American and other securities firms scored what looks like a big win
Friday when China announced new rules allowing them to own 51 percent
stakes in joint ventures. It’s just the sort of market-opening move
President
Donald Trump was seeking on his first trip as president to Beijing.
Except Trump didn’t know it was coming.
He
didn’t even ask for it in specific terms on the trip, say people
familiar with the situation -- even though it’s been at the top of the
wish list for U.S. financial firms for years. The State Department
didn’t know either.
It is the single most-important thing that happened while
Trump was in China, business experts agree, and he would have been well
within his rights to trumpet it on Twitter. China has resisted letting
overseas firms have controlling stakes inside the country, but experts
say it’s a critical step to allowing investment to flourish inside that
nation’s tightly controlled economy.
And
yet it didn’t even merit a mention in the 1,392-word statement the
White House released about what happened while Trump was in China.
U.S.
officials sought to downplay the significance of the development,
saying it’s just one small step when China needs to fundamentally remake
its approach to letting foreign investment onto its shores.
Trade Deficit
Some
financial experts disagree, saying that it’s an important development
for individual banks seeking to strengthen their foothold in the world’s
second-largest economy -- something that also would help Trump with his
goal of reducing the U.S. trade deficit with China.
In one way, the lack of notice to Trump reflects a very
Chinese approach to such matters, to do things that benefit China, and
only in the manner and in the timing that suits China’s needs.
“China
has planned for this for a very long time, and now is the right time to
announce it because Trump is visiting," said Iris Pang, a China
economist at ING Groep NV in Hong Kong.
In another way, it puts
the relationship between Trump and Chinese President Xi Jinping in a
clearer light. During the trip, Trump boasted of the closeness and
warmth between the two men, and White House aides stressed repeatedly
that the trip was about cementing that relationship, not individual
wins.
Xi’s Timing
But Xi easily could have bestowed this
gift upon Trump during his visit by telling him about the pending move
-- ahead of one of their joint appearances, for instance -- something to
blunt the theme in the coverage that Trump has very little to show
despite already spending almost a week in the Asian region, either on
trade or North Korea.
The fact is that Xi didn’t let show just how hard it will be to make the achievements concrete in the future.
The
exact timing of the openings are not yet known and few details were
offered in today’s announcement. There are also many ways that Chinese
policy makers could slow-walk market opening, Tom Orlik, the Chief Asia
Economist at Bloomberg Economics in Beijing wrote in a note.
In
addition, U.S. banks may approach investments in Chinese banks with
some caution, considering ongoing concerns over leverage in the Chinese
economy and shadow-banking exposures. What’s more, banks including Bank
of America Corp. and Goldman Sachs Group Inc. have in recent years
exited their stakes in Chinese lenders, seeking to avoid punitive
capital imposts on minority shareholdings, a legacy of regulations
introduced after the financial crisis.
HSBC’s Stake
After sales by
Citigroup Inc. and others,
HSBC Holdings Plc has been left as the only one with a major holding, in the form of its 19 percent stake in Bank of Communications Co.
Andrew
Polk, co-founder of research firm Trivium China in Beijing, said he
doesn’t know why this announcement wasn’t folded in with Trump’s trip.
He believes past work between U.S. and Chinese trade negotiators had
brought this item to the point of being announced -- and suggested that
if Trump had just asked directly, the Chinese might have given it to him
or told him ahead of time.
But the real motivation for China
isn’t offering the U.S. a concession -- it’s about the Chinese
government wanting to boost foreign direct investment, or FDI.
China
is "panicked about the extremely low levels of FDI inflows they have
and now realize that to get higher FDI inflows they’ll have to do some
more opening. This is part of that," Polk said.
China’s growing
debt pile is a major economic risk. Total debt will reach 292 percent of
output in 2019 and 328 percent in 2022, up from 162 percent in 2008,
according to projections by researchers at Bloomberg Economics.
No Way to Compete
Polk
said the Chinese are making changes in sectors, like banking, where
their built-in advantage is so huge, a little more outside money won’t
really challenge them. "They’d never have done this 10 years ago," he
said. Now, "just with the size of these things, there’s no way a foreign
firm can compete."
Polk believes this is a big deal for
individual firms, less so in the overall picture of China’s economy,
because the amounts are still relatively small. "It’s not a big deal in
the relationship between China and outside entities. If you’re HSBC or
Standard Chartered then it could be a big deal for your business," he
said.
— With assistance by Jeff Kearns
