The banking industry seems to have set its eyes on the Asian Market. UBS AG (USA) (NYSE:UBS) recently launched its locally-incorporated unit in China, which will allow it to conduct business in areas like wealth management. UBS operates brokerage and mutual fund joint ventures with local partners along with private equity units. The Zurich-listed bank is the first Swiss bank to set up a wholly-owned subsidiary in China.

China is the world’s second biggest economy with more than 330 western institutions operating within its boundaries. The past few months have seen 40 outside banks, including JPMorgan Chase & Co. (NYSE:JPM), the Asia-focused European bank HSBC Holdings plc (ADR) (NYSE:HBC) and Morgan Stanley (NYSE:MS) injecting capital there.

A total of $111.7 billion of foreign direct investment (FDI) flew into China in 2012.

In the financial sector, the current surge of foreign investment came in when the Chinese Government relaxed its foreign investment rules in May 2012. The foreign banks were allowed to increase their stakes in domestic investment banking joint ventures to 49% from 33%. Last May, JP Morgan invested $394.08 million into its China unit, while HSBC added $450 million into its Chinese operation in 2011.

Foreign banks have been operating in China for decades, however according to a report by KPMG, they account for less than 2% of the total assets in the banking sector. This is mainly because foreign banks have only been allowed to serve individual Chinese customers since 2007. But in the bigger picture, world economy is lagging while, according to HSBC, Chinese GDP will increase by 8.6% in 2013 and will improve further in 2014. The nation’s GDP is predicted to touch between $16 trillion to $20 trillion by 2020, which will translate into per capita GDP of more than $10,000.

In other words, even with the slowdown, the Chinese economy is still moving at forward at an incredible clip as compared to their North American or European peers. Financial institutions cannot afford to ignore it.  The issue is going to be whether they will be competitive.  U.S. banks have to slash staff and outsource so much of their research as a consequence of the huge bubble they helped build in the first part of the century.  UBS is actively streamlining operations but keeping particular focus on Southeast Asia, which it considers a ‘second home market.’

HSBC also believes that the US, Japanese and European market remain bearish as compared to the Chinese economy which is showing great growth opportunities hence the bank itself continues to invest in its core operations in China while divesting its non-core assets such as in insurance.