January 16, 2020 / 5:18 AM / 12 days ago

Breakingviews - China’s reform camp high-fives Wall Street

Chinese Vice Premier Liu He reaches out to U.S. President Donald Trump as he approaches the podium to speak during a signing ceremony for "phase one" of the U.S.-China trade agreement in the East Room of the White House in Washington, U.S., January 15, 2020. REUTERS/Kevin Lamarque

HONG KONG (Reuters Breakingviews) - China’s reform camp is toasting Wall Street’s trade war win. Beijing has further committed to open its financial sector as part of the so-called phase one of a U.S.-China trade deal signed on Wednesday. The promise to import an additional $38 billion in U.S. services by 2021 follows other liberalisations in the sector, and will mean Chinese institutions could soon face serious American competition. That could benefit both sides.

Scepticism abounds. China has dragged its feet to meet commitments made when it joined the World Trade Organisation in 2001, in particular on promises to let companies like Visa and Morgan Stanley compete on level playing fields with domestic rivals. As it procrastinated, the People’s Republic built up state-backed giants including the Industrial and Commercial Bank of China, the world’s largest bank with $4 trillion in assets, and UnionPay, which has a near-monopoly in payment systems and credit cards at home and competes with Mastercard and Visa abroad.

It may look like China is luring Wall Street firms into a market it thinks they cannot dent. Not necessarily. While mainland banks and brokerages have become notable for their size, they are also parochial and inexperienced. Few have ventured far into overseas markets, and they largely sat out China’s last overseas acquisition spree. The exception that proved the rule was Citic Securities’ troubled $1.3 billion acquisition of brokerage CLSA in 2013.

Many Chinese banks excel at conservative lending that keeps inefficient industrial dinosaurs afloat – a de-facto subsidy that fuelled trade-distorting overcapacity. Others focused on funding speculators who inflated asset bubbles from real estate to egg futures. As regulators work to reduce systemic risk and guide capital to more productive private companies, neither skill is in high demand any more. American institutions, freed to create online banks, control joint ventures, rate debt and equity and so on in China, may be more competitive than they think.

Economic liberals like chief trade negotiator Liu He and top banking official Guo Shuqing have long wanted to use foreign competition as sticks to beat the financial system into an efficient, less risky, model. Now, at long last, they may get it. Whatever happens with the rest of the trade deal, that’s something to celebrate.

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