In 2018, the Swiss money house was the first foreign bank to receive approval from the Chinese government to take over the majority in its joint venture UBS Securities. Now the bank wants to increase its stake further.
UBS founded its joint venture UBS Securities in China 15 years ago.
They spoke to each other again just before Christmas. Federal Councilor Ueli Maurer and China’s Deputy Prime Minister Liu He discussed deepening financial market relations between the two countries via video conference. As in their previous virtual meeting in March, the Swiss finance minister and China’s economic leader spoke again about a closer cooperation in stock tradingdigital central bank money and opportunities for cooperation in asset management and insurance.
Alone: Even after more than four years, in which the government representatives of both countries are discussing these issues, there is still no concrete agreement. Even with the long-planned so-called “Stock Connect”, in which investors can invest in shares traded on the Shenzhen Stock Exchange via the Zurich SIX and vice versa, there is still no breakthrough.
Foreign investors want to increase
Eugene Qian is someone who can hardly wait for progress to be made. “We hope for closer cooperation in all fields,” says the head of the joint venture UBS Securities in Beijing. The international clients wanted to expand their portfolios in China in Chinese currency. It’s been like this for four to five years now, and “recently demand has accelerated again,” says Qian. New York-based financial services provider MSCI’s inclusion of Chinese stocks in its 2019 Emerging Markets Index provided additional momentum.
Almost exactly 15 years ago, UBS founded its joint venture UBS Securities in Beijing, which is active in securities trading and investment banking, among other things. In October 2019, Qian moved to the executive chair; Ten months earlier, the Chinese authorities had given UBS permission to increase its stake in the joint venture to 51 percent. The Swiss are currently waiting for approval to increase the share to 67 percent. The second largest shareholder is the state-owned Beijing Assets Management.
The fact that the Chinese government gave UBS the green light to acquire a majority stake in the joint venture also had something to do with Donald Trump. The American president at the time imposed punitive tariffs on China, while the big American banks lobbied in Beijing to increase their stakes in their joint ventures. As a kind of kick in the American shin, the Chinese authorities granted UBS the first foreign bank to approve the majority takeover.
Small investors dominate the capital market
Even if there has been no concrete progress in the recent Chinese-Swiss consultations, Qian expects the Chinese financial market to open up further in the medium term. “China is continuously expanding the scope for foreign providers to further modernize its financial market,” says Qian. The Chinese capital market is still dominated by small investors. Large, institutional investors from abroad should ensure professionalization. The government is exposing Chinese banks and insurers to pressure from foreign competitors to make them fit.
China’s economy has now reached a size where business with financial services is growing faster than economic output. Qian says: “The financial services business in China is growing 1.25 to 1.5 times faster than the gross domestic product.”
China’s per capita economic output is currently around 12,000 dollars, and it will soon be 15,000 dollars; rosy prospects for financial service providers like UBS – also in wealth management. There are not many countries with so many rich and super rich. “They also need services that domestic providers cannot provide.”
Gloomy prospects for China’s economy
However, with increasing restrictions due to the spread of the omicron variant of the novel coronavirus and the turbulence in the real estate market, China is now entering uncertain times. Qian still spreads confidence. “Yes, growth will slow down,” says the UBS man, “but there won’t be a hard landing.”
Qian believes China’s government has room to counteract; the authorities have signaled their willingness to use monetary and fiscal policy instruments. In fact, the People’s Bank of China lowered the interest rate on medium-term loans on Monday. Further steps could follow soon.
“From the second quarter, the momentum will pick up again,” Qian believes. Most analysts expect growth of 4 to 5 percent for the current year. Qian assumes that the government and central bank will use the means at their disposal to ensure that growth in 2022 is “around 5 percent”.
That is a magnitude at which China, if the country maintains it, could be the largest economy in the world in a decade. China’s economy grew by 8.1 percent last year. But the downside risks for the current year are great.
In particular, the uncertainties in the real estate sector could cause unpleasant surprises over the course of the year. The government is doing everything it can to cool down the overheated housing market and is making it difficult for corporations to access capital.
Several real estate developers have recently defaulted on payments. Qian believes he knows the motives behind government policy – and finds it reasonable: “Housing should become affordable to encourage couples to have more children.”