How bad could it get? America’s ugly election

Present tense, future market

S H A N G H A I

As America tries to cut links, China is opening its door to foreign capital

Finance & economics

63 The Fed’s softer target

63 Indian finance in the dock

64 Wall Street’s political donors

64 World Bank business rankings

65 Buttonwood: Private equity

66 Free exchange: Abenomics

Also in this section

---

62

Finance & economics

The Economist

September 5th 2020

2

funding by issuing bonds and stocks, to

lessen reliance on bank lending.

China’s regulatory relaxation dovetails

with the second factor: the interests of for-

eign financial firms. The Chinese market is

simply too big to ignore. The investable

wealth of retail clients is projected to grow

from about $24trn in 2018 to $41trn by 2023,

according to Oliver Wyman, a consultancy.

And few sophisticated, globally minded as-

set managers operate in China today.

Foreign institutions know better by

now than to assume that the economy’s

scale will directly translate into business

for them. In the early 2000s China began

opening its commercial-banking industry

to foreigners, but their share of the market,

always tiny, has shrunk over time, dipping

to just about 1% of domestic-banking as-

sets. They are bit players.

Yet foreigners may fare better in the sec-

tors newly open to them. No global bank

can compete for deposits against the likes

of Industrial and Commercial Bank of Chi-

na, which boasts some 15,700 branches.

Success in investment banking and asset

management, however, is more related to

experience than to sheer heft. Can an ad-

viser help structure a cross-border acquisi-

tion? Can an asset manager offer the right

interest-rate swaps to hedge currency ex-

posure? “These are the areas where foreign

firms feel they have an advantage,” says

Mark Austen, head of the Asia Securities In-

dustry and Financial Markets Association,

a group that represents many of the world’s

biggest financial institutions.

Not that China is going to make it easy. A

taste of the potential complications came

in the approval granted to BlackRock for a

fund-management company. Unlike prior

approvals for Chinese-owned entities, the

regulator added a condition, demanding

adherence to the Internet Security Law.

BlackRock will need to store client data

within China and authorities could de-

mand access, likely forcing it to segregate

its Chinese and global systems.

Foreign firms will also face a ferocious

battle with domestic firms on a playing

field that is tilted against them. “They’ll

never just completely open and be fine

with us crushing the locals,” says one bank-

er. State-owned firms will reserve their

juiciest deals for domestic banks. The gov-

ernment is engineering mergers to create

what it calls an “aircraft-carrier” invest-

ment bank to repel foreigners. And global

asset managers will have little choice but to

distribute their products through domestic

banks and tech platforms. Chantal Grind-

erslev, founder of Majtildig, a Shanghai-

based advisory firm, sees a split between

foreign firms that commit capital to China

for the long haul and those that are less pa-

tient. “If you have to be profitable in three

years or less, this is not the market to en-

ter,” she says. JPMorgan Chase, she notes, is

on track to buy out the local partner in its

asset-management venture for $1bn, a 50%

premium over fair value. That is expensive,

but it also testifies to the weight that Jamie

Dimon, the banking colossus’s chief,

places on China. “He is looking to build a

real business,” she says.

The political tussle with America looms

over these corporate decisions. “Global

headquarters asked us to develop optimis-

tic, realistic and pessimistic scenarios,”

says the 

ceo

in China of an American bank.

“I laughed because there’s no point think-

ing of things getting better. It’s binary. Ei-

ther we can continue in China or we can’t.”

So far things have clearly remained on the

remain-in-China side of the equation.

America’s financial measures against Chi-

na have thrown some sand in the gears but

have not stopped them from turning.

The Trump administration has blocked

a federal-government pension plan from

investing in Chinese stocks. It has threat-

ened to delist Chinese firms from Ameri-

can stock exchanges. And it has placed

sanctions on Chinese officials in Hong

Kong and Xinjiang. All three moves are, in

the grand scheme, mild. The government

pension plan that now excludes Chinese

stocks represents just 3% of American pen-

sion assets. China has until 2022 to stave

off the threatened delistings, and has al-

ready proposed a compromise, giving

American auditors more access to its com-

panies’ books. In the meantime, the value

of Chinese listings on Wall Street has risen

this year (see chart 2). As for the sanctions,

they can be painful for individuals, but

would have harmed China much more if

they had named entire banks.

It is only prudent for firms to prepare

for America to take a tougher line against

China. But the implications in the financial

sector are different from, say, the industri-

al sector. Factories require a large fixed in-

vestment and carefully configured supply

chains. Investments in bonds or equities

are, by contrast, much easier to adjust—at

least so long as China lets investors move

cash out of its markets. Even for firms

building up brokerages or asset-manage-

ment operations in China, the investments

are small compared with their global foot-

prints. The Chinese securities firm con-

trolled by 

ubs

, for instance, held just 5bn

yuan ($730m) in assets at the end of 2019—

bigger than any other foreign-owned secu-

rities firm in China but barely 0.2% of 

ubs

’s

global investment-banking assets.

The one American action that could al-

most instantaneously derail financial cou-

pling would be to block China from the dol-

lar-payments system. The administration

could do so by pressuring 

swift

, a Bel-

gium-based messaging system that under-

pins most cross-border transfers, to boot

out Chinese members. Or it could order the

big banks which clear dollar payments in

America to stop serving Chinese banks.

Chinese officials, alarmed by these

once-unthinkable possibilities, have held

meetings in recent months to discuss how

they might respond. They have talked

about promoting the yuan as an alternative

to the dollar and home-grown payment

networks as alternatives to 

swift

. In prac-

tice, neither would help much. The yuan,

constrained by capital controls, remains a

weakling in global finance, while China’s

would-be 

swift

replacements have failed

to gain traction.

The biggest constraint on America is the

damage that it would suffer itself. Cutting

China off from the dollar would undermine

not just Chinese banks but also China-

based companies that account for more

than a tenth of the world’s exports. This

would trigger a collapse in international

trade, massively disrupt supply chains

and, quite possibly, deepen the global re-

cession. The fact that American policymak-

ers must contemplate such consequences

is an argument in favour of China’s linking

strategy. “The only option is more open-

ness,” says Larry Hu, head of China eco-

nomics at Macquarie Group in Hong Kong.

“You must create a situation where your

counterpart has more to lose.” For foreign

financiers in China, that, oddly enough, is

music to their ears.

7