Financial and professional services

Overview

The financial and professional services space in China is experiencing significant growth and reform on a range of fronts, meaning that business consulting, legal services, accounting, banking, asset management, insurance, and fintech all present opportunities for UK companies.

While domestic laws and regulations can pose a challenge, the Chinese government has enacted a number of new policies in recent years that have facilitated operations in these sectors.

Business consulting

Business consulting is one of the fastest growing professional service industries in China and is one area of financial and professional services where there are relatively few regulations facing international service providers looking to enter and grow in China.

Up until now, consulting services for manufacturers have proved particularly lucrative as China has grown, yet the ongoing opening up of China’s financial service sector promises new growth opportunities for finance-orientated consultancy service providers, especially as financial services already account for one third of China’s business consulting industry.^{[Footnote 1]}

A second emerging market for consulting services in China is IT consulting. With China now a pioneer in a range of digital technologies, including e-payments, e-commerce, and AI, demand for technology-related consultancy is expected to see considerable growth in the coming years.

Legal services

The market for legal services is one of the more closed markets among those for international professional services in China; therefore, opening a foreign law firm in the country remains challenging. In general, China’s Special Administrative Measures on Access to Foreign Investment (Negative List) continues to restrict foreign lawyers from advising clients on Chinese law, while the National Judicial Examination – the Chinese bar exam – cannot be taken by foreigners, meaning it is not possible for a non-Chinese citizen to become a China-qualified lawyer.

An exception to this is in the China (Shanghai) Pilot Free Trade Zone, where foreign law firms are permitted to provide certain legal services in partnership with qualified Chinese legal practices.^{[Footnote 2]}

For the most part, foreign law firms in China limit themselves to consulting and advisory work offered via representative offices and therefore collaborate with Chinese law firms and Chinese lawyers where needed. Arbitration and cross border services are currently particular areas of interest and opportunity – the latter tying into the international nature of the Belt and Road Initiative (BRI).

Accounting services

As China’s economy has grown, so too has its demand for accounting and other related services. Indeed, the major international accounting firms all have a presence in China using an affiliate model. This allows them, via their partners, to carry out audits on behalf of Chinese and foreign businesses in China, as well as a selection of other professional services. Similar to the situation with international law firms described above, foreign accountants require a special licence to conduct audits of Chinese firms. International businesses planning to open an accounting firm in China should be aware that if they seek an affiliation with a local Chinese firm, they require approval from the relevant authorities to do so.

Key opportunities for UK accounting firms exist in helping Chinese companies apply international accounting standards (which can differ from those used in China), assisting in market entry to the UK or other international markets, supporting regulatory approval, and providing tax services.

Banking, asset management and insurance

There have been a number of key regulatory changes in the banking, asset management, and insurance field in China.

Prior to 2019, there was a foreign ownership cap of 49% for entities offering asset management, securities, and insurance services. Following a series of reforms, there is no longer any such cap in place, allowing foreign financial firms and insurance companies offering these services – although notably, not those offering banking services – to open wholly-owned subsidiaries in China.

The China Banking and Insurance Regulatory Commission (CBIRC) has also changed the by-laws regulating foreign banks, removing the approval requirement for RMB-denominated trading, ^{[Footnote 3]} while the New Foreign Banks Regulation, detailed in the State Council’s Amendment of the Regulations of the People's Republic of China on Administration of Foreign Funded Insurance Companies and Foreign Funded Banks that was issued in 2019, lowers the limits on individual deposits which can be paid into foreign banks from RMB 1 million (£110,500) ^{[Footnote 4]} to RMB 500,000 (£55,200).^{[Footnote 5]}

In line with these reforms, foreign banks are now allowed to be lead underwriters for bonds issued by local governments. While foreign-invested companies were already able to participate in underwriting Chinese bonds, this move lets them play a potentially far greater role in China’s bond market. The licence needed to lead in such underwriting services can take some time to apply for though.

The State Council has also removed restrictions on foreign investors in financial services from the Special Administrative Measures on Access to Foreign Investment (2020 edition), which is also referred to as the 2020 National Negative List. This not only allows foreign firms to own majority stakes in Chinese financial institutions but also removes ownership caps altogether.

Foreign companies should be aware, however, that China’s financial services regulatory framework is fragmented, with various regulators overseeing different segments of the market. This remains true despite the establishment of the Financial Stability and Development Committee, a so-called super-regulator designed to bring together regulators from the People’s Bank of China (PBoC), the CBIRC, and the China Securities Regulatory Commission (CSRC). These agencies nonetheless retain a considerable degree of autonomy, perpetuating the risk of diverging or contradictory rules for different services.

Furthermore, the State Administration of Foreign Exchange (SAFE), which regulates capital flows in and out of China, can impose limits on money transfers on a somewhat arbitrary basis, causing potential obstacles for cross-border financial services and the repatriation of profits.

More generally, foreign businesses setting up in China face stiff competition. Unlike in previous waves of liberalisation, where foreign firms entered markets with little or no domestic competition, international financial service providers are now entering a crowded field.

Banking

There are a range of types of commercial banks in China, including state-owned commercial banks, joint stock commercial banks, city commercial banks, rural commercial banks, and internet banks.

International bank have made only relatively small inroads into this market, and that state-owned banks such as ICBC and the Bank of China still dominate China’s banking sector, a state of affairs that is unlikely to change for the foreseeable future. Foreign banks thus risk being limited to servicing only corporate and institutional clients, where there could be said to be less growth potential and higher risks.

Asset management and pensions

Traditionally closed to foreign players, China’s asset management market has seen major changes in recent years following the foreign ownership reforms mentioned above. With these reforms, global asset managers are now poised to reconsider their China market strategies and, in some cases, seek licences for a foreign-owned asset management company. Leading firms have already started this process and as global leaders in asset management, UK firms have significant potential to expand into China.

A steady growth in asset management in China has meant that the country’s asset management market is now the second largest globally. ^{[Footnote 6]} This expansion is the result of several factors, including a growing economy, an ageing population with a pension system undergoing reform that is leading to increased interest in new asset classes and investment strategies, and market liberalisation that has encouraged more firms, including international firms, to enter and compete in this sector.

In terms of pensions, China uses a three-pillar structure:

Pillar 1, which refers to government-backed programmes such as basic pension schemes and the national social security fund
Pillar 2, which consists of employer-sponsored enterprise and occupation annuities
Pillar 3, which is made up of individually chosen commercial or private pensions

The Chinese pension system is dominated by pillar 1 funds, with only 0.1% allocated to commercial pillar 3 funds. ^{[Footnote 7]} There are, however, pilot zones where pillar 3 funds are being trialled more widely.

Insurance

China’s insurance industry is growing. It is now the world’s second-largest insurance market and, according to some forecasts, could become the largest in the next decade.^{[Footnote 8]} The market covers both property insurance and personal insurance, with the latter comprising life insurance, health insurance, and accident insurance. Of these, life insurance contributes the largest share of premiums.

Different subsectors of the insurance industry are going through different stages of development. The life insurance market is shifting towards value-driven growth following high growth rates in the past, while in the non-life insurance market big players continue to dominate. With long-term interest rates dropping in China, insurance companies are realising the need to move toward digitisation to improve efficiencies. They are also seeing the disruptive effects of technology giants entering the market looking to apply their resources in new ways.

The UK’s insurance industry, with its innovation in products, regulation, and technology, is highly regarded in China. In particular, life insurance, health insurance, and reinsurance offer opportunities for UK providers. Furthermore, the UK’s expertise in product design, risk management, and technology adoption could prove valuable not just in China’s domestic market, but also with Chinese partners in third markets.

Fintech

China is a world leader in digital payments, with 853 million users of mobile payment methods in China and 74% of these users making payments every day.^{[Footnote 9]} The main digital payment apps used in China are Alipay and WeChat Pay, with the former belonging to Alibaba and the latter to Tencent.

Investment in fintech remains strong as there is an active market supported by both central and local government policies, such as funding and subsidies for newly established and expanding firms. The big players in technology – including Alibaba, Baidu, and Tencent – are also important investors in this area.

The busiest geographical hubs in China’s fintech space are Beijing, Shanghai, Shenzhen, and, to a lesser extent, Hangzhou. Beijing and Shanghai are the financial capitals of the country while Shenzhen and Hangzhou are leading technology centres boasting some of China’s most powerful tech companies like Alibaba (Hangzhou), Huawei (Shenzhen), and Tencent (Shenzhen).

With a strong demand for improvements across the sector, there are several areas where fintech is leading major industry changes, including:

Financial inclusion: Banks in China have a tendency to favour providing lending and other services to established companies. This means that there is a sizable gap between the services available to SMEs relative to larger corporates. Similarly, many of China’s rural population are unbanked or underbanked. In both cases, financial technology is helping to bridge this gap.
Peer-to-peer (P2P) lending and alternative finance: The Chinese consumer lending market is still relatively underdeveloped as most banks tend to favour large actors and only approximately 20% of SMEs receive bank-disbursed loans. ^{[Footnote 10]} P2P loans, where individuals or businesses work with numerous lenders for a loan, are very popular, while in the alternative finance space, large platforms like Alibaba and Jingdong have created products for customers to help facilitate transactions.
Big data analytics: Most Chinese consumers lack a credit history, which makes establishing credit risk challenging. Using both big data and a score generated by China’s social credit system, a customer’s risk profile can be assessed by looking at either their shopping behaviours or their social media content.
Blockchain: China is a leader in both cryptocurrencies and distributed ledger technology, and the PBoC is in the process of rolling out a Chinese digital currency.

As a global leader in fintech, UK firms are increasingly finding opportunities for collaboration and business in China. These include:

Cross-border transaction solutions: Chinese firms can find it difficult to receive and make cross border payments. This means there is strong demand for payments, foreign exchange, trade finance, and other transaction solutions.
Regtech: there is growing demand from Chinese companies for platforms that can provide compliance and risk assessment technologies.
Wealth management: Chinese banks and brokers are looking to international firms to help develop wealth management and trading platforms.
Underwriting and risk assessment: As China continues to develop its credit rating system, and as the insurance market grows, there will be opportunities for foreign companies to participate in these areas.
Insuretech: With increasingly diverse insurance products on offer, risk control and data management services are required in China.