How bad could it get? America’s ugly election

The wealth of nations

Source: Maddison Project Database

GDP per person, $’000, 2011 prices

China

Britain

0

10

20

30

40

1500

50

1600

50

1700

50

1800

50

1900

50

2016

France

India

---

The Economist

September 5th 2020

61

1

I

f you want

a sure-fire way to get reject-

ed, try asking Western financial firms for

interviews about how geopolitical ten-

sions have affected their strategies in Chi-

na. “This topic carries some sensitivities,”

one bank demurs. “We don’t want to end up

in a Trump tweet,” says another. 

The Econo-

mis

t sought interviews with 15 global

banks, insurers and asset managers. All de-

clined to speak—except on background.

Such bashfulness from the swaggering

titans of finance is revealing in itself. They

are on unfamiliar ground. For years the

American government called on China to

open up to foreign capital, while China

dragged its feet. Suddenly, these roles have

been reversed. President Donald Trump’s

administration wants global financiers to

pull back from China. But China is enticing

them in, creating opportunities that few

had expected to come so quickly, if ever.

It has made for a disconnect between

the political and the financial realms.

Many observers focus on the decoupling

between America and China. Yet for those

managing the trillions of dollars that flow

through global markets every day, the main

trend looks more like coupling. Consider

these moves by investment and commer-

cial banks in the past half-year alone. Gold-

man Sachs and Morgan Stanley took major-

ity control of their Chinese securities

ventures. 

hsbc

acquired full control of its

Chinese life-insurance venture. Citi re-

ceived a coveted custody license to serve

institutional investors in China. Among

asset managers, BlackRock received ap-

proval to sell its own mutual funds in Chi-

na and Vanguard decided to shift its Asian

headquarters to Shanghai.

Even more astonishing are the money

flows. Roughly $200bn has entered China’s

capital markets from abroad over the past

year. Foreign holdings of Chinese stocks

and bonds at the end of June were, respec-

tively, 50% and 28% higher than a year ear-

lier (see chart 1 on next page). Some of this

reflects an inevitable pull as global index

compilers such as 

msci

add Chinese assets

to their benchmarks; fund managers that

passively track these benchmarks must al-

locate cash in line with the new weight-

ings. But it is more than that. China has

made it much easier for foreigners to enter

its markets, and it offers two things that are

rare in the world at the moment: 

gdp

growth and interest rates higher than zero.

Despite talk of a new cold war, there are

two reasons to think that coupling, not de-

coupling, will remain the better descrip-

tion of Sino-American financial ties. The

first is China’s own actions. It is pursuing

what Yu Yongding, a prominent econo-

mist, has described as a “linking strategy”,

seeking to create more connections with

foreign companies. Since late 2019 the gov-

ernment has lifted foreign ownership caps

on asset managers, securities firms and life

insurers. It has belatedly allowed Master-

Card and PayPal to enter its payments in-

dustry. And it has let foreign ratings agen-

cies cover more Chinese firms.

Even without the linking strategy, Chi-

na has ample incentive to open its finan-

cial system more widely. Its current-ac-

count surplus has steadily narrowed as a

share of 

gdp

over the past decade (though it

will soar this year because of the covid-19

impact); that puts pressure on it to attract

more inflows through its capital account.

At the same time reformist officials want

greater foreign participation in the finan-

cial system. Zhou Xiaochuan, China’s for-

mer central-bank governor, has argued that

just as competition from abroad helped

make Chinese manufacturers world-class,

so it can elevate the finance industry. Regu-

lators also want companies to raise more 

Financial coupling in China