TheEconomistSeptember 5th 2020 611I
f you wanta 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-
mist 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 flowthrough 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. hsbcacquired 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 msciadd 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 gdpover 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 moreFinancial coupling in ChinaPresent tense, future market
SHANGHAI
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