As the US fired the first shots in a tit-for-tat trade battle with China, concerns are mounting over whether President Donald Trump’s vituperative rhetoric will escalate into a full-blown war. The fallout could affect the Chinese aspirations of US financial firms.
As the situation stands, the US has threatened tariffs on $200 billion of the Chinese goods it imports, including manufacturing goods, as well as flat-panel televisions and solar panels. Beijing said it would apply tariffs on the same amount of US imports. Trump is wielding the US’s $375 billion trade deficit with China as a cudgel. In effect, he is trying to leverage the fact the US buys more from China than it sells. That is why he proclaimed trade wars “good and easy to win”.
To date, Trump’s protectionist instincts have focused on goods; he seems largely oblivious to the role services play in trade. Thus far, financial services have been spared any direct pain.
That might not remain the case forever. If Trump does embark on outright trade hostilities, and China reacts, financial services will get swept up. A key potential victim? The inbound growth aspirations of US banks, fund managers and insurers.
Back in November the environment was very different. Trump met Chinese President Xi Jinping in Beijing, and, amid mutually flattering talks, Xi’s government announced offshore banks, asset managers and insurers would be allowed to buy out local joint venture partners.
This is a big deal. China’s life insurance sector is growing fast, with assets hitting a reported Rmb13.62 trillion ($2 trillion) in April, up 3.1% from the beginning of the year, said the China Banking and Insurance Regulatory Commission. Its fund management sector is also rocketing. It had $1.7 trillion of assets at the end of last year, and Shanghai-based local consultancy Z-Ben predicts this could soar to $12 trillion by 2027.
Meanwhile, China is easing open the door to more foreign investment, while index provider MSCI adds A-shares into its Emerging Markets Index. As a result, international investors look set to pour money into China.
Insurers and international fund houses want a piece of that action, including the likes of BlackRock, State Street Global Advisors, JP Morgan Asset Management, and Goldman Sachs Asset Management.
But with the political rapport of Trump and Xi having soured, the likelihood is rising financial services will be affected by a growing spat over trade.
China has several options to make US financial players suffer. For a start, Beijing could simply not approve requests by US banks, securities houses, fund managers to buy their onshore JVs. Similarly, it could prevent US insurers from taking stakes in Chinese peers. That would be a painful rebuttal of the longstanding ambitions of US financial companies to expand into China’s large but still relatively rudimentary financial services economy.
In addition, it’s easy to imagine the State Administration of Foreign Exchange not approving qualified foreign institutional investor quota requests from US asset owners or fund houses. That would curtail their ability to put money to work onshore in China—except via Stock Connect.
Plus regulators could sit on applications for wholly foreign-owned investment management company licences or private fund management from US investment managers. Meanwhile, it could breezily approve the JV ambitions and licence applications of European or Asian rivals. To date Beijing has announced no such changes. But it wouldn’t necessarily have to. US financial services companies would soon get the message if their applications went nowhere.
US financial houses had best hope Trump’s bellicose rhetoric doesn’t heat up. If it does, they may end up mothballing their China growth ambitions.