Xi Jinping’s Measured Boao Speech
Xi Jinping made a surprisingly concessionary speech at the Boao Forum April 10 in response to the escalating trade war instigated by the Trump Administration. I had expected him to avoid making any overt signs of concessions to Trump’s trade threats. Perhaps I underestimated how little these overseas speeches are disseminated to domestic audiences, allowing him to speak freely to a foreign audience. However, there were few firm commitments and several very typically broad Chinese statements of intent.
He affirmed China will:
- Increase the foreign ownership restrictions for the insurance and financial sector.
- Lower the auto import tariffs this year.
- Proactively expand imports.
- Allow more foreign stakes in auto manufacturing.
Foreign automakers already hold significant stakes in the domestic market and are unlikely to increase exports apart from high-end autos and specialty vehicles such as ambulances. Tesla, however, may benefit.
Commercial banking is the lifeblood of state firms and Beijing is intent on controlling the country’s savings deposits so I doubt there will be significant concessions there. By the end of 2016, 39 foreign banks had established subsidiaries on the mainland. Most of their business has been restricted to yuan services, accounting for 70 percent of their assets, loans and deposits. Early joint ventures in banking by CBA of Australia and ANZ of New Zealand, for example, have been dismal failures with few cross-synergies.
The insurance and brokerage sectors are the one area likely to have a significant impact. Insurance has been going through tough times and could use the capital. The industry expanded rapidly over the past few years through the sale of financial products and the investment in highly risky property and local government infrastructure loans. In the past year, their activities have been curtailed and their ability to raise capital in the “shadow” (i.e., private) markets has been restricted.
Same with securities firms. The brokerage business is a huge mess with competing groups all across the country that have engaged in risky fund raising activities in the shadow market. Allowing the sale of smaller institutions — below controlling interest and with fresh injections of capital — would probably be welcomed. However, I doubt we will see the larger, more systemically important firms like Citic Securities and Haitong welcoming foreign investment, however.
Other comments pertaining to areas such as IP Protection are unlikely to yield significant gains.
In the end, the U.S. and China are likely to engage in an escalating war in much larger markets such as semiconductors that will reflect a sheer battle for market share. Although President Trump may try to turn these engagements into accusations of unfair trade, the underlying reality of China’s economical significance will be hard to ignore.