The business opportunities in China have captured a significant amount of investor imagination, media exposure and the attention of the world. The statistics are startling and at times contradictory. In terms of geographical size, China is twice as big as Europe including its new member states. However, there are large regional differences not just in culture, but a chasm of prosperity and poverty between the eastern coasts and the rural areas to the west. The disparities are growing and may lead to destabilizing economic and social problems if not managed properly. For example, the per capita Gross National Product (GNP) of Shanghai was 12.5 times that of Guizhou province in 2000. And, while the per capita spending ability is on the rise and the aggregate is attractive, China overall ranks between El Salvador and Belize in Gross Domestic Product (GDP) per capita.

Since the reforms implemented by the Chinese leader Deng Xiaping in 1979, the Chinese economy has maintained a stellar GDP average annual growth rate of 9.4%, to a total production of US$1.45 trillion dollars in 2003. The country's growth rate has continually exceeded 7% per year since 1991, in spite of potentially disruptive crises such as the Asian Crisis, the technology bubble and market collapse in the United States, and SARS. As of 2002, China is the largest recipient of Foreign Direct Investment (FDI) and has the second largest foreign exchange reserves. It is the world's fourth largest export country and the fifth in imports. The reality, however, is that the GNP of China is equal to only the GNP of Tokyo. Clearly, this is a market of tremendous potential as well as tremendous uncertainty.

China is moving its protected, inefficient government and business institutions into the global business community by cautiously and gradually introducing changes. China's entry into the World Trade Organization (WTO) is forcing the opening of the financial sector to foreign competition. New laws and regulations, such as Qualified Domestic Institutional Investors (QDII), will allow Chinese investment in overseas markets, and require companies in China, both domestic and foreign, to provide corporate pensions to Chinese employees. As China straddles the old and new worlds, what then, are the current opportunities, considerations and issues for global custodians?

As Chinese institutions invest overseas, there is a very real opportunity to sell global custody and related services. Unlike the guarded attitudes of the Japanese, there is recognition of a strong need for professional global custody knowledge and services from foreign providers in several categories. The first service category is performing global custody for non-Chinese assets. This would include settlement, safekeeping, accounting, foreign exchange, securities lending and investment risk and analytical services. Certain government agencies with foreign reserves are already able to invest globally, and more will be able to do so over time. And, as corporate pension legislation develops in 2004, corporations in China, especially multinational corporations with Chinese operations, will expect global custody services. While the 2002 pension market was only $US13.1 billion, this was before the pensions were mandated for corporations. The corporate pension legislation was passed on May 1 of this year, and this number is expected to grow exponentially to US$125 billion by 2010.

There are many important factors for custodians to consider. Frequently one of greatest concerns is the uncertainty surrounding the market. The Chinese market is evolving on many levels. There are differences in standard business, legal and accounting practices. The lack of transparency ranks highly as an issue for many. A number of potential partners and clients based in China have unstable financial situations and clearly would not be considered as partners if they were in the U.S. or Europe. Rules and regulations are changing or are undefined, which could result in long-term strategies being jeopardized. To mitigate that risk, it is critical to be on the ground to build knowledge and relationships, while implementing flexible long-term strategies that can readily adapt to changes as the business environment evolves.

The focus on understanding cultural issues should not be underestimated. The Harvard Business Review in October of 2003 crisply pointed out the Western versus Chinese differences of individualism v. collectivist, egalitarian v. hierarchical, and information oriented v. relationship oriented, as key differences. While the West looks to quick meetings, informality and cold calls, the Chinese pursue a long courting process, formality and use of intermediaries. Lord Macartney pointed out in 1794 that “Nothing can be more treacherous than to judge China according to European standards.” This is still absolutely true today.

There must be a willingness to invest time in relationship building at a deeper level than frequently seen in the West. Partnerships with a focus on education and transfer of knowledge are highly regarded by the Chinese and offer an opportunity to build trust, reputation and personal ties. Northern Trust, for example, has been appointed by the World Bank in 2002 as consultant to the Chinese National Social Security Fund to help strengthen their risk management systems. Northern Trust also has had cooperative agreements in place since 2001 with the Bank of Communications to educate and exchange information to help them build their custody expertise and business. Northern Trust has jointly worked with the Bank of Communications to offer seminars, and recently also with ChinaBond to educate potential institutional investors. These initiatives have enabled Northern Trust to develop the knowledge to customize its solutions to the unique needs of China, while earning the trusted relationships that will enable success.

This is a long-term perspective that is respectful of the Chinese culture and realities. Investment in relationships and the two-way exchange of information in the context of the Chinese environment will pay off as the market stabilizes and reaches its potential.