62 Finance & economics The EconomistSeptember 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, ison 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 ceoin 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 firmsbuilding 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 swiftreplacements 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.^7Coldish war, hottish market
Foreign holdings of domestic Chinese assets
Yuan trnSource:Wind12.52.01.51.00.50
2019181716152014EquitiesBondsPeaceofferings
US-listedChineseIPOs*Source:Dealogic*Primarylistingsonly
†ToAugust31st2504030201001086420
20†191817162015Number Value, $bn