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Don't Bank on China
As dates go, December 11 is supposed to be a big one for foreign banks in China. That's when Beijing throws open its financial markets fully to foreign competition. And if you believe that, we have a Great Wall to sell you.
It's been five years since China acceded to the World Trade Organization and embarked on step-by-step financial-sector liberalization. The process mostly has gone smoothly. Foreigners set up shop and surveyed the scene. Wall Street's finest paid huge sums to buy minority stakes in effectively bankrupt Chinese partners for their vast branch networks, licenses and political heft. Credit card companies built credit histories and issued cards. Retail banks started doing foreign currency business with Chinese consumers and local currency business in yuan with Chinese companies. Asset management companies have been more circumspect, limiting their investments.
All this was done with an eye on December 11, 2006, when Beijing is supposed to let foreign banks have access to the holy grail: Chinese consumers. But it's worth reading the WTO documentation's fine print to understand what, exactly, Beijing has committed to do. Within five years after accession -- in other words, next month -- "all geographic restrictions will be removed," and "foreign financial institutions will be permitted to provide services to all Chinese clients," the agreement reads.
Note that the language refers to "foreign" financial firms, but doesn't say anything about how China regulates its domestic financial players. So Beijing may very well throw open the doors to foreigners on December 11, promise to put them on an equal footing with their Chinese peers, and then issue national regulations that would favor big, domestic, state-owned banks. This bit of chicanery is called "national treatment" policy.
Behold: Last week, the State Council -- China's highest executive body -- issued its 11th five-year plan for foreign investment. The new rules haven't been publicly circulated. But we're told that the intent is to make foreign banks subject to the same regulations as Chinese banks. But -- surprise, surprise -- domestic banks may now have higher capitalization requirements, a move that would heavily favor the big four Chinese state lenders which, right now, are the only ones allowed to accept yuan-denominated deposits.
In another possible end run around the rules, foreigners may also be required to incorporate their subsidiaries, just like the locals. That may sound innocent. But foreign banks' branches already have had to meet certain requirements to be eligible for the local currency business; namely, to be in operation for three years, and profitable for two of them. If foreign banks have to make branches local subsidiaries, will the clock start over?
Beijing, we're told, might relax those operating rules if foreigners want to venture into the poorer regions in the west, where infrastructure and business are scarce. So much for equal treatment of local versus foreign banks.
Last Thursday, Xinhua news agency, the Communist Party's mouthpiece, reaffirmed that China will fulfill its WTO duties by opening up its "banking, insurance, securities and telecommunications sectors to foreign investment in a positive and prudent manner." But again, note the wording. "Prudent" may be a nod to WTO protections for "prudential regulation." Contained in an annex on the General Agreement on Trade in Services, the provision gives domestic regulators wide latitude to protect depositors, policyholders, and the sanctity of the financial system as a whole.
For other regulators around the world, this loophole won't be worth a second glance. But China isn't any other country. The Party, whose rule rests heavily on the extension of credit and favors, has no incentive to give up control of those levers. So while earnest reformers at the central bank and the securities regulator are pushing for more open markets, the State Council -- China's highest executive body -- is pushing back hard. Citing "prudential regulation" concerns could be a way to satisfy the letter, if not the spirit, of the WTO. Call it commitment, Chinese-style.
There's already a protectionist wind blowing. Private equity firm Carlyle tried to buyout a local construction company, and saw its stake reduced to 50%, rather than 85%. Citigroup's bid to buy a majority stake in a bankrupt southern lender has also fizzled. New merger and acquisition laws give Beijing power to block deals, if it's in the "national interest." Various licensing procedures for financial services areas are opaque and fee structures unclear. The brokerage industry -- another big money maker for banks -- has been shuttered to foreign investment entirely.
The Party understands that it has to reform its financial sector to keep the economy rolling and its political power intact. But capitalism, where individuals have leverage, is fundamentally incompatible with a one-party state. Next month, China will likely abide by the letter of its WTO commitments. But the joke could be on the foreigners.
From: Wall Street Journal
Date: November 15, 2006 Back