Joe Biden’s election victory could result in a more unified front by developed countries pushing China to further open up its domestic market, which in turn could encourage American and global financial firms to increase their presence in Chinese markets, according to analysts.
Biden’s stance on China is far from certain for now, but his administration – set to begin with his swearing-in as president of the United States on January 20 – is less likely to use tariffs as a negotiating tactic while being more aggressive in engaging with Beijing on deeper structural issues such as creating a level playing field for foreign firms and better protecting intellectual property (IP), analysts said.
“Biden’s party represents the interests of top American corporates, financial firms and hi-tech companies, so he is more likely to push China on reforms,” said Sheng Liugang, an associate professor with the Department of Economics at the Chinese University of Hong Kong. “As China opens up, American banks will be especially eager to enter, because the US’ strength is in finance.”
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Amid the Trump administration pushing for a decoupling of the US and Chinese economies over the past two years, Beijing has been shifting the nation towards a policy of self-sufficiency that relies more on domestic demand while selectively opening up the economy to entice foreign companies such as JPMorgan Chase and Tesla to stay put and other American companies to join them.
Beijing’s efforts to relax market restrictions to boost foreigner ownership of domestic stocks and bonds, as well as to promote international use of the yuan, could be set back by the implementation of new US regulatory changes to drive financial decoupling in the final days of the Trump administration, said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis.
“But for some international investors, the time is ripe for investing in yuan assets in China,” Garcia-Herrero said. “This time around, the onshore yuan market is king, with Beijing keen to attract as much capital inflow as possible [based on] the notion that Chinese capital markets are too big to be missed.”
Foreign investors, including American firms, have been ramping up their purchases of Chinese stocks listed on the mainland, as the economic recovery has surged in the wake of the coronavirus pandemic, relative to the rest of the world. The benchmark Shanghai Stock Exchange Index has risen 10 per cent this year, and the CSI 300 Index – which tracks large firms listed in Shanghai and Shenzhen – is up 22 per cent, making it one of the best performers globally.
In addition, investors are piling into the mainland bond market, since its yields are much higher than in the West. For instance, a 10-year Chinese government bond now yields 3.23 per cent, well above the 0.80 per cent available on US Treasury 10-year notes and the negative 0.64 per cent return available on 10-year German government bonds, the benchmark in Europe.
Sheng said that, as China’s middle class continues to grow, the prospect of taking part in Chinese wealth management will become increasingly important to international institutions. Recent moves by major Western financial institutions underscore this point.
Last week, JPMorgan raised its stake in its Chinese securities joint venture to 71 per cent, taking the bank a step closer to gaining full ownership of its Chinese operations in investment banking, research, equities and fixed income.
Other US financial institutions such as American Express, BlackRock, The Carlyle Group, Citigroup and Goldman Sachs have all moved more actively into China over the past year or so following China’s decision to scrap caps on the share of domestic financial operations that foreigners could hold, while awarding new business licenses for financial ventures in the domestic market.
“There isn’t a good level playing field in China in utilities, internet, entertainment and telecoms because they are all being protected by the state,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital. “[But] foreign investors find China very attractive in the financial sector.”
Julian Evans-Pritchard, senior China economist at Capital Economics, said a Biden presidency could lead to economic strains on new fronts if his administration puts greater emphasis on human rights and structural issues, including intellectual property and industrial policy, where China would be much less willing to give up ground.
China’s authoritarian government’s realisation of economic growth through state-planning agencies under the centralised and unified leadership of the Chinese Communist Party comes in stark contrast with last week’s US democratic elections that highlight a political system based on individual civilian liberties.
“The argument made is that differences over human rights and politics should not be allowed to derail economic relations with China, as economic integration would in time lead to political liberalisation,” Evans-Pritchard said. “[But] that hope has died as Xi Jinping has consolidated his power. If President Biden takes a harder line on other issues, that will make economic strains harder to resolve.”
Louis Kuijs, head of Asia economics at Oxford Economics, said US foreign policy is likely to be more multilateral under Biden, which could increase the likelihood of a “common front” being formed among developed countries pushing for changes in the role of state-owned enterprises and industrial policy in China, as well as the realisation of a more level playing field for foreign firms and better protection of intellectual property.
“There are significant concerns in other developed countries about these issues,” Kuijs said. “The absence of a common position among developed countries in recent years is largely because of the current US government’s inclination to go it alone. A more multilaterally minded US government would thus make such a common position on China much more likely.”
International investors continue to characterise China as an emerging market, so there is still a lot of work to do before they become comfortable with buying Chinese [assets]
Terry Zhang, Pengyuan International
Terry Zhang, the head of global strategy and business management at Chinese credit rating agency Pengyuan International, said the reluctance of international investors to buy yuan-denominated corporate bonds highlights the riskiness of Chinese financial markets, despite their high investment returns.
The main challenge comes from the extent to which Chinese regulators, companies and investors are willing to accept a more developed financial market that aligns with international standards regarding corporate information disclosure and regulatory predictability, Zhang said.
As more international capital enters the mainland domestic markets, however, market demand will increase with the adoption of global standards, and the Chinese markets will evolve more quickly, Zhang said.
“Interest in China is definitely there,” Zhang said. “But for the moment, international investors continue to characterise China as an emerging market, so there is still a lot of work to do before they become comfortable with buying Chinese [assets].”
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