Beijing’s track record for liberalizing its financial markets is worse today than it was 18 months ago
By Ker Gibbs
This Op-Ed piece was first published in the Wall Street Journal on July 4th and written by AmCham Shanghai Chairman Ker Gibbs.
The meeting of G-20 trade ministers in Shanghai beginning Saturday is a good opportunity to examine the efforts China has made toward liberalizing its financial markets and opening them to foreign participation. By any measure, progress is poor. But certain regulatory behavior over the past 18 months points to something worse: The country is backpedalling.
Fifteen years after China joined the World Trade Organization, it remains difficult for foreign banks to grow in China. Foreign securities companies very rarely get a majority stake in joint ventures, and foreign-bank securities joint ventures still aren’t permitted to underwrite and trade stock. Western banks are prohibited from buying a majority stake in local banks. Regulations are unnecessarily onerous.
International banks in Shanghai receive hundreds of regulatory changes each year. Foreign banks that have subsidiaries in China are held to the same strict norms of local banks, but are unable to take into account the capital of their parents.
So despite some positive moves in recent years, including the dropping of the three-year requirement for yuan business, the regulatory burden remains a barrier to entry and a tool that protects inefficient local operators.
Window guidance practices are a nightmare. These unofficial, undocumented regulatory requirements arrive through a multitude of channels, not always formal. They inexplicably target particular institutions, are rarely issued with an expiration date, and banks are regularly told that they cannot share the information. The costs of compliance seem designed to curtail the ambitions of foreign financial institutions.
After the Shanghai stock-market debacle of 2015, capital controls have also tightened so that profits are trapped in China instead of legitimately returning to the U.S. and elsewhere.
And just in recent weeks, the insurance-industry regulator has insisted that foreign insurance companies must use “secure and controllable” hardware systems if they wish to conduct business in China. This means that foreign insurance companies not only face the possibility of giving regulators access to all their operational know-how, but they must purchase their computer hardware systems from domestic IT manufacturers. Either that, or they cannot do business in China.
The demand mirrors earlier banking legislation enacted by the China Banking and Regulatory Commission, now temporarily on hold following public outcry. But Chinese banks are already behaving in ways that suggest that law will resurface, buying domestic technology rather than the superior hardware systems of foreign manufacturers.
In March 2009, China’s State Council announced that by 2020, Shanghai would become one of the world’s global financial centers. But the qualities fundamental to such status—a predictable regulatory environment, free flow of information, rule of law and transparency—are irrefutably absent.
In the most recent Z/Yen Group’s Global Financial Centres Index 19, published in March, Shanghai finished 16th. That was up from last year, but a long way down from the top 10, where Shanghai was ranked for the first time in June 2010.
It’s easy to see why. China’s stock-market regulators are in the habit of intermittently closing the stock market, most recently last year, and offer no guarantee that they won’t do so again. Bloomberg, Reuters, the Economist and this newspaper remain blocked by the Great Firewall. Western ratings agencies are forced into joint ventures, leaving the proper pricing of bonds and other financial instruments open to political meddling.
For Shanghai to achieve financial-market status on par with London and New York, it must internationalize its market. That includes opening its capital account and having a currency that is freely convertible. It means creating a regulatory environment that allows the raising of dollars, yen or other leading foreign currencies. And it means adopting immutable principles of openness and transparency.
A good place to start would be by treating foreign banks and other financial institutions as equals of China’s own. Otherwise, Shanghai will continue to be what it is now: just a Chinese financial center.
Mr. Gibbs is the chairman of the American Chamber of Commerce in Shanghai.