The custody arm of HSBC is looking to expand in China by offering its services to mainland insurers.

As insurance companies in China see their AUM rise steeply, they are starting to invest offshore, and China Life’s issuance of mandates to international managers is expected to lead to similar moves by peers, as reported.

However, doubt has been cast on whether foreign financial institutions can succeed in cracking China’s custody market, given the fierce competition for business among domestic banks.

HSBC Securities Services was granted an onshore insurance custody licence by the China Insurance Regulatory Commission (CIRC) last December, making it the second foreign bank to be authorised to serve mainland insurers. The other licensed foreign bank is Standard Chartered.

HSBC has been providing securities services in China for more than two decades, having started with onshore custody for China B-shares in 1992. Most of the custody arm’s Asian business comes from mutual funds, but it has identified growth opportunities in the insurance sector, especially in China.

“China is a particular focus for us. Renminbi internationalisation is the goal of China and we’ve been active in supporting the initiatives in RQFII, QDLP and QDII,” said Ian Stephenson, global head of fund services at HSBC Securities Services.

“In addition to our natural strength in funds we are increasing our share in the insurance segment, which has a large, growing asset pool. That’s where we need to be."

Chinese insurance companies had Rmb10.159 trillion ($1.6 trillion) in overall AUM at the end of 2014, a year-on-year rise of 22.5%, according to the CIRC. Investing offshore is still in its early stages, but others are expected to follow the lead of China Life, which last month issued a series of mandates for international managers (see link above).

“The China local custody market is still dominated by domestic banks and there is a lot of potential there. We anticipate the flow of assets outside of China will increase and we are interested to capture that,” Stephenson said.

Howhow Zhang, director of research at Shanghai-based consultancy Z-Ben Advisors, said it would be tough for foreign banks to tap the onshore custody business.

“Unlike QFII custodian business, where foreign players dominate, domestic custodian business is a highly contested area among domestic banks,” he said.

“It’s not like QFII and RQFII where you have 10 more clients coming to play every month. If an insurer chooses a custodian, then chances are they are going to stick with this custodian for a long time.”

But Zhang added that despite the competitive market, the future looked promising for the offshore custodian business. As Chinese insurers grow their overseas investments they would need assistance on the offshore custody side – “and foreign banks are the go-to guys for them”.

Foreign banks are required to apply for a licence to offer onshore and offshore custody services to mainland funds and insurers. Stephenson said Chinese regulators also required securities services firms to locate operations and technology in-country, driven by concerns around data confidentiality, especially investor-related data.

International banks have seen this as a challenge since it can lead to significant duplication in technology spend and reduces the scale benefits for clients.

HSBC is building the infrastructure to be able to offer onshore custody services. “In recent years we have been expanding our Guangzhou [largely funds] and Shanghai [for all services] operations and technology,” Stephenson said.  “We have over 220 staff in Guangzhou and 116 staff dedicated to securities services in our Shanghai office.”

HSBC is also developing its custody system to suit the China market and to comply with regulatory requirements. Some of the systems are in the testing phase. “It is one of our big projects,” Stephenson added.