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 US 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.
US 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.
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 US 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.
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, US 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.
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 US 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 US 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.