Banking Blowups, the US-China Trade War, and Implications for China’s Financial Sector Reform

In my March blog, I expressed skepticism about China’s financial sector reform due to Beijing’s myriad political and economic reasons for maintaining control of the banking, insurance, and securities sectors. Despite this and the fact we still need to see if many policies are implemented or implemented fully, there has been progress. Deals, albeit limited, have transpired, and China recently has moved to open up new financial services sub-sectors and to accelerate the opening of sectors it previously was opening. For example, Chinese agencies such as the People’s Bank of China and China Securities Regulatory Commission announced China would give space for foreign direct investment (FDI) in money management companies and establish or acquire stakes in pension fund firms. It also revealed China would eliminate ownership limits for securities, asset management, and other firm types by 2020, a year earlier than planned. All of this is good news for the optimists! Recent developments, though, suggest other reasons not to bank too much on comprehensive or rapid reform. First, stresses among smaller banks like Bank of Jinzhou and Baoshang Bank that have necessitated bailouts could raise government concerns about financial stability (the adage “where there’s smoke, there’s fire” may apply) as well as lead to more sectoral consolidation, with the latter yielding a competitive environment even more inhospitable to FDI. Second, the continuation and apparent escalation of the United States (US)-China trade war may intensify Chinese leaders’ concerns about economic growth, driving them to keep their grip over the financial sector as a mechanism for promoting growth and sectoral development initiatives. History indeed is no predictor of future results as financial firms like to say. Nevertheless, past drivers of China’s closed financial sector remain relevant and contemporary events suggest one cannot yet “insure” reform will progress to the degree optimists expect.