Trade War Hasn’t Stopped Wall Street’s $9 Billion China Rush




Executives from the biggest U.S. financial firms, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., met with top regulators in Beijing in a sign that the trade war with the U.S. has done little to derail China’s opening of its $43 trillion financial system.

Among those attending meetings at the Ritz-Carlton hotel on the city’s Financial Street were Yi Gang, governor of the People’s Bank of China and senior officials from the China Securities Regulatory Commission, according to an agenda that was seen by Bloomberg.

Even as the trade war rages, China has continued to open its financial sector at an unprecedented pace, luring global banks seeking to compete for an estimated $9 billion in annual profits. While the policy has often been cast as addressing U.S. complaints that the Asian nation has been a one-sided beneficiary of trade, domestic motivations are also behind the push, said Michael Pettis, professor of finance at the Guanghua School of Management at Peking University.

“China is very determined to reform its financial markets and knows that without the major American players, it is very hard to talk about having a truly internationalized market,” he said. “It also makes sense for China to accommodate a very important source of lobbying support, especially as there’s so little in the U.S. right now.”

Forcing Change

Chinese regulators can’t ignore the country’s financial-market issues. Corporate bond defaults reached a record high last year and the nation’s banks are seeing their balance sheets swell with ever more bad loans. Publicly-traded companies have come under increased scrutiny as a spate of poor disclosures — from inaccurate IPO applications to an accounting “error” that wiped out $4.4 billion — left investors wary. Officials and academics say an influx of foreign competitors could help the industry get into shape and also sharpen the focus on just doing business.

“Opening up is a way of putting pressure on financial-system reforms, especially considering the many competing interest groups,” said Li Haitao, dean’s distinguished chair professor of finance at Cheung Kong Graduate School of Business in Beijing.

Burdened by the policy-oriented tasks, such as lending targets for private firms or rural industries that domestic firms need to take heed of, Zhang Chenghui, former head of the finance institute at the State Council Development Research Center, said at a recent conference in Yichun, suggesting that local firms may be allowed to shed these duties as the market opens to foreign competition.

Other scheduled attendees at Friday’s meeting in Beijing included China Vice Finance Minister Liao Min, CSRC Vice Chairman Fang Xinghai, Goldman Sachs Chief Operating Officer John Waldron and Morgan Stanley’s global head of international business, Franck Petitgas, according to the agenda. Ken Griffin, who runs the hedge-fund firm Citadel, and Alan MacDonald, Citigroup Inc.’s vice chairman, were also on the list, along with Chris Heady, chairman of Blackstone Group Inc.’s Asia unit.

Senior Wall Street executives attended a meeting with Chinese policy makers in Beijing in September 2018, people familiar with the matter said at the time. That meeting was also chaired by former PBOC Governor Zhou Xiaochuan and John Thornton, chairman of Barrick Gold Corp.

Foreign Cash

China’s transition to a more consumption-driven economy has lead to a shrinking trade surplus — a trend that could be accelerated by the trade war. As more and more Chinese are also lifted into the middle class and beyond, the need for managing that wealth is growing.

China's current account surplus is disappearing

Daniel Rosen, a partner at Rhodium Group LLC, an economic research firm based in New York, said the transformation of China and the limits of its policies, will likely mean “trillions of dollars” in capital outflows in the years ahead.

“To avoid balance of payments challenges, Beijing needs to attract correspondingly large capital inflows, and is plunging ahead with financial sector opening with this long-term reality in mind,” he said.

Wall Street Allies

Crucially, opening up could also allow China to make friends with people in the right places at a time of heightening political tension.

Bloomberg Intelligence analysts Francis Chan and Sharnie Wong estimate that — barring a major economic slowdown or change of course — foreign banks and securities companies could rake in profits of about $9 billion a year in China by 2030. The increasing ties between Wall Street and the Chinese market could make some of its executives important voices for China in Washington.

Even so, opening up the financial sector may not go far enough in addressing the core concerns of the current U.S. administration.

“You would need a full slate of credible reforms across core areas of political and national security concerns before you moved the needle in D.C.,” said Jude Blanchette, chair of China studies at the Center for Strategic and International Studies in Washington. “We’ve seen these narrower measures pretty consistently over the last year and they have not had an impact on the U.S. position.”

Costly and Cumbersome

There are still significant hurdles in setting up shop in China. The latest central bank data showed that foreign participation in the local financial market is still small, accounting for just 3.1% of the stock market and 2.2% of its bond market. Foreigners held 1.6% and 5.8% of banking and insurance assets, respectively, as of May.

“Certain business license application processes, such as those for majority ownership in securities businesses, still require large upfront capital commitments and face a lengthy review process, many of which disadvantage foreign investors,” the American Chamber of Commerce said in its 2019 China White Paper.

Foreign financial executives also complain about the difficulty in competing against government-controlled rivals with longstanding relationships.

Moving Forward

Friday’s meeting could help set the stage for high-level trade talks next month. China and the U.S. are in close contact to prepare for the discussions, Commerce Ministry spokesman Gao Feng said on Thursday, without giving more details.

In the meantime, more opening is expected in China’s financial sector. Most recently, regulators allowed foreign companies to be lead underwriters for all types of bonds, and control entities including wealth management firms and pension fund managers.

“Further liberalization of China’s financial services market is in the interest of China’s regulators because it raises the standards of the overall domestic market,” said Jake Parker, senior vice president at the US-China Business Council. “The U.S. is effectively pushing on an open door in this area.”

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