The Phase I Trade Deal and FDI, Part I-Financial Services

Previously, I expressed mild skepticism and then later guarded optimism about China’s financial sector opening. The recent United States-China Phase One trade deal suggests the situation may be even better than originally thought with one entire chapter of the agreement speaking to the sector’s opening. Specifically, Chapter 4 makes it easier for US banks to meet the licensing requirements for providing securities investment fund custody services and underwriting non-financial debt instruments. In addition, it opens the door to more American credit rating services providing full credit services and having majority ownership of joint ventures. Furthermore, it commits China to accept the application of American electronic payment service providers like Visa and to rapidly process those applications. Beyond this, China has to remove equity caps on American health, life, and pension insurance companies so such companies can have wholly owned foreign enterprises in China, eliminate "any business scope limitations, discriminatory regulatory processes and requirements, and overly burdensome licensing and operating requirements," and remove some onerous qualification requirements for business establishment. Chapter 4 also contains good news for American securities, fund management, and futures firms regarding business scope flexibilities, equity cap restrictions, and investment products. Getting past the border, having your own "storefront," and fully stocked shelves constitute signs of progress. However, they do not guarantee success. One reason, as many have noted, is that American firms will face well-ensconced Chinese competitors. Another is China’s capital controls and information security requirements. Beyond this, Chapter 4’s liberalizing language does not apply to all sectors while other Chapter 4 provisions are vague. Ultimately, the agreement per se will not decide the degree of financial sector opening, but rather if China feels compliance will serve its objectives at an acceptable cost, if alternative mechanisms exist for fulfilling its needs, and if non-compliance produces painful penalties.