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Recap: China’s Financial Opening: The New Horizon for Global Companies, 5.5.21

Recap: China’s Financial Opening: The New Horizon for Global Companies, 5.5.21

On May 5, China Institute hosted an important conversation with Andrew Collier, founder of Orient Capital Research, and Li-Gang Liu, Chief China Economist at Citi Group on the new opportunities and challenges for foreign ownership in China since the country’s reopening after the pandemic.

Speaker Bios:

Andrew Collier (AC) is Managing Director and Founder of Orient Capital Research, based in Hong Kong. Collier is the former President of the Bank of China International USA, where he helped to launch BOCI’s U.S. office. Earlier in his career, he was an equity analyst with Bear Stearns and CLSA in Hong Kong, and a journalist covering business for the South China Morning Post in Beijing. He has a Master’s Degree in International Relations and Chinese Studies from Yale University and studied Chinese at Peking University. He also is a Senior Fellow at the Mansfield Foundation in Washington. Mr. Collier is currently based in Hong Kong.

Li-Gang Liu (LL) is Managing Director and Chief China Economist, Citigroup, based in Hong Kong. Liu has had more than two decades of professional experiences working in both public and private financial institutions. He was Chief Economist for greater China, ANZ Bank in Hong Kong for more than six years. Prior to ANZ, he held various research and senior research roles, among others, at the Hong Kong Monetary Authority, the Asian Development Bank Institute in Tokyo, and the World Bank and Peterson Institute for International Economics, both in Washington D.C. Liu focuses extensively on China’s economy, with in-depth analyses on China’s local government finances and financial vehicles, shadow banking sector, interest rate and financial liberalization.

Moderator’s Bio:

Dinda Elliott (DE) is Senior Vice President of Programs at China Institute.

Full Video of China’s Financial Opening:

Selected Program Quotes:

On the importance of foreign financial participation

LL: If you look at how emerging market economies develop their financial systems, foreign participation is often a critical part, given that foreign financial institutions have better risk management skills. They have more products and even bring in more technology to make transactions faster. With more foreign participation, we will see more competition within China’s financial system. It’s the hope that financial institutions will learn quickly. We have seen it already. Even with limited presence of foreign financial firms in China, Chinese companies are learning quickly by providing more products to Chinese households. Their risk management skills and corporate governance are improving as well.

How much will China open?

AC: The problem is that ultimately there is a limit to how much China is willing to give up control over financial system. They are taking the playbook from [former Premier] Zhu Rongji and the WTO, which is to use foreign presence to try to modernize certain aspects of plumbing of the financial system within China, but they don’t actually want to hand over the plumbing itself…So a lot of the entry currently and what’s going on in the future is going to be what I called fast money, which is essentially the investment banking business.

There are two kinds. There is foreign entry into equities and into the bond market, where there is no actual control handover that point. You simply own the security, and in fact there is a huge dodgy element to that in terms of access to the underlying assets those securities are based on through these Keepwell Deeds [complicated credit protection tools often used by Chinese companies issuing debt offshore] and VIE structures [in which investors have contract agreements, instead of direct equity ownership] and so forth. And the second aspect is the banks that are rushing in to do one-off transactions like IPOs, like bond deals. So they make a quick buck, they turn it over, and they move on. If there is a problem, they don’t have a lot of capital tied up. They don’t have a lot of infrastructure and they can simply withdraw.

I think China is quite happy to see this money come in, because it’s additional capital and tends to be smart money…I do think the amount of actual impact on the domestic financial system in China is going to be limited.

On the performance of Chinese regulations

LL: I think overall they have done a reasonably good job. China did not have a major financial hiccup even during the last global financial crisis…The issue with Huarong is that this big Asset Management Companies didn’t issue the financial report on time, along with the chairman being taken away and sentenced to death. That really spooked investors…China has been experimenting with increased SOE default over the years. SOE default is no longer something we have never seen. We have seen more lately.

Could Zhu Rongji’s WTO-entry reforms be a model for reform today?

AC: China was able to do that because Zhu Rongji was in a very powerful position. He was able to force the banks to modernize, and get them listed, and he also reformed the state sector more significantly than has occurred since. As a result of that, foreign firms probably gained the most market share than they will ever have for the next several decades…

I would argue that Xi Jingping lacks the power to do that now. Even though he is considered as the most powerful leader since Mao. He is less powerful in many ways compared to what we saw in the Zhu Rongji era. Xi’s ability to make decisions about reform are much more restricted. That’s why [we] have talked a lot about this dancing around the state ownership issue because they can’t really touch a lot of these things. Like local government debt, because if they did, a lot of places would collapse. So the reform is happening and it’s quite significant that they’ve had this growth. And the PBOC really knows what it’s doing and they’ve tried to tamp down the fires of contagion and shadow banking and interbank lending and so forth. But there is a limit to what they can do given the imperatives of the system right now.

The future of China’s financial sector reform

LL: Financial sector reform is quite a complex process. Unlike the real economy in which you can open up, you can bring in stable FDI, and you can operate a factory. In the financial sector reform, you need to look at whether your financial institutions are ready, whether your regulatory capacity is there, whether you have the right legal system, credit rating and all sets of soft infrastructure. This will take time. I think perhaps China’s delay in opening its financial sector for foreign participation is based on these considerations. But from now onward we think that conditions are quite ripe for faster liberalization in China’s financial system.

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