisitions.
3. Manage local IT system complexities
Entering the Chinese market requires foreign investors to carefully consider multiple technological complexities. For example, operating systems and underlying processes must be robust enough to support the huge transaction volumes and processing speeds of China-based businesses. System infrastructure also needs configuration and inter-connectivity that are consistent with local country requirements which may differ from those at home.
While these issues could pose challenges to newcomers, inbound FIs have many options to develop suitable IT infrastructure for their Chinese operations. These include engaging infrastructure and software-as-a-Service (IaaS and SaaS) vendors, considering API-driven open banking platforms to reduce application development and maintenance cost, or exploring shared utility models with other institutions.
4. Keep pace with China’s advancing technological revolution
China is fast becoming a global hub for accelerated innovation and foreign FIs must keep pace with the lighting speed of local FinTech evolution. By 2017, China’s digital economy had already grown to one-third of the country’s GDP, - and as 5G mobile technology, e-payments, advanced data analytics and non-banks reconfigure the financial landscape, inbounds will need to develop sophisticated, innovative digital strategies to compete effectively.
Fortunately, choices abound. For example, foreign FIs could embed a new digital culture and develop innovative offerings that leverage emerging technologies such as blockchain and robo-consulting. They could also establish networks with innovation communities or collaborate with external developers on APIs and cloud-based architecture to build innovative financial solutions.
5. Acquire and retain domestic talent
As inbounds expand their Chinese presence and scope, they will need to build local workforces with the right skills and cultural knowledge, and that are aligned with their own organizational brand language and corporate ethos. Herein, finding top talent is a perennial issue for foreign companies needing to compete not only with other established institutions but more dynamic, enticing new non-banks.
Hiring priorities include branch staff and retail bankers for those expanding their front-office retail presence, as well as staff skilled in risk management, cyber security, and digital professionals such as data scientists and user-experience designers. Talent management programs should include grooming local management pools to support succession planning and future leadership requirements.
6. Engage with market experts to formulate effective strategies
While reforms increase the regulatory consistency and international accessibility of China’s financial sector, this market still presents a unique, multifaceted and challenging operating and business environment. Apart from the constantly shifting macro geopolitical issues, foreign institutions must grapple with local legal, licensing, compliance and risk management requirements, as well as differences in conduct, culture and general ways of doing business in China.
For inbound FIs keen to stake a claim in this attractive but highly complex market, deep industry and local knowledge is critical. Consulting those with on-the-ground experience and business connections can help guide effective investment strategies, identify target acquisitions and manage the myriad of risk, cybersecurity, digital and talent issues that can make the difference between success and setbacks in the Chinese financial market.
For deeper insight on the impact of China’s financial liberalization on foreign institutions, read the full report (pdf).