Although trade tensions between the US and China show no signs of abating, there are some reasons for cautious optimism. One is that the US has finally gotten around to giving the Chinese a concrete list of demands — and, on at least one score, China is prepared to deal.
The Chinese financial market has long been closed to foreign ownership, despite widespread criticism from the US and others. In November last year, following US President Donald Trump’s state visit to Beijing, the Chinese Ministry of Finance announced that this was set to change this year, and now the Trump team is pushing China to make good on that promise.
The catch is that the practical impact of this opening will be minimal — and for China, that is the point. It will accelerate its financial opening not because the US is demanding it, but because foreign financial firms no longer pose much of a threat. Chinese banks are now too big and too dominant domestically for foreign financial institutions to genuinely compete with them.
Consider that the four largest banks in the world are all Chinese state-owned institutions. Together they have US$11.9 trillion in assets. The world’s next five-biggest banks roughly match up to China’s Big Four, accounting for US$11.8 trillion, but they represent the largest institutions in four separate countries: Japan, the US, the UK and France.
No single country has financial firepower on China’s scale. Just taking the US’ banking sector — where the concept of “too big to fail” originated — it would require the combined balance sheets of the top 10 lenders to equal the assets of just China’s top four.
Within China, foreign firms own slightly more than 1 percent of total bank assets, compared with a full 36 percent owned by the five major state-owned institutions. Similarly, foreign banks account for less than 1 percent of annual earnings, or the equivalent of about 5 percent of the yearly profit made by just the Industrial and Commercial Bank of China. Starting from such a minuscule base, and up against such huge incumbents, foreign banks will always be relegated to the minor leagues in China, whether market restrictions are eased or not.
And it is not just size that gives Chinese banks an advantage. They also benefit from a well-oiled industrial policy. “Buy China” stipulations apply to projects of any significant magnitude, foreign or domestic, and include purchases of financial services. Such requirements generally are not written into formal policy documents, because they do not have to be — everyone involved understands them. Cross-shareholding arrangements between state-owned financial institutions and the companies whose projects they finance help reinforce these requirements. Increasingly, China is even exporting this model through its Belt and Road Initiative.
A final disadvantage for foreign firms concerns data management. Chinese regulators are finalizing the details of a new cybersecurity law that would cover cross-border data flows, protections for personal information, and other sensitive issues. It is aimed at protecting China’s “critical information infrastructure,” of which finance has been deemed a part, and would make handling certain kinds of data far more onerous. Foreign financial institutions would almost certainly face more restrictive rules than domestic ones.
In short, China is set to make significant strides toward improving market access in finance — but only in areas where Chinese firms already have insurmountable advantages.
The same approach applies to payment systems. China in 2016 allowed Apple Pay into its market, but only after WeChat and Alipay had achieved complete dominance in the mobile-payments space and Apple had agreed to partner with the state-owed payments system UnionPay.
Visa and Mastercard were officially given access the same year, but regulatory delays meant that they were not able to apply for operating licenses until late last year. The pending compliance and security reviews mean that they probably would not be up and running before late next year.
Meanwhile, UnionPay has become the largest card company in the world by transaction volume.
Back in November last year, China’s announcement that it was planning to scrap limits on foreign ownership of its banks was met with much caution and skepticism.
However, we should take Chinese officials at their word on this one: They really do plan to move forward. That is because such caps are no longer needed to safeguard China’s interests, and if removing them helps to diffuse a trade war, then all the better.
Andrew Polk is a founding partner of Trivium/China, a Beijing-based research firm. He was formerly director of China research at Medley Global Advisors and chief economist at the Conference Board China Center.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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