"The city of Beijing has become a different place," says Laurence Bailey, business executive of JPMorgan Investor Services Asia Pacific region. His observations are confirmed by visitors who remark that, compared to just 10 years ago, the city of Beijing would be almost unrecognizable to a returning visitor today. Beijing has undergone a transformation into a modern city now characterized by wide boulevards, new hotels, restaurants and modern shops selling designer clothes. This change has not only meant an increase in Beijing's tourism but has also spawned an increase in the level of foreign interest and investment.
According to www.cbsmarketwatch.com, China's gross domestic product grew by almost 10 per cent in the first half of 2004. "With 1.3 billion people in China, many thought the speed of change would be much slower," Bailey says. "But where the trend in the last few years had been toward investing into China, the trend now is shifting toward Chinese investors who want to invest their own funds cross border," reflecting a growing affluence among Beijing 's middle class.
Traditionally owners of all aspects of the financial chain, Chinese banks have started using the services of western banks and global custodians for custody, accounting, performance and securities lending. While the statistics are difficult to justify, as there are no published tables/records to date, Bailey believes JPMorgan Investor Services is one of the largest global custodians in China at the moment.
"The local Chinese banks used to only invest through Euroclear, but they've started broadening their relationships with global custodians as the services they require increase. JPMorgan Investor Services is well positioned to support these banks as well as insurance companies that are likely to start investing overseas in the near future," he says.
Proceed with Caution, Phenomenal Growth Ahead
With all the positive developments in China 's market, Bailey does express some caution regarding the highly competitive environment in the country right now. "The challenge," he says, "is to understand that the financial dynamics of Asia are very different when compared to western ways. In the west, business is focused on quarterly profitability.
My fear is that expectations for quick profits have resulted in an in flux of investors into the country, many of whom lack the understanding of how the Asian markets work. This could cause companies to become disenchanted quickly when those immediate profits don 't materialize."
"We can't let standards and controls fall by the wayside in deference to winning new business. In other words, we can't let the western way of traditionally doing business distract us if we don't see an immediate return," he says. "While we 're all keen to get the next deal," Bailey explains. "People have to be realistic about what that entails.
"Not many companies are brave enough to invest large amounts of capital and ride out the uncertainty of ROI. It's a really interesting situation," he says.
In addition to the highly competitive environment, the topic of Renminbi (RMB), China's legal tender, appreciation and its impact on the world economy
have been dominating economic headlines. With more and more multinational enterprises and financial institutions wanting to do business with China, it is the RMB exchange rate, as well as its offshore clearing capacity that is attracting attention.
Last November, China's central bank announced its plan to allow banks in Hong Kong to offer limited offshore RMB services, which has been perceived as a symbolic reflection of RMB stepping towards an international currency, all indicating a direction and a determination on deregulation by the Chinese government.
On a recent visit, Bailey made a presentation to the China Risk Forum, a unique open forum of nearly 80 representatives from China's banks, fund management and insurance companies. The Forum focused on the topic of risk and featured presentations by JPMorgan Investor Services settlement risk and DVP, as well as its sister Treasury & Securities Services (TSS) business, Treasury Services, talking about operational risk and its Horizon product.
In addition, the JPMorganFleming Asset Management team reviewed the market investment risks associated with the process of investing. "The Forum was very well received," Bailey says. "The Chinese are very anxious to further understand and learn all there is to know about global investing. They attend seminars; they send their people around the world to take in as much information as possible. As a result they are developing a new wave of investments and products."
Putting Down Roots
China opened its A-share market to foreign institutional investors in 2003, when it introduced the Qualified Foreign Institutional Investors (QFII) scheme. The scheme permits select foreign investors to buy yuan-denominated securities previously reserved for Chinese nationals. To date, China has granted QFII status to 18 overseas investors*. JPMorgan attained QFII approval in November of last year, which allows the firm to tap into the debt and the $500 billion RMB-denominated main stock markets in China. JPMorgan has a presence in China, with three JPMorgan Chase bank branches in Beijing, Tienjian and Shanghai. JPMorgan Treasury Services and JPMorgan Institutional Trust Services have representation in the Beijing branch while JPMorgan Investor Services currently serves Beijing from its Hong Kong office but is investigating putting down its own stake there.
After a recent visit to China, Tom Swayne, Investor Services business executive said, "I am particularly excited about our growing market opportunities in China. With people on the ground our opportunities are even more appealing."
Bailey describes Beijing's atmosphere as dynamic. "When you're there, the city exudes a sense of change and opportunity. Of all the countries in Asia, I think China is really on a mission."
For more information, contact Laurence Bailey, business executive, JPMorgan Investor Services Asia Pacific, (61-2) 9250-4833 or Steven McCullough, business executive, JPMorgan Investor Services Asia, (852) 2800-1800
*Source: Business Report August 16, 2004 www.busrep.co.za
