By Nan-Hie In

As China moves towards a consumer-driven economy, the services sector has attracted much attention as the economic driver of the nation’s future. Amid this shift, will there be expanding roles for foreign service providers in China? Stephen Lackey, chairman of Asia Pacific, BNY Mellon, says there are two realities international firms are facing.

All service providers want to be in China, as the GDP of the nation will eventually surpass the US to become the world’s largest economy, says Lackey.

On the other hand, there are limits to expansion of foreign companies in the territory. “Speaking from a financial services industry perspective, all of us have enjoyed growth in China but none of us are actually growing on a relative basis compared to our domestic competition,” he says.

For example, the size of foreign bank balance sheets in China have not grown anywhere near as what the domestic banks have generated, he says. It is unclear if Xi Jinping’s “China dream” was conceived with foreign service providers as part of that dream, adds Lackey.

Nonetheless, the Asia chairman of the financial services giant remains optimistic about the mainland despite its recent economic woes. “People make the mistake of taking one single brush stroke across China when it is a mosaic, and pieces of that mosaic are growing very differently,” he says. Services will become a larger piece of that picture as the sector will continue to grow at a good rate.

Speaking at AmCham’s China Conference earlier this month on a panel about opportunities for foreign service firms, Lackey as well as business leaders from FedEx and Jones Lang LaSalle (JLL) shared their insights on the growth prospects and challenges in their respective industries.

Logistics hurdles

China’s shift to services has had an immediate impact on couriers, according to Karen Reddington, president of Asia Pacific of FedEx. This is reflected in the volume of parcels moving across the country, which has been growing in recent years. According to the China’s State Post Bureau (SPB), around 14 billion packages were delivered in 2014, a 52 percent increase from the previous year. These figures are expected to grow in the coming years.

E-commerce is the key driver behind this trend as the increase in sales from online shoppers has boosted demand for parcel deliveries. Redding­ton points out that according to the SPB, 64 percent of all packages that moved through the nation’s postal system in 2014 were related to e-commerce.

“The e-commerce transformation is also driven by the technological transfor­mation in China, which is bringing business production closer to consump­tion,” she says, adding that the likes of Alibaba indicate that China is ahead of this trend.

Yet despite such profound changes, the logistics sector is marred by “old normal” processes that are imposing inefficiencies and costs to deliveries such as some high tariffs and customs clearance processes. For example, the threshold value for packages to get exempted from duties and taxes is very low. “It is around US$50 to $60 in China, whereas in Australia it is US$1,000, so that already creates a lot of barriers and costs for small companies,” explains Reddington.

Cross-border systems also interrupt the flow of deliveries. For example, there is no single window for customs,

clearance and immigration. “For the development of the ‘New Normal’ in China, you have to focus on developing some of the old normals and making sure regulations keep apace and that we are not still in a pre-Internet age when we look at these factors of change,” she says.

A more domestic property market

(From left) Alastair Hughes, Stephen Lackey, Karen Reddington and moderator Thomas Gorman
(From left) Alastair Hughes, Stephen Lackey, Karen Reddington and moderator Thomas Gorman

For the property sector, growth continues. Alastair Hughes, JLL’s CEO for Asia Pacific, elaborates: “In terms of overall growth we are still experiencing it, and underneath the banner of growth there’s been a slightly different demand for space but it still remains positive.”

First, domestic clients are on the rise. “Five years ago, 80 percent of our revenue came from multinational corporations in China or foreign inves­tors and developers building and selling things in China,” he says. Now Chinese clients account for 50 percent of the company’s revenue.

Part of this shift is from JLL helping local firms make the client’s properties more efficient by putting the spaces up for best use. “Around two years ago when we went to a Chinese company to help them growth efficiently, they often gave a blank look because at that time it was all about growth, while efficiency was secondary,” he says. Nowadays domestic clients are eager to realize efficient growth for their spaces.

As China moves to a consumer-oriented economy, JLL has observed a huge demand for space from service-orientated companies. This is evident in the Shanghai market. “The average net take up of office space in Shanghai over the last three or four years was 10 billion square feet per annum; compare that to Hong Kong where the figure is one or two [billion square feet],” explains Hughes.

Despite these opportunities, the market is not without drawbacks. For Hughes, the not-so-easily-tradable Chinese property market is a pressing concern. In 2014, the company’s overall property trades in the UK amounted to $100 billion. The equivalent figure was generated in China, which perplexes Hughes as the mainland market dwarfs the size of the UK. He attributes this discrepancy to transparency and liquid­ity factors.

In the UK for example, particularly London, the market is “beautifully liquid.” He explains: “[Properties] have been bought and sold 100 times, there­fore it is a well-trodden path that can be done in two weeks.”

In contrast, the process is more complicated in China, where one needs to find out the property’s proprietor and its value, plus the new owner’s property rights is not always guaranteed. Hughes prescribes changes in the territory’s economic policies to bring more trans­parency and openness to the market.

Challenges facing the financial market

China’s recent turbulence has not impacted BNY Mellon’s growth model on China. “Our business model was built for the long-term and it remains very bullish on China; we see the slowdown in China as a natural outgrowth of any large economy over time as the growth rate has to come down,” explains Lackey. “Every economy goes through cycles and we think there is still opportunity for signifi­cant growth in China.”

At BNY Mellon, a focal point of interest is in China’s rising importance in the global markets. “Even though we’ve seen the recent decline in the equity markets, currency devaluation, and the recent slowdown in the overall economy, there is no doubt that China is going to play an increasing role in the economy globally,” he says.

Lackey cites the significant outflows of investments leaving China – which is almost equivalent to the US$120 billion foreign investment to the nation – as an indication of this trend. It also explains the need for this international service provider to be in China to not only serve its Chinese clients but to find greater opportunities for them globally.

On the industry’s challenges, one major issue is the high scrutiny compa­nies are under by regulators. Recently, BNY Mellon received multiple informa­tion requests from different regulators with responses expected in very tight time frames. “Some of it reflects our highly regulated market, but some of it reflects the time we are now in China where regulators for any industry feel under the gun and they are trying to insure that they are on top, even if they have been asking things that were requested a week ago just to see if there is any change.”

Another concern is the mixed messages from the government which is making it difficult for companies to make decisions in the market. On the one hand, China’s financial markets are opening up; the arrival of the Shanghai-Hong Kong Stock Connect is an example. On the other hand, Beijing’s tendency to intervene in the markets has sapped investors’ confi­dence, as the public witnessed recently with China’s over-handed response to stem the crashes of its domestic bourses. The senior official from BNY Mellon says the equity markets should operate on their own.

“The government made a wise decision on its policy to devalue the currency and to open the band in which the renminbi trades; conversely, the government made a mistake to actively intervene in the equity markets,” he says. The latter actions encourage investors in these markets to make moves not based on funda­mentals but on the government’s investments. “That is not the way equity markets are designed.”