Could US-China tensions hinder Beijing’s plans to integrate further with global financial markets?

Karen Yeung
·5-min read

The pressure is on for Chinese banks now the country is opening its financial sector to top-flight global competitors.

That’s the message from Wang Kun, deputy general manager of the international banking department at the Industrial Commercial Bank of China (ICBC), one of China’s so-called big five banks.

“We see competition, with more participants going for the same trophy not only in the traditional retail or corporate banking sectors, but it is also coming from capital markets, where Chinese players previously have not been so strong or skillful,” Wang said at an online conference hosted by the Institute of International Finance last week.

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China’s efforts to liberalise its financial markets, which have accelerated in recent years, mean more business for ICBC, which will act primarily as a local agent for foreign traders and provide domestic hedging tools, Wang said.

China tries to woo wary foreign firms with market access to offset US decoupling

Chinese banks understand local companies and clients the best, so they can add value by providing market education to overseas investors, he added.

“But at the same time there are several areas in which Chinese banks are lagging behind,” Wang said. “In terms of research, and their ability to price companies and to price risks.

“We really feel some kind of pressure to be honest because full custodian service licenses have been given to international banks like JPMorgan Chase, Citibank, and HSBC. These global custodians will have a competitive edge.”

In the past, ICBC possessed unrivalled dominance for fund custodian services due to its status as China’s biggest bank and because international lenders were only allowed to operate through joint ventures on the mainland.

But that could all change as China presses ahead with long-awaited reforms to its financial sector, including lifting restrictions on foreign banks, brokerages and fund management firms.

David Dollar, a senior fellow at Brookings Institution, said there was a strong case for China to open up its financial sector as it works toward high-quality economic growth and productivity, while tackling domestic imbalances such as last year’s rebound in debt.

Stabilising the investment environment and attracting foreign capital have become more urgent concerns for China to offset a more challenging external environment, particularly as the United States continues to threaten it with financial sanctions.

US President Joe Biden has pledged to prevent China becoming the world’s most wealthy and powerful country, saying it is “not going to happen under my watch.”

His administration has so far made no move yet to unpick financial measures targeting China made by the Trump White House.

Last year, US federal pension funds were ordered to halt purchases of Chinese stocks and bonds. Global index providers FTSE Russell, MSCI, S&P Dow Jones and Nasdaq have also removed companies such as China Telecom, China Mobile and China Unicom from their indexes in response to a White House order banning investments in publicly traded companies with links to China’s military.

Last week, the US Securities and Exchange Commission also started enforcing regulations that could force some Chinese firms to de-list in the US unless they comply with American accounting standards, pushing shares in Chinese technology giants down sharply.

But so far, the US measures do not point to wholesale decoupling with China, Dollar said. Instead they appear to be selective with limited impact, so as to avoid serious impediments to international capital flows or China’s integration of financial services.

Financial sanctions imposed on government officials in China and Hong Kong over alleged human rights abuses are mere annoyances for the individuals in question, Dollar said.

“The Biden administration is reviewing all the previous administration’s policies, the likely result is you’re going to roll some of them back and keep others,” Dollar said. “The Treasury department will be a voice for not interfering with the operation of international capital markets because this is quite critical for the US economy and for the global economy.”

As American financial institutions such as American Express, BlackRock, The Carlyle Group, Citigroup and Goldman Sachs double down on their China strategy, deeper reform is required to establish more transparency and consistency with international practices, analysts said.

Integration with global financial markets will mean China has to give up some of its control to foreign influence and collaborate internationally, they added.

Increasing foreign ownership means more people will be scrutinising Chinese financial markets since their money is on the line

Raphie Hayat

“Increasing foreign ownership means more people will be scrutinising Chinese financial markets since their money is on the line,” said Raphie Hayat, senior economist at Rabobank. “That could also mean increased volatility as asset prices will adjust to incorporate the views of more people.”

Even though foreign companies can hold a controlling equity in their Chinese operations, they still need to navigate a complex regulatory framework to obtain licenses for individual businesses or individual products.

And while Chinese banks were given the green light to trade in domestic bond futures last year, a landmark reopening of a market that was shut since the 1990s, foreign banks are not part of the pilot. Policymakers hope the new hedging instrument would boost liquidity in China’s bond market and attract more foreign investors.

“We have learnt a lot from our joint venture on how derivative products are being used and the efficiency of their management,” said Freddy Wong, managing director and head of fixed income for the Asia-Pacific at Invesco. “I do hope these instruments would be adopted at a much faster pace to give global investors back a level playing field, and allow them to actually do this kind of portfolio management in a more efficient way.”

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