At the high point of Donald Trump’s relationship with Xi Jinping, when they met in Beijing three years ago, the Chinese president responded to his US counterpart’s pressure to liberalise financial services with a pledge: “We will never close our doors. They will only open wider and wider.”
Barely had Air Force One whisked Mr Trump from Beijing than, sure enough, China’s finance ministry announced sweeping reforms to remove ownership limits on foreign financial services companies operating in the country — much to the delight of Wall Street.
As the Financial Times series on the “New Cold War” outlined last week, US-China relations today look very different. A battle is being fought on many fronts between the world’s top two economies. Yet in the realm of finance, there is no evidence of relations breaking down.
JPMorgan is just completing the $1bn buyout of a joint venture partner in asset management to give it full control of China International Fund Management. The bank has also set in a train a process to take control of its Chinese securities and futures joint ventures. Goldman Sachs is meanwhile poised to buy out its securities joint venture partner, in a deal that could establish it as the first major fully foreign-owned investment bank allowed to operate in China.
If 2020 has been the year when Sino-American tensions escalated to resemble the 1980s stand-off between the US and the USSR, it has also been the year when Beijing — after 20 years of baby-step financial liberalisation — finally threw open its doors to Wall Street.
JPMorgan and Goldman are far from alone in winning greater control of their Chinese operations.
Like JPMorgan, Morgan Stanley in March took majority control of its securities joint venture, increasing its stake from 49 to 51 per cent, with a plan to push for 100 per cent ownership. Last month, Citigroup secured regulatory authorisation to become the first US custody bank in China, allowing it to hold securities on behalf of fund managers in China. That followed the August news that BlackRock had secured the go-ahead to run its own wholly owned mutual fund business in the country and that Vanguard would set up a new regional headquarters in Shanghai.
The big question is: why? When US rhetoric has become poisonous, translating into damaging disruption to Chinese manufacturers and existential threats to China’s tech giants, why has Wall Street not been dragged into the stand-off?
Mutual expediency is the short answer. It suits the big banks, asset managers and insurers to be given freer access to what will soon be the biggest economy in the world, albeit one where profits in the short-term remain elusive. If western financial institutions are more embedded in the blood flow of the Chinese economy, that also suits western governments. A more predictable regulatory landscape, underpinned by Beijing’s five-year planning system, has reassured foreign money.
As for Beijing, President Xi’s growing appetite for a Chinese slant on western capitalism makes financial market liberalisation an obvious means to the end: Chinese financiers can gain from greater exposure to western counterparts and the economy can benefit from the access to capital they bring.
Chinese policymakers are concerned that lending by domestic banks and non-banks is the dominant source of corporate finance. At the same time, there is scope to do more with the mounting savings of middle-class Chinese: there is a gap in the country’s personal finance market between the two traditional extremes of under-the-bed cash-hoarding and wild speculation on single stocks. A more developed insurance and pensions market is another key policy goal. Most of all perhaps, China believes that having friends on Wall St will be a soft-power relaxant of geopolitical tensions.
The timing of the latest push is interesting, though. Some see a correlation with the political crackdown on Hong Kong with foreign firms being used as a lever to advance Shanghai’s relative rise. There may also be some truth in speculation that Beijing is keen to cut some of the biggest players in Chinese private sector finance down to size.
Will the financial detente last? If Joe Biden wins next month’s US election, Wall Street’s advance into China may face new hurdles given his hawkish stance on Beijing. But even under President Trump, there are worries, says one seasoned banker. “We’re constantly on tenterhooks that we’re going to wake up to a tweet saying something like: ‘JPMorgan, Goldman Sachs: GET OUT OF CHINA!’”
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