Is China Serious About Opening Its Economy to Foreign Competition?

October 15, 2019, 9:40 PM UTC

Last week’s truce in a U.S.-Chinese tariff war and Beijing’s promises to open more of its state-dominated economy are raising investor hopes. But Beijing is trying to temper expectations, while companies express frustration over the halting pace of China’s market-opening measures overall.

It’s a familiar script followed in other Chinese global business initiatives. Authorities announce dramatic but vague promises that raise hopes abroad. Six months to a year passes while foreign businesses wait to see regulations. Many are dismayed when they impose costly licensing requirements or curbs on the size of a business.

Foreign companies’ frustration has been building for 17 years since China joined the free-trading World Trade Organization. But China, the biggest global exporter, has been slow to open its markets in accordance with WTO rules.

The world’s most populous country is widely seen as having benefited most from being a member of the 164-country WTO, while violating its rules and spirit by blocking access to its own markets and subsidizing Chinese competitors.

“China’s opening-up process needs to move beyond piecemeal changes and instead embrace an absolute approach in which China goes from ‘increasingly open’ to ‘open’,” said Joerg Wuttke, the president of the European Union Chamber of Commerce in China.

Chinese leaders want foreign capital, skills, and competition for an economy where huge but inefficient state companies still control industries including oil and gas, telecoms, banking, insurance, and power generation.

Beijing wants more foreign involvement to help improve China’s finance industry, said Lester Ross, a lawyer in Beijing for the firm WilmerHale.

“There is a lot of attractiveness” for foreign banks, insurers, and other competitors in China’s fledgling market, he said.

Opening its own markets also gives Beijing leverage to ask the United States and other governments to let wholly Chinese-owned banks, insurance, and other companies into their markets, Ross said. “China is accelerating the pace of opening, but we still need to see those implementing regulations in place and how fast those are carried out,” he said.

U.S.-China trade war ceasefire skepticism

China’s historic sluggishness toward opening its markets might explain reaction in China to Friday’s U.S.-China trade war ceasefire.

The China Daily, an English-language newspaper aimed at foreign readers, warned Tuesday the two sides have yet to specify details in a signed agreement, after President Donald Trump suspended a planned tariff hike. In exchange, Trump said Beijing would buy up to $50 billion of American farm goods, a pledge China has yet to confirm.

Similar concerns have been expressed in the United States about the lack of specificity in the interim agreement, which Trump calls “phase one” of a larger pact to address knotty concerns at the root of the 15-month U.S.-China trade war.

“There is always the possibility that Washington may decide to cancel the deal if it thinks that doing so will better serve its interests,” said the Chinese newspaper. It called on the Trump administration to “avoid backpedaling.”

Business groups welcomed the truce as a possible step toward ending the costly trade war that’s rocked the world’s two largest economies and international commerce. However, they said the overture was a small gesture.

This is the second ceasefire the two countries have called in their protracted trade war. A truce was declared in June, only to be upended with tit-for-tat tariffs and recriminations. 

On Tuesday, a foreign ministry spokesman said Chinese importers this year have bought 20 million tons of soybeans and 700,000 tons of pork from the United States. He gave no details on when that happened.

China’s imports of U.S. soybeans fell by about half last year to 16.6 million tons from 2017’s 33 million tons.

“China will further speed up procurement of U.S. agricultural products,” said the spokesman, Geng Shuang.

Relaxing China’s foreign-ownership rules: A reality or more promises?

In other market-opening news, China has announced a timetable to carry out a 2017 promise to abolish limits on foreign ownership of some finance businesses. The phaseout starts Jan. 1 with futures trading firms. Securities firms and mutual fund managers follow later in the year.

Investors see this as a commitment to freer trade. Chinese officials say it has nothing to do with the trade war talks and isn’t a concession to Washington.

Over the past 18 months, President Xi Jinping’s government also has promised to allow full foreign ownership in banking, insurance, and auto manufacturing in hopes of making its slowing economy more competitive and productive.

None addresses U.S. complaints that plans for government-led creation of Chinese competitors in robotics and other industries violate Beijing’s market-opening commitments and are based on stealing or pressuring companies to hand over technology.

Foreign ownership of electric car producers in China

Last year, Beijing allowed full foreign ownership of electric car producers. Restrictions on commercial vehicle manufacturing end next year and for passenger vehicles in 2022.

That reflects confidence Chinese electric car brands including BYD Auto and BAIC, which are among the global industry’s biggest producers by vehicles sold, can compete with foreign rivals.

Global automakers that until now were required to work through state-owned partners are so deeply enmeshed in those ventures that most plan to stick with them. Buying out partners could cost billions of dollars and the foreigners would lose their political connections.

The high cost of foreign banks opening in China

Foreign banks are applying to set up shop in China following an August 2018 pledge to allow full foreign ownership. But they need an eye-opening high minimum capital of 40 billion yuan ($5.7 billion) to operate in China or 8 billion yuan ($1.1 billion) to conduct cross-border services.

That is beyond the reach of all but the richest foreign institutions.

A handful of American, European, and Japanese banks have been given approval to set up Chinese ventures. It is unclear whether they met the capital requirement or whether regulators eased that as a concession to Washington and other trading partners.

In insurance, foreign investors face a time-consuming licensing process that requires them to apply in one of China’s 36 provinces and major cities at a time and wait up to a year for approvals. Obtaining approval for the biggest provinces could take up to a decade.

“China’s efforts to boost investor confidence face significant headwinds,” said Andrew Coflan and Allison Sherlock of Eurasia Group in a report.

Another hurdle: Government controls on the movement of money into and out of China. That adds to the cost and difficulty of bringing in capital and taking home profits.

Such obstacles “make entrance by foreign financial firms a challenge, even with no ownership caps,” said Coflan and Sherlock.

U.S.-China postal war rate hike

Also Tuesday, the Chinese post office said fees it pays the United States and other countries to deliver packages will nearly triple through 2025 under an agreement following complaints by Washington.

Payments will rise 27% next year and by 164% in total through 2025 under the Sept. 25 agreement by members of the Universal Postal Union, the Chinese State Postal Bureau said in a statement.

The Trump administration complained the U.S. Post Office was subsidizing Chinese exporters, which it said pay too little to deliver the vast flow of packages generated by online commerce.

More must-read stories from Fortune:

—The four Democratic 2020 presidential candidates on shaky ground
—How to watch tonight’s Democratic Debate—And what to look for
—3 questions for whistleblower advocate Joe Kostyack
—For big gig economy companies, California is no longer a Golden State
5 lessons history has taught us about impeachment
—How whistleblowers have taken down titans of American business
Follow Fortune on Flipboard to stay up-to-date on the latest news and analysis.

Read More

Biden AdministrationUkraine InvasionInflationEnergyCybersecurity