Traders at the New York Stock Exchange watch President Donald Trump’s televised White House news conference on March 18. New US regulations may force several Chinese firms to delist from the American exchanges, resulting in these companies turning to Hong Kong and Shanghai to raise capital, in listings underwritten by US investment banks. Photo: AP
Peter McGill
Peter McGill

US-China decoupling? Wall Street missed the memo

  • Very few steps have been taken by the Trump administration to decouple American financial services from China
  • Technology and financial services are twin pillars of American business supremacy, so why has battle raged fiercely with China over one, but not the other?
Hardly a day goes by without the United States warning of some threat posed by China that justifies economic sanctions. Amid all the smoke from this “ new cold war”, scant attention has been paid to what is actually happening on the ground in finance.
Here, American banks, insurance companies and asset managers have lost none of their appetite for making money in China and have met with remarkably little deterrence from US President Donald Trump’s administration. Far from decoupling from China, Wall Street seems more intent on tightening the knot.
Foreign financial investment in China is booming. A combination of China’s strong economic rebound from the Covid-19 pandemic, successive openings of its capital markets, and rock-bottom interest rates in the West is drawing billions of US dollars into Chinese bonds and stocks.

China’s 10-year government bond yields 3.21 per cent, four times the 0.77 per cent yield of the 10-year US Treasury. Flows into China’s onshore bond market have pushed foreign holdings from 2.1 trillion yuan (US$304 billion) at the start of the year to 2.8 trillion yuan at the end of August.

Net equity inflows also increased rapidly to more than 1 trillion yuan. Next year, Chinese government debt will be included in the FTSE Russell, one of the world’s main bond indices, and this is expected to add another US$140 billion to inflows.
After many years of lobbying Beijing, leading US investment banks – Goldman Sachs, Morgan Stanley, JP Morgan – have been allowed majority control of Chinese joint ventures.
In further signs of favour, Goldman has received the green light to buy out its mainland securities partner, while Citigroup has become the first US bank to receive a fund custody licence, allowing it to hold securities for fund managers in China.

Meanwhile, US giants BlackRock, the world’s largest asset manager, and Vanguard, the world’s largest provider of mutual funds, have been granted access to China’s gargantuan asset fund market.

UBS forecasts that mainland China fund assets will quadruple from about US$4 trillion in 2019 to US$16 trillion by 2030, by which time the fee pool for those who manage the funds will have increased fivefold to US$120 billion a year, and foreign firms will have taken a third of the market.

As the savings of middle-class Chinese steadily mount, Chinese authorities are keen to develop the country’s pension and insurance markets, and American asset managers are among those only too eager to help.

Very few steps have been taken by the Trump administration to decouple American financial services from China. Only the Federal Retirement Thrift Investment Board has been asked to halt its planned investment.
The “Equitable Act”, which would force overseas companies to delist from US exchanges if they do not comply with audit requirements, has had the perverse effect of strengthening China’s equity markets.
“Homecoming” initial public offerings and secondary share issues by Chinese-based companies have proved a massive shot in the arm to the Hong Kong, Shanghai and Shenzhen exchanges. In the third quarter of this year, the three exchanges together raised US$72.1 billion from IPOs, a third more than the total for the Nasdaq and New York Stock Exchange.

Hong Kong iBonds, China bonds offer a haven for those seeking yields

Some of China’s largest companies are opting to float or offer new shares at home. This includes Ant Group’s looming US$35 billion Hong Kong and Shanghai IPO, which it is hoped will yield a market valuation of US$250 billion, greater than many global banks.

American investment banks have benefited handsomely from this “homecoming” bonanza. Morgan Stanley has enjoyed its biggest share of equity offerings in Hong Kong since 1999, thanks to record share sales by Chinese health care and biotech companies.

Three of the four “bookrunners” or primary underwriters for the Ant IPO are also American – Citigroup, JPMorgan and Morgan Stanley.

Employees work at the Shanghai office of Alipay, owned by Ant Group, on September 14. Ant Group, an affiliate of Chinese e-commerce giant Alibaba, which also owns the Post, is expected to raise US$35 trillion in a dual listing in Hong Kong and Shanghai. Photo: Reuters

The sanctuary granted to US financial services in the new cold war is evident in the relative dearth of China-bashing rhetoric from US Treasury Steven Mnuchin and a parallel restraint shown by Beijing in criticising Wall Street.

Instead, it has been hapless HSBC that has borne most of the political lashing, from China for allegedly abetting US persecution of Huawei, and from US Secretary of State Mike Pompeo for supposedly accommodating China in its crackdown on Hong Kong’s democracy movement.
While Pompeo was fuming at HSBC in August, not a whisper of rebuke came out of Washington at Vanguard’s announcement that it was quitting Hong Kong and setting up its Asian headquarters in Shanghai.

Such double standards have fuelled suspicion that US targeting of HSBC has as much to do with commercial competition – HSBC has by far the biggest China network of any foreign bank – as concerns over human rights.

Beijing’s attack on HSBC is a blow to Hongkongers

Technology and financial services are twin pillars of American business supremacy, so why has battle raged fiercely with China over one, but not the other?
The answer lies in the development of China’s economy. In technology, China’s lightning advances are challenging American dominance, whereas in finance, China still lags far behind Wall Street.

China not only needs access to Western capital, but to the more advanced skills of Western financiers if its own banks and investment houses are to learn and catch up. Until that day arrives, there are plenty of moneymaking opportunities in China for foreign financial institutions.

Peter McGill is a contributing editor for The Banker. He began his career in the Hong Kong government, and then spent two decades as a journalist in Japan, including as Tokyo-based correspondent of The Observer

This article appeared in the South China Morning Post print edition as: Wall St seems to have missed the message on decoupling