Beijing refuses to relax grip on yuan, financial services
Tom Miller in Xianghe
US companies allowed to list on mainland bourses
Beijing refused to bow to US pressure to loosen its grip on currency controls and open its financial services sector to greater foreign competition, but US companies will be allowed to list on stock markets under a series of commitments thrashed out during yesterday's economic talks.
The United States promised in return that mainland banks applying to set up US subsidiaries would be given the same treatment as domestic banks, while mainland lenders will be allowed to make portfolio investments in US stocks for the first time.
'China isn't ready to have a market-determined currency, but they are moving in that direction,' US Treasury Secretary Henry Paulson said at the close of the third strategic economic dialogue.
Although the yuan's annual pace of appreciation has accelerated from 3.4 per cent last year to 6.1 per cent this year, US officials believe that a much faster rise is needed to help trim the mainland's soaring trade surplus - to make its exports more expensive and cut the price of imports.
Mr Paulson pointed out that currency reform was not a panacea for solving the trade imbalance but said that it had become a proxy for Beijing's willingness to give market forces a greater role in the economy.
He said modest progress had been made in nibbling away at the barriers preventing US financial services firms from operating in the mainland, although no agreement had been reached to raise the equity cap limiting foreign banks' stakes in domestic lenders to 20 per cent.
'Both the banking and the securities regulators have said they will open up the market over time, but we wish they would raise the equity caps now,' said David McCormick, under secretary of the US Treasury for international affairs and a leading adviser to Mr Paulson.
US officials said the much criticised two-year moratorium on the licensing of new joint-venture securities companies had finally been lifted, although regulations detailing the form of new foreign-invested brokerages have yet to be released.
Morgan Stanley and Credit Suisse are said to be the first in line to join Goldman Sachs and UBS, the only foreign institutions with joint-venture securities companies.
Analysts said that Beijing had maintained its tight grip on the financial services industry and remained averse to allowing foreign competition into the market.
'These are diversionary tactics. If they said they would allow 100 per cent foreign ownership of brokerages, that would be a significant move,' said Fraser Howie, an expert on the mainland's stock markets and co-author of Privatising China.
Mainland negotiators were more pliable with regard to policies deemed genuinely 'mutually beneficial'. The move to foreign companies doing business in the mainland to issue yuan-denominated stocks and bonds will help shore up the quality of the mainland's capital markets and boost the nascent corporate bond market.
'There is clearly demand for any company doing business in China and investing in China to be able to finance yourself in renminbi,' Mr Paulson said.
Similarly, letting mutual funds managed by mainland banks invest in US stocks will be welcomed by fund managers in New York waiting for the so-called 'Great Wall of Chinese liquidity' to hit US shores, but it is also another move by Beijing to loosen the nation's capital account and drain excess liquidity from the domestic economy.
'The US capital market is huge, so in terms of real impact Chinese investment may not be that significant. But it's an important first step,' said Qu Hongbin, chief China economist at HSBC.
Cutting a deal
China and the United States made a number of agreements at the third strategic economic dialogue. They included:
1 China pledged to allow foreign-invested companies to issue yuan-denominated stocks and bonds.
2 The investment quota for foreign institutional investors in China was raised to US$30 billion from US$10 billion.
3 Beijing has agreed to tighter supervision of manufacturers of food and drug products following a spate of product safety scares in recent months.
4 The two sides will embark on a 10-year period of intensive co-operation on energy and the environment.
5 China and the US pledged greater co-operation on developing biofuels, low-sulfur fuels and other low-pollution fuel sources. The two sides also agreed to strengthen co-operation on the construction and management of strategic oil stocks.
6 Co-operation on combating illegal logging of timber worldwide to help protect forests and aid the fight against climate change, as trees help to absorb harmful carbon dioxide emissions.
7 Both sides signed a memorandum to expand collaboration on the exchange of information on regulations for alcohol and tobacco products.