As the world’s atten-tion has been fixed on Beijing, where athletes are competing for gold this month in the 2008 Summer Olympics, some Canadian financial services institutions have been turning their attention toward China for different reasons.

For them, China offers the potential to tap into a burgeoning, emerging middle class with increasing disposable income and the desire to save, invest and plan.

Heavyweights such as Manulife Financial Corp., Sun Life Financial Inc., Bank of Nova Scotia and AGF Funds Inc., all Toronto-based, as well as private-equity players such as the Canadian Pension Plan Investment Board and the Ontario Teachers’ Pension Plan Board have all decided that navigating the maze of legal and regulatory hurdles in China is worth it.

Meanwhile, investment bankers with Vancouver-based Canaccord Adams Inc., Jennings Capital Inc. of Calgary, and GMP Capital Trust, Research Capital Corp., and CIBC World Markets Inc., all of Toronto, are providing capital for smaller ventures in manufacturing and mining in China by underwriting initial public offerings on the TSX Venture Exchange.

The floodgates for Canadian insurance companies opened in 1992, when China’s government issued a licence to sell insurance to U.S. insurance giant AIG Inc.

“The bell sounded, and everyone else started to line up to get a licence,” says Marc Sterling, Manulife’s vice president responsible for its China operations in Shanghai. “Before AIG, it had not been the case that the Chinese government allowed foreign businesses to manage the money of Chinese citizens. The Chinese government felt it was most competent to do that.”

With the loosening of China’s regulations came competition, consumer choice and more financial products in the realm of savings accounts; residential, auto and consumer loans; insurance; and even mutual funds. And, unlike some North Americans, it’s not hard to convince the Chinese of the importance of saving money.

Says Sterling: “The Chinese are good savers.”

They sock away about 30% of their net income. Whole-life insurance is seen as an attractive savings vehicle by white-collar workers, who earn at least $5,000 a year. The Chinese dislike debt and are known to buy real estate with cash. “They’re frugal and responsible about their savings,” Sterling adds. “They really prioritize. They make choices.”

There are currently 53 insurers in China offering life and pension plans. They are working to meet a huge demand. Manulife is already operating in 31 Chinese cities, says Sterling, who adds: “We would like to expand even faster.”

And although Canada’s Sun Life is also active in China, Manulife considers its real competition to be the U.S. giants AIG and Prudential Financial Inc. Manulife employs 8,500 salespeople, but must battle other companies to recruit more.

Opportunities for these salespeople are emerging from a compelling demographical and economic landscape. China’s gross domestic product grew by 11.4% in 2007. According to China’s National Bureau of Statistics, 2007 was the fifth year in a row in which its GDP had expanded by more than 10%. And recent statistics indicate growth of 10.4% for the first half of 2008, surpassing the government target of 8%.

Meanwhile, the median age of China’s population of 1.3 billion is about 33 (the median age in Canada is 39). That bodes well for financial services businesses.

“The people have not yet begun borrowing for personal consumption in the same way as in the West, and household debt as a percentage of GDP is relatively low,” says Michele Kwok, Scotiabank’s senior vice president of Asia/Pacific and the Middle East in Hong Kong. “As these economies develop, the size of the consuming class increases dramatically and releases enormous pent-up demand for personal credit and other banking products.”

About 300 million Chinese are considered “bankable,” Kwok says.According to China’s NBS, savings deposits in financial institutions in 2007 were up by 15.2% from the year before, while loans were up by 16.4% and insurance premiums rose by 25%.

Scotiabank has a 2.5% stake in a local bank in Xi’an, a city twice the size of Toronto. The bank is the No. 5 lender in the region, and holds about a 10% market share with US$5 billion in assets and 2,250 staff at 113 branches.

There are many Chinese cities like Xi’an, unknown to most Canadians but larger than Canada’s largest city, says Elliott Jacobson, a partner with Deloitte & Touche LLP’s entrepreneurial public company audit practice in Toronto. “The middle class in China is growing by numbers greater than the Canadian population,” Jacobson says. “Also, the cities are becoming much more urban.”

@page_break@China’s growing middle class is still beginning to acquire what Westerners consider basics, such as homes, cars, televisions, consumer electronics and financial products beyond savings and insurance, Jacobson says, thus presenting a huge opportunity for companies such as Manulife and Scotiabank.

“You have to be very patient to be successful there. It’s not going to happen overnight,” he warns. “This is not an underdeveloped society; it’s a different society.”

The Chinese entrepreneurial community has found the Canadian capital market to be a good place to raise capital. “There’s an inherent China/Canadian comfort,” Jacobson says. “Everybody — accounting firms, law firms, investment bankers, the Toronto Stock Exchange and the TSXV — are very aggressively promoting Canada as a place to raise capital.”

But for Canadians who aren’t ready to delve into the speculative world of the TSXV can still get a taste of China by buying into a mutual fund.

AGF has its China Focus Class Fund; its largest investments are in financials, at about 31%. The fund holds China Life Insurance Co., which saw its premiums grow by 39% in the first quarter of 2008, although the stock has seen its shares plummet by 30% year-to-date because of investment equity losses, according to the April 2008 fund commentary, which adds: “We believe the stock is undervalued and is the best-positioned insurance company to take advantage of the liberalization of investments.”

Although some investors may shy away from China, given its controversial human rights record, Sterling urges people to have realistic expectations: “China has taken 400 million people out of poverty in 30 years. There’s a lot to be said for it.”

Still, the “bankable” population in China remains a small slice of the overall population; the bulk of urban China remains relatively
impoverished. IE