China must reform financial markets to ward off US financial sanctions, think tank urges
Frank Tangfrank.tang@scmp.com
5 min read
China should make its own financial markets big enough and open enough to foil any attempt by the United States to decouple financially, according to a semi-official Chinese research group.
The tactics suggested in a report released on Sunday by the China Finance 40 Forum (CF40), a think tank comprising senior Chinese regulatory officials and financial experts, comes amid worries that the United States will expand the conflict between the world's two largest economies beyond the trade war and efforts to restrain China's technological development in the name of national security.
"[We] must firmly oppose and properly handle the United States' long-arm jurisdiction [of applying US law outside its borders] and financial sanctions, and in the meantime make contingency plans against extreme conditions," according to a report excerpt released on the group's social media account.
The Beijing-based organisation has links with Wall Street banks and American think tanks, and it has served as an important platform for dialogue about ongoing trade tensions. For instance, its delegation paid visits in November to the Office of the US Trade Representative and the US Department of Commerce in Washington after bilateral trade talks stalled, and tried to rally American support for an online seminar with the Peterson Institute for International Economics in April.
The just-released report highlights the latest efforts by Beijing to keep bilateral relations from deteriorating further in the run-up to the US presidential election on November 3.
Concerns about possible financial sanctions have mounted since President Donald Trump used the recently signed Hong Kong Autonomy Act to sanction 11 Hong Kong and mainland officials, opening the door for possible sanctions against financial institutions that continue to do business with those officials.
In addition, Trump continued to sharply criticise China at last week's Republican National Convention, suggesting further sanctions could be announced ahead of the election.
But the Chinese government is widely believed to have only limited options if the Trump administration were to use the "nuclear option" of restricting access to the US financial system and the US dollar payments system.
The CF40 report, like other recently released studies, suggested a cooperative approach to manage bilateral differences, trying to appeal to US investors using China's growth prospects while addressing some of the concerns of US regulators.
"We'll use higher-level financial opening up to counter the increasingly complicated international environment, and strive for mutual benefits ... We also need to strengthen financial regulatory capability, international cooperation and coordination," the report said.
This year's research was led by some heavyweight officials and researchers, including Xiao Gang, former chairman of the China Securities Regulatory Commission; Cai Fang, vice-president of the Chinese Academy of Social Sciences, who gave President Xi Jinping advice last week on the nation's next five-year plan; and Wang Xin, head of the People's Bank of China's research bureau.
Xiao, who stepped down from the top securities regulatory position after the 2015 stock rout, warned that the rising bilateral rivalry could erode existing financial connections.
"Our financial institutions could face long-arm jurisdiction and even economic sanctions. Some executives could also be sanctioned," he warned at Sunday's media briefing.
In addition, there could be stricter scrutiny of Chinese investments in the US and a possible delisting of US-listed Chinese companies with new regulatory requirements.
"These could happen or are happening," Xiao said. "Under the current situation, we should not only keep fighting, but also make good preparations by developing our own financial markets. Building a super-large financial market can lower the possibility of financial decoupling."
Foreign investors currently hold less than 5 per cent of the A-share market capitalisation on Chinese stock exchanges, less than 4 per cent of the domestic bond market, and less than 2 per cent of the banking sector. However, Wall Street financial institutions have started to penetrate the world's second-largest stock and bond market at an unprecedented pace amid Beijing's efforts to make them welcome.
While Morgan Stanley and JP Morgan were allowed to take controlling stakes in their mainland ventures, American Express and MasterCard have, for the first time, been granted licences to process foreign card payments in yuan. In addition, US investment firm Vanguard, the second-largest asset manager in the world, is planning to move its Asian headquarters to Shanghai, while Blackrock has completed its registration for an onshore investment licence.
Lu Lei, deputy head of the State Administration of Foreign Exchange, said China's financial resilience amid the pandemic and massive global monetary easing had laid a foundation for more foreign participation, but deeper reforms of the country's financial infrastructure are needed to help facilitate their entry.
"Why is the [foreign] proportion [of Chinese securities ownership] not high? Is our infrastructure - such as the payments, settlement, regulation and legal system - suitable for a more international market? This is what we should consider," he said at the briefing.
