China regulation: the path clears slowly

Co-ordination among Chinese regulators has improved, but new data law shows continued tensions

While co-ordination among Chinese regulators has improved immeasurably over the past few years, a cautious stance toward foreign investors is still hampering financial reforms in the country.

Much of this caution is, of course, understandable.

The transformation of the country’s financial markets clearly requires some reliance on foreign capital and expertise, but Beijing can’t afford to lower barriers too quickly for fear domestic players would buckle under competitive pressure.

It is true things are more coherent than they used to be. A concerted effort by Beijing to bring the country’s disparate regulators closer together vastly improved the country’s ability to drive through important financial reforms.

Nonetheless, obstacles still appear too frequently in places where they don’t need to be – and this creates unnecessary confusion, which is slowing the development of China’s financial sector.

One clear example of this is China’s new data laws, the latest of which was introduced at the start of September. Even before the introduction of tighter data requirements, foreign institutions operating in China were fretting this would make it more difficult to meet know-your-customer obligations back home.

It now looks as though they might have another cause for concern: data restrictions may effectively disrupt plans for launching structured product lines in the country.

It has been more than 12 months since China announced a relaxation of rules governing the Qualified Foreign Institutional Investor scheme, one of the avenues available to foreign firms that want to invest into the country.

Skilled quants increasingly prefer to work in the fields of artificial intelligence or the data hubs of investment funds, which they perceive to be more interesting than the rather drab confines of banks

A number of foreign banks were at the time very excited about what this might mean for tapping into the country’s lucrative market for structured products. Since then, they have been working hard on plans for entering the market – although none have yet been willing to publicly disclose what these plans might be.

The embryonic plans of these banking giants quickly hit a snag, though: to be able to offer the kinds of products they want to offer the market, they need to build up a team of onshore quants that can dynamically manage such structures.

Finding decent quants in Asia is hard at the best of times – there has been a talent shortage across the region for a number of years – but trying to find them in China, at the very time when everyone else is doing the same, is a whole other thing.

Tackling such a quant shortage was never going to be easy. It takes many years to train up new talent, and skilled quants increasingly prefer to work in the fields of artificial intelligence or the data hubs of investment funds, which they perceive to be more interesting than the rather drab confines of banks.

However, a more cohesive approach to regulation in China could have helped things.

One of the reasons foreign banks can’t simply leverage off their existing quant teams when dealing with China is that certain information – such as client data and market risk limits – cannot be shared offshore.

There is some measure of logic to this: concerns over personal privacy and national security are very valid reasons for being wary about what ends up in foreign hands.

But at the same time, the tug-of-war between the country’s data law and the government’s desire to woo foreign banks shows there is still a way to go in terms of developing a consistent regulatory approach in China.

Ironing out these remaining wrinkles would do wonders for the future development of the country’s financial markets.