McKinsey advocates continued opening of China’s financial markets

What’s your view of the further opening-up of China’s financial market?

We believe that in the long-term it is critical for China to open up its financial markets. As the secondlargest economy today, it is a “oneway street” in terms of China’s financial market opening-up.

We are already seeing many positive developments, including the lifting of many overseas institutional investors’ restrictions on investing in Chinese mainland markets, the inclusion and weighting of A shares in MSCI’s indices, and the various stock connect and bond connect programs with Hong Kong.

On regulations, there is also increasing relaxation of foreign ownership limits in various financial areas, including asset management, securities, insurance and banking.

Through facilitating more foreign participation in the financial system and creating a level playing field for foreign financial institutions, China’s capital markets will develop in a faster and healthier way.

Undoubtedly, China’s financial institutions and capital markets have come a long way in the past decade. However, given China’s economic growth, there is increasing need for Chinese financial markets and institutions to accelerate their development to efficiently allocate capital between investors and issuers with the proper risk management.

How has your company benefited from China’s opening-up policies?

McKinsey established our Beijing and Shanghai offices in the 1990s. In the first phase of our firm’s activities in China, many of our clients were State-owned enterprises looking for reform and modernization.

At the same time, many of our global clients were looking to establish their presence in China to participate in the country’s openingup. That gave us a great foundation in many industries, including manufacturing, financial services, advanced technologies and consumer goods.

Throughout the 2000s, we started to consult many entrepreneurs as privately owned enterprises scaled up their businesses. Many of them were transitioning from family-run businesses into large-scale, listed enterprises.

These involved many operational transformations and organizational changes, as well as developing institutional capabilities.

In the last few years, our clients have all been transforming their business models due to the influence of the digital economy, as well as other innovations and technological changes.

Increasingly, more clients are also looking at expanding beyond China and tapping into overseas markets. The business context has become a lot more complex, and we are privileged to be a core partner to many of China’s leading companies across many sectors.

What do you think of China’s efforts to support free trade and multilateralism?

China has been a major beneficiary from free trade with the world.

The country exported $2.2 trillion of goods in 2017, making it the world’s largest exporter. It also imported $1.7 trillion of goods, the second-largest importer in the world.

This compares with exports of $111 billion and imports of $125 billion in 2000. Over this period, it is estimated that Chinese imports have cut US consumer goods prices by an estimated 27 percent.

There is more room for China to continue to open up and support free trade. Since joining the World Trade Organization, China had halved tariffs from an average of 16 percent in 2000 to 8 percent in 2008.

But since then, the average tariff rate had edged up to 9.6 percent as of 2016, which was more than double the US and European Union average. So there have been significant gains around the world due to increased trade and multilateralism with China, but there is still work to be done for China to continue this journey.

What measures are needed if China wants to further open up?

I think that there are a few areas that would be interesting to look out for.

First, China can continue to liberalize its services sector. Services are a growing part of China’s economy, accounting for 54 percent of GDP in the first half of 2018, compared with 44 percent in 2010.

However, labor productivity in China’s service sector is about 10 to 30 percent of the Organisation for Economic Cooperation and Development average, suggesting that there could be a big prize if China could boost productivity in its service sector.

A key way of achieving this is further liberalizing trade in services. Our McKinsey Global Institute research found that services are growing faster than goods trade, and are already more valuable in global trade than is commonly realized.

Supported by improved institutional capability and competition, further liberalizing China’s service sector could deliver a substantial boost to the Chinese economy through improved infrastructure, increased efficiencies, lower prices, and faster innovation. The world would benefit from a larger, fastergrowing and more liberalized Chinese service sector.

Second, the continued openingup of China’s financial system. Today, foreign participation in the financial services sector is low. Foreign ownership in the Chinese banking system — the world’s largest at $39 trillion — is less than 2 percent, compared with about 13 percent in the United States. Foreign ownership in the Chinese stock market (the world’s secondlargest) is less than 3 percent, compared with 22 percent in the US and 32 percent in Japan.

Moving more boldly ahead to integrate China’s financial system with global markets would reduce the risk of excess domestic liquidity and relax the constraint of the “impossible trinity” — that is, simultaneously seeking to control monetary policy, exchange rates, and capital movement.

This would also have the benefit of developing a more global set of options for China’s savers, including investment in OECD economies that are suffering from a savings gap. Domestic savers in China today continue to face a lack of investment options. Historically, Chinese households have tended to have lower rates of return on their financial investments than their global counterparts.

Third, China can be a major player in shaping a new framework for global prosperity. The rules of the game underpinning the global economic system and governance are in flux, yet international cooperation is still vital to preserve and increase prosperity and sustainability.

A consensus among world economic powers on what constitutes fairness in competition, intellectual property rights, data governance, inclusive growth and environmental sustainability requires a new comprehensive deal, and China can help to shape it.

Among the many areas that need urgent attention are: designing a new multilateral trade system, tackling global climate change, reaching consensus on digital governance (such as data sovereignty), and filling the world’s estimated annual $350 billion infrastructure investment shortfall.

China has already indicated its interest in playing a greater role in defining the new rules of the game, by establishing new institutions, mobilizing capital through its Belt and Road Initiative, and participating in international climate agreements.

However, much remains to be done.

Has competition become intensified between your company and your Chinese counterparts?

In our industry, management consulting, it is crucial to have scale and a global footprint. Our Chinese clients want to understand innovations and best practices from around the world. With our presence in more than 60 countries and over 14,000 consultants, we are able to mobilize our global network and experience for our clients as “One Firm”.

This capability is not easy for local Chinese companies in our industry to replicate, at least not yet.

We actually work with many Chinese companies as collaborators. For example, sometimes we will form a consortium of different firms to jointly help our clients.

We are building ecosystems with many specialized partners, who contribute different expertise and skills.

In the end, I think of Chinese companies as collaborators, much more so than as competitors.