Trade pact may give U.S. banks more freedom to operate in China

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The framework of a trade deal between the U.S. and China appears to give large U.S. banks an entrée into the lucrative, yet heavily restricted, Chinese banking market. But industry experts are tempering expectations, saying there are no guarantees the tentative agreement reached Friday will go much beyond efforts the Chinese government has already undertaken to open up its markets to foreign competition.

China has long prohibited foreign banks and other finance companies from operating there unless they partnered with a Chinese company that owned a majority stake in the venture.

But in an effort to introduce more competition, meet its swelling wealth management needs, and attract bigger sources of capital to help offset its trade imbalances, the Chinese government began lifting some of these limitations two years ago. JPMorgan Chase, for instance, applied to the Chinese Securities Regulatory Commission in 2017 to control a 51% stake in a local securities firm.

In October, the agency released a timetable for removing more foreign ownership restrictions securities, insurance and fund management firms starting next year — a full year earlier than planned. JPMorgan has said it eventually plans to raise its stake in the Chinese securities firm to 100% as regulations require.

“We’re all-in,” Dimon said in an interview with Bloomberg in March about the bank’s plans in China. “We’re not slowing down.”

The Treasury Department circulated a summary of “Phase One” of the agreement with China on Friday. In addition to sections involving agriculture and intellectual property, the agreement “addresses a number of longstanding trade and investment barriers to U.S. providers of a wide range of financial services, including banking, insurance, securities, and credit rating services, among others.”

“These barriers include foreign equity limitations and discriminatory regulatory requirements,” according to the Treasury’s outline. “Removal of these barriers should allow U.S. financial service providers to compete on a more level playing field and expand their … export offerings in the Chinese market.”

An industry representative who has been closely following the discussions with China said that while financial firms are pleased that they have a seat at the table, the preliminary language “didn’t give is a lot of color or clarity in terms of where this will get us.”

The hope, he said, is that the pact will eventually include stronger language that would hold China accountable if it fails to follow through on the pledge to open up its financial markets.

Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles and the former CEO of Hanmi Financial in Los Angeles, is skeptical that the deal will ultimately open up more of the Chinese market to foreign banks.

“There are too many administrative and regulatory hurdles for foreign banks to jump over. One of the objectives of the trade war with China was to get a ‘good deal’ which would dismantle non-tariff barriers in China,” Sohn said in an email. “It is unlikely that the U.S. has gotten a ‘good deal’ in financial services.”

Others are skeptical that a trade pact will do much to boost economic growth, particularly if the two sides are unable to negotiate a broader deal down the road.

“We think the agreement is mostly a time out from what will be a decades-long economic battle between the U.S. and China,” analysts at Keefe, Bruyette & Woods wrote in a research note to clients Monday. “The rhetoric may cool down between now and the 2020 elections in the U.S. but we remain skeptical of China's commitment to the deal and whether the deal accomplished as much as advertised last week.”

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Trade agreements Tariffs Wealth management Jamie Dimon JPMorgan Chase J.P. Morgan Securities