China Fails to Woo U.S. With Financial Sector Opening

Yves here. This post provides another confirmation of the cool and getting cooler official stance of the US towards China. China maven Scott Kennedy, in South China Morning Post, stated in The US is preparing for a trade war with China – don’t be fooled by the noise:

My sense is that we are on the cusp of a new American strategy in which Washington replaces dialogue and multilateralism with extended unilateral pressure…the Trump administration has been moving systematically to put the regulatory pieces in place so that it can credibly threaten China with limits on its exports, investment and other elements of the relationship.

The tepid US reaction to a Chinese overture seems consistent with this strategy. Another interpretation might be that the US side does not think the Chinese measures mean anywhere near as much as they appear to on the surface, that the official liberalization will be significantly curtailed via numerous informal impediments.

By Alicia Garcia Herrero, non-resident research fellow at Real Instituto El Cano. She is also the Chief Economist for the Asia Pacific at NATIXIS. Alicia Garcia Herrero is currently adjunct professor at City University of Hong Kong and Hong Kong University of Science and Technology (HKUST) and visiting faculty at China-Europe International Business School (CEIBS). Originally published at Bruegel

Now that the dust has settled, one thing is clear: President Donald Trump’s visit to Asia in November served as a milestone in the increasingly rapid transfer of power from the U.S. to China. President Xi Jinping’s enthronement during the 19th Party Congress as China’s leader for the foreseeable future did most of the work, but Mr. Trump helped by failing to advance a clear agenda articulating the U.S.’s key national interests regarding China.

The transfer of economic power to China has only accelerated since Mr. Xi came to power. It will accelerate further if and when China institutes real economic reform. But when China announced reforms to open up its financial sector—just hours after Mr. Trump concluded his visit to Beijing—the reaction from the Trump administration was muted at best, as the administration remains focused on China’s too-benign attitude toward North Korea and its nuclear missile program.

Reaction from investors, too, was muted. The only significant announcement came from UBS for a securities investment that was approved months before the announcement. Recall that China has been promising to open its financial markets since entering the World Trade Organization in December 2001. Beyond the lack of progress so far, the announcement does not fully cast away doubts about the speed and depth of the opening going forward.

For example, the foreign ownership cap of domestic securities firms will increase from 49 percent to 51 percent and then to 100 percent in the coming three years. However, there was no hint about lifting the current restriction on listed securities companies (ranging from 20 percent to 25 percent based on various conditions). Until further clarification, this probably means foreign investors can only gain control of non-listed securities firms, which are, of course, much smaller.

There’s even less clarity regarding the banking and insurance sectors. We already know that reforms are delayed for another three years. However, China’s vice finance minister, Zhu Guangyao, told The New York Times that China would raise the investment in insurance companies to 51 percent in three years and 100 percent in five years. In addition, China also plans to end its current 25 percent limit of foreign ownership in banks, according to what Mr. Zhu told the Times.

China clearly has a strong self-interest in opening up its securities market. After the massive growth of bank balance sheets and the piling up of non-performing loans, Chinese regulators hope that the market (with Chinese characteristics) will do the cleaning up.

The massive securitization occurring in China over the last couple of years would clearly benefit from foreign expertise. Even better would be if foreign players brought along foreign investors to share in the potential losses. Within this context, one should not be too surprised at the general lack of interest in the opening of China’s financial sector.

Certainly the move does not seem to have softened the U.S. administration’s stance toward China. The U.S. has officially declared its opposition to China’s obtaining market economy status from the WTO. Of course, this decision might be more closely related to China’s perceived lack of cooperation on North Korea. But it also suggests that obtaining a couple of licenses to operate in China’s financial market will not calm down Mr. Trump.

Clearly, Mr. Xi is frustrated with Mr. Trump’s reaction to his kind gesture. All in all, it would be hard to expect an auspicious 2018 for the Trump-Xi couple—probably the most important one on earth.

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  1. Synoia

    China clearly has a strong self-interest in opening up its securities market.

    The bold part is most certainly true. The italic section would benefit from an enumeration of the pros and cons, and a lengthy discussion od the issues.

  2. Chauncey Gardiner

    My sense is that this administration’s strategic vision remains unarticulated because there isn’t any. It is largely reactive to developments globally where key US donor constituencies have financial or national attachments; i.e., the MIC, Israel, oil & gas, Wall Street; where the president has some personal affinity with totalitarian foreign leaders; and by resentment at the now well recognized self-inflicted, long-term structural damage to the US economy caused by the historical decision of US policy elites to transfer huge swaths of American manufacturing to China.

    WRT China, the “money” quote in this piece for me is: …”Even better would be if foreign players brought along foreign investors to share in the potential losses.” If I were Xi, I would not take the lack of US investment interest in China’s financial sector at this time too seriously, especially given the influence of Goldman Sachs on this administration’s policies. I don’t think the primary driver for the emerging US position is China’s policy regarding Korea, although that may be the face presented to the public.

  3. Sound of the Suburbs

    The US still hasn’t worked out how things went so wrong in the first place.
    Donald is blaming everyone else when the problem is at home.

    How would the Washington Consensus create an Asian century?

    The UK was the first nation to champion free trade.

    The repeal of the Corn Laws ushered in the era of free trade.

    The businessmen wanted lower corn prices, to lower the cost of living so they could pay lower, internationally competitive wages.

    Disposable income = wages – (taxes + the cost of living)

    Lower wages means higher profits, requiring low taxes and a low cost of living.

    With a low cost of living the UK was internationally competitive.

    The Washington Consensus came in, but the West was not prepared for a globalised, free trade world and had a high cost of living, which it made worse with real estate booms.

    The Western nations were not internationally competitive and the off-shoring began to Asia.

    Asia is ideal as it has a low cost of living and low taxes enabling lower wages and higher profits. Once NAFTA was passed, millions of jobs headed to Mexico and Germany off-shored to Eastern Europe, all for the some reason.

    For those at the top in the West, there are higher profits and dividends, and everything looks very good indeed.

    The jobs in the middle are off-shored. More low paid service sector jobs replace those old jobs in the middle as these jobs have to be done locally. Society polarises and social unrest isn’t far away.

    The East does brilliantly from all the off-shoring and investment capital coming in from the West.

    Asia rises and the West goes into decline through the Washington Consensus.

    1. Sound of the Suburbs

      Disposable income = wages – (taxes + the cost of living)

      One of Michael Hudson’s main points in an equation.

      The minimum wage is set when disposable income = 0.

      Minimum wage = taxes + the cost of living

      Why the US needs a high minimum wage.

    2. False Solace

      The UK was also a nation of disease-ridden slums fed by landless peasants driven from the commons. By contrast the American system was based on high wages, which led manufacturers to invest in high productivity machinery, which led to higher skilled laborers who could command high wages. A virtuous cycle.

      The cheaper wages are, the less incentive manufacturers have to invest in high tech and automation and the further your manufacturing base falls behind international competitors. Eventually you’re no longer able to manufacture weapons and then you’re in real trouble.

  4. Joel

    When you think that 60% of the world’s people are in Asia, it truly is infuriating that the US foreign policy establishment is obsessed with the Middle East (granted, mostly in Asia, but only a tiny part of it) and the US intellectual establishment is obsessed with Western Europe.

    1. H. Alexander Ivey

      I wake up every day thanking The Big Guy above that the US elites and foreign policy types are so focused on the Middle East and Europe and not so much on Asia, East and Central, which is where this American lives.

      1. Joel

        You might want to open up a history book and look back at what it was like for Americans living in East Asia circa 1942-1945. Or in China 1950-1980.

        I’m not saying we’re guaranteed a return to the bad old days, but we holders of the blue passport have a pretty sweet deal now and I don’t imagine us getting a much better deal in a “post-US” world. Just look at how the nice East Asians treat migrants from Africa, Eastern Europe, or from other parts of Asia, for that matter.

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