Opinion

China’s financial opening: Will it be different this time?

It is hard to judge whether China will indeed carry out a substantial opening of its financial sector, despite the significant external pressure it faces from countries such as the United States to liberalise its economy.

By: and Date: May 9, 2018 Topic: Finance & Financial Regulation

This opinion piece was published in China Us Focus

President Xi Jinping, in his speech at the 17th Boao Forum, announced plans to further open China’s economy. One of the key highlights of these new measures is the opening of the financial sector to foreign competition, which was confirmed by the recently-nominated governor of the People’s Bank of China (PBoC), Yi Gang. Although the official list of reforms is quite long, covering 11 different items ranging from relaxing foreign ownership in financial institutions to substantially expanding the business scope of foreign banks, most of the reforms had already been announced during President Trump’s visit to China last November or were scheduled to have been fulfilled after China’s entry to the World Trade Organization (WTO) in 2001.

It is obviously hard to judge whether China will indeed carry out a substantial opening of its financial sector, despite the significant external pressure it faces from countries such as the United States to liberalise its economy. The reaction of potentially interested investors to President Xi’s announced reforms has been muted. The only significant announcement came from UBS, which has secured a private-funds license, allowing it to start managing money for mainland institutional and high-net-worth investors in China for the first time. This licence allows foreign banks to set up a wholly owned onshore enterprise to offer fixed income, equity, and multi-asset private funds in China. However, UBS’ stand-alone securities investment had actually been in place months before the announcement of the opening up process in November 2017.

Governor Yi Gang offered more detail on the Chinese government’s plans for financial opening during a panel discussion at the Boao Forum, specifically regarding the banking, insurance, and securities and asset management sectors. He described the measures as “a prudent, cautious, gradualist move” towards reform. Firstly, China has provided a timeline for the elimination of foreign shareholder restrictions on banks and asset management companies, which will occur by June 2018. Compared to the announcement during Trump’s visit to China last year, President Xi’s speech came with an additional phrase that mentioned the Chinese government’s plans to substantially expand the business scope of foreign banks. However, it is still uncertain which type of business regulations will be relaxed. The market has speculated that the opening could include the credit card business, which is largely dominated by U.S. corporations globally.

Secondly, the opening of the insurance sector has been confirmed. The Chinese government plans to fast-track the progress of opening up by raising the foreign shareholder limit to 51% by June 2018, and eventually removing the ceiling after three years. This plan was originally announced during President Trump’s visit to China last year, including the provision to fully liberalise the sector within five years. In addition, foreign insurance companies will no longer need to have a representative office in China for two consecutive years prior to establishing a fully-owned institution.

Thirdly, the caps on foreign ownership in security, fund and future companies will be increased to 51%, without further limits after three years. This, also, had been previously announced. This time, however, Yi Gang provided further details on the removal of restrictions on the business scope of jointly-funded securities companies. This also includes the removal of any cap on foreign ownership of financial asset investment companies and wealth management companies newly-established by commercial banks. However, even though this looks like an immediate move towards opening up, a company that wishes to take a controlling stake in joint ventures is required to have a large net asset value of at least ¥100 billion, which is not practical for many corporations.

Of course, China clearly has a lot to gain in opening up the markets above. 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. This includes sharing the loss with different financial institutions, corporations and households. The massive securitisation that has occurred in China over the last couple of years would clearly benefit from foreign participation— even better if foreign players bring 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 up of China’s financial sector.

If China’s moves towards financial opening did not soften the U.S. administration’s stance toward China after Trump’s visit last year, why would this year’s Boao Forum speech, containing mostly old ideas, be any different? The U.S. has officially declared its opposition to China obtaining market economy statusfrom the World Trade Organization. Now the stance of the U.S. on trade with China is increasingly strict, due to what the U.S. government perceives as significant issues, such as intellectual property theft and the “Made in China 2025” program, which threatens the U.S.’ comparative advantage in technology. Obtaining a couple of licenses to operate in China’s financial market will not palm off the United States government or the U.S. business community. The delegation of American trade and economic officials set to visit China in early May will likely demand negotiations over whether China’s opening up process can be sped up or extended to cover other sectors. Even though the speed of China’s financial opening has somewhat increased, it would be hard to expect an auspicious 2018 for the Trump-Xi relationship— probably the most important one on earth.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Opinion

Can Multilateralism Adapt?

Global governance requires rules, because flexibility and goodwill alone cannot tackle the hardest shared problems. With multilateralism under attack, the narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read about event More on this topic

Past Event

Past Event

Trade war trinity: analysis of global consequences

Analysis of the long-term impact of the trade war and its three key players: EU, US, and China.

Speakers: Alicia García-Herrero, Ignasi Guardans and Carl B Hamilton Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 28, 2018
Read article More on this topic

Blog Post

China’s strategic investments in Europe: The case of maritime ports

The EU is currently working on a new framework for screening foreign direct investments (FDI). Maritime ports represent the cornerstone of the EU trade infrastructure, as 70% of goods crossing European borders travel by sea. This blog post seeks to inform this debate by looking at recent Chinese involvement in EU ports.

By: Shivali Pandya and Simone Tagliapietra Topic: Global Economics & Governance Date: June 27, 2018
Read article More on this topic

Blog Post

The G7 is dead, long live the G7

The summit in Charlevoix left behind a Group of Seven in complete disarray. The authors think that the G-group, in its current formulation, no longer has a reason to exist, and it should be replaced with a more representative group of countries. In this fast-changing world, is the G7 only a relic of the past?

By: Jim O‘Neill and Alessio Terzi Topic: Global Economics & Governance Date: June 13, 2018
Read article Download PDF More on this topic

Working Paper

European and Chinese trade competition in third markets: the case of Latin America

While Europe continues to hold important trade powers, the rise of China in the global economy has significantly reshaped international trade and competition. In this paper, the authors show that the degree of competition between both powers in Latin America has risen in the past decade due to China's increased trade of high-quality products. They address whether China is an increasingly relevant competitor for Europe in Latin America and in which sectors China-EU competition is fiercer. These findings should be a wake-up call to Europe in its quest to remain competitive at the global level.

By: Alicia García-Herrero, Thibault Marbach and Jianwei Xu Topic: Global Economics & Governance Date: June 7, 2018
Read article More on this topic More by this author

Blog Post

China’s new role in the global economy

The changing role of China in the world economy has recently been highlighted by its registering of a first current account deficit in 17 years. We review the economists’ analyses of this new role and associated challenges.

By: Nicolas Moës Topic: Global Economics & Governance Date: May 28, 2018
Read about event

Past Event

Past Event

Where is China’s financial system heading? Implications for Europe

How ready is China for the transformation of its financial system and how will this effect Europe?

Speakers: Elena Flores, Alicia García-Herrero, Gene Ma, Hu Yuwei and Guntram B. Wolff Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2018
Read article Download PDF More on this topic

Working Paper

How big is China’s digital economy?

The rise of influential Chinese digital giants, including Baidu, Alibaba, Tencent and Xiaomi has shown the world that China is a global leader in digital innovation and it is not surprising that China has started to influence the global digital market. But is China exploiting its full potential in this area? To answer this question, the authors assess how big China’s digital economy is relative to the rest of its economy, and how China performs compared to the rest of the world.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: May 17, 2018
Read article More on this topic More by this author

Blog Post

Trade war: How tensions have risen between China, the EU and the US

The multilateral trading system has been challenged by unilateralist measures and subsequent threats of retaliation. We collect the main events that have shaped the current situation and show which trade flows have been and will potentially be affected by the various measures. We end by discussing possible scenarios moving forward for the EU.

By: Francesco Chiacchio Topic: Global Economics & Governance Date: May 15, 2018
Read article More on this topic

Opinion

Germany’s export-oriented economic model is caught in a US-Chinese squeeze

The new Merkel government has to reduce the dependencies on exports by stimulating domestic growth forces in Germany and Europe. At the same time, Berlin should push for a more ambitious national and European innovation policy as well as a robust European foreign trade policy.

By: Sebastian Heilmann and Guntram B. Wolff Topic: Global Economics & Governance Date: April 30, 2018
Read article More on this topic

Opinion

Why this round of U.S. protectionism is different

Although it is not the first time that the world has been caught in the China-U.S. crossfire, this round of U.S. protectionist moves against China is very different, and more worrisome than past ones. They involve a much larger number of products and in that they also target the global competition for U.S. companies and not only the U.S. market. It is in no way just a poker game launched by the U.S. to reduce its bilateral trade deficit with China, but the herald of an era of China-U.S. strategical competition.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: April 24, 2018
Load more posts