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.
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.
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.
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.
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.
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.
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.
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