HFS Subcommittee Discusses Increasing Market Access for US Firms in China
The House Financial Services Subcommittee on International Monetary Policy and Trade held a hearing to examine the market access opportunities for financial services firms in China. The hearing was timely considering last Friday’s announcement by Treasury on the progress made during the fourth meeting of the U.S.-China Strategic and Economic Dialogue (S&ED).
David Strongin, SIFMA’s Managing Director for International Policy, testified at the hearing.
In his opening statement, Subcommittee Chairman Gary Miller (R-Calif.) called for a level playing field in China, saying it is in both the U.S. and China’s interest. He added that while China “might be meeting the letter of the World Trade Organization (WTO) obligation, U.S. firms have complained that China is not meeting the spirit of those obligations.”
Referring to past dialogues with China, Miller said “while we make commitments, they only make comments,” and stressed the need to hold them accountable for changes they have agreed to.
Ranking Member Carolyn McCarthy (D-N.Y.) echoed Miller’s statement and said that while the S&ED is not a binding agreement, it is important to follow through and enforce the agreement.
Panel I Testimony
In her opening statement, Treasury Under Secretary Lael Brainard said she believed the administration has made important progress on economic, trade and financial issues following the fourth S&ED.
“We secured commitments that will expand market access and help level the playing field for U.S. companies in China,” she said, and China agreed to take concrete steps to shift away from exports and relying more heavily on its own domestic consumption for growth.”
Brainard stressed that “a more open and market-based financial system is also central to achieving more balanced Chinese growth and a more level playing field … China’s financial sector, which remains dominated by government-owned banks and subject to extensive government controls on the price and quantity of credit, generates massive distortions that filter through the whole economy. That is a problem for China, and for us.”
Brainard reviewed the commitments made at the S&ED but did not expand into any detail on the timing of their implementation.
She characterized financial sector commitments as “tangible, significant gains that will benefit the United States… But they are not enough.”
Panel I Q&A
Rep. Robert Dold (R-Ill.) asked what is being done to decrease regulatory barriers and restrictions for U.S. business. Brainard said they are pushing to raise issues associated with equity ownership restrictions and investment allocations across the board and are looking to further revisions to China’s investment catalogue.
Rep. David Scott (D-Ga.) asked whether China is impressed by our financial resilience since 2008. Brainard said they have “heightened interest” in having our firms participate in their society and are pushing their financial institutions to implement the same safe guards, such as capital buffers and surcharges.
Scott argued that, because of China’s large debt holdings, it is difficult to understand why China has such restrictive policies in place. Brainard said firms are “just now starting to increase their investment” and noted that U.S. firms still have a larger amount of branches and subsidiaries in China that there are Chinese branches in the U.S.
Rep. Don Manzulllo (R-Ill.) expressed concern about the Federal Reserve’s approval of licenses for three Chinese banks earlier this week. Brainard said that while foreign institutions must undergo a review by the Federal Reserve, the U.S. does not impose equity cap restrictions.
Manzullo said it is problematic to allow full access to the U.S. market for Chinese firms but not requiring the same for U.S. firms in China. Brainard reiterated that there was some progress made to raise equity caps and argued that the move is an important step forward that will “expand meaningfully beyond their WTO commitments.”
Rep. Bill Huizenga (R-Mich.) agreed with Manzullo and said negations with China are “like the U.S. taking two steps forward, China taking one step forward and declaring a tie.”
With respect to the Fed’s decisions, Brainard said she believe the approval of licenses was made on “the basis of prudential requirements.”
Panel II Testimony
In his testimony, Robert Nichols, Chairman of Engage China Coalition and President and CEO of the Financial Services Forum, said the modernization of China’s underdeveloped financial system is “one of the most fundamental and important reforms necessary for the United States.” A more developed and sophisticated financial sector brings more efficient, effective, and diverse capital formation and increases the means and expertise for mitigating risk and weathering any economic difficulties and adjustments, he said. Nichols added that a shift to a more consumption-based Chinese economy requires “a more modern and sophisticated financial sector.”
Nichols identified a number of U.S. financial sector challenges in China, including a limit on investments in Chinese financial institutions to a capped minority interest. The limitations “are among the most restrictive of any large emerging market nation and stand in the way of a level playing field for financial service providers.” Other barriers include arbitrary limitations of permitted products and services, discriminatory regulatory treatment, and restrictions on licensing and corporate form.
Despite the challenges, Nichols said the Chinese leadership “recognizes the connection between faster financial reform and a more consumption-based economy,” and detailed a number of recent speeches by Chinese political and economic leaders, including the U.S.-China Strategic & Economic Dialogue (S&ED) talks that took place last week. Those talks produced “additional progress” including allowing foreign investors to take up to 49 percent equity stakes in domestic securities joint ventures, agreeing to allow investors from the US and other economies to establish joint venture brokerages to trade commodity and financial futures, and China reaffirming its intention to promote a more market-based interest rates.
Nichols said future talks both within and outside of S&ED should focus on the “critical importance” of opening up the Chinese financial sector to promote the services and consumption-led economic growth that China’s leaders seek; increased market access for foreign financial services firms; the discriminatory national treatment towards foreign firms; regulator and procedural transparency, and further expansion of QFII and Qualified Domestic Institutional Investor (QDII) programs, amongst other issues.
In his testimony, David Strongin, Managing Director at the Securities Industry and Financial Markets Association (SIFMA), said SIFMA “has long supported more open, fair and transparent markets, and liberalization of the national treatment of financial services in U.S. multilateral and bilateral trade forums.”
Strongin identified five key and inter-connected industry priorities to ensure a more level playing field including: 1) Permit 100 percent ownership and right to establish in corporate form of choice; 2) Allow same scope of business; 3) Further develop QFII/QDII programs; 4) Improve bond market depth/liquidity/efficiency; and 5) Promote regulatory transparency.
SIFMA highlighted the “most notable outcomes” from the S&ED including increased equity caps from 33 percent to 49 percent for securities joint-ventures (JVs), reduction of the “seasoning period” to two years, increased QFII quotas, and a commitment to continue the Bilateral Investment Treaty (BIT) discussions. SIFMA also made recommendations under each of these notable outcomes for U.S. policymakers to continue to pursue during future discussions.
In closing, Strongin said in light of the Committee’s central role in ensuring the timely implementation of China’s current S&ED commitments, whilst pursing a level playing field for U.S. firms, SIFMA offered two recommendations: 1) An annual report from the Treasury to Congress demonstrating China’s implementation of commitments agreed to at each S&ED; and 2) Increasing the frequency of the economic portion of the dialogue to twice per year.
In his testimony, Clay Lowery, Vice President at Rock Creek Global Advisers LLC, said the time is right to further open China’s market to foreign financial firms “because such liberalization is an essential part of China’s broader effort to rebalance its economy.” Lowery noted the challenges to this including entrenched interests (both private and public), Chinese firms’ unwillingness to compete, potentially captured regulatory entities, or “just pure politics and inertia at local levels” that will work to maintain the status quo.
Lowery said “it is becoming in China’s interest” to allow foreign firms with decades of experience to compete and offer their services. Other recent important steps include the recent U.S.-China decision to resume BIT negotiations, adding that the Committee “should bring the same intensity and oversight to pushing for strong deliverables at the S&ED and in BIT negotiations as Members of Congress have shown on exchange rate issues.”
Lowery said the Trans-Pacific Parternship talks currently being held in Dallas “are very positive for the U.S.” and will “truly help our competitiveness in the region” while bringing “even more pressure on China to rebalance its economy and allow for greater market access.”
In his testimony, Nicholas Lardy, Senior Fellow at the Peterson Institute for International Economics, said the current disappointment expressed by foreign firms in not being able to expand their financial sector presence in China stems from three factors: 1) The bilateral negotiations for China’s entry into the World Trade Organization (WTO) saw the U.S. fail to press “very hard” for market opening in financial services; 2) Both U.S. and Chinese negotiators are constrained in their ability to make reciprocal concessions so further market opening measures flowing from recent dialogues “has been painfully slow; and 3) The U.S. argument that China would benefit from further unilateral opening of its market to U.S. and other foreign financial services firms “is far less compelling today than it was prior to 2008.”
Lardy went on to discuss factors behind the limited role of foreign financial institutions in China, the limited access of foreign firms to the domestic insurance market, and whether the recent SE&D talks “will be sufficient to erode the dominance of the securities market in China by indigenous firms.”
Panel II Q&A
Miller discussed the 2010 Organization for Economic Co-operation and Development (OECD) financial markets restrictiveness index and asked how the pace of growth for financial services can be accelerated when Chinese officials “just talk” instead of entering into firm commitments.
Nichols said there is a “huge group” of Chinese citizens that do not have access to the financial marketplace. He added that “it is in their best interest to change their economy.” However, Nichols reiterated that “we’re not satisfied… there’s much more to do to get them to open their markets.”
Strongin told the subcommittee not to “discount the importance of continued outside pressure,” including the S&ED discussions, the BIT negotiations, and the subcommittee’s commitment to the issue. “They all provide us with both pressure and some leverage,” he said.
In a follow up question, Miller asked whether the S&ED meetings are helping to move China in the right direction.
Strongin said “from a securities industry perspective they’ve been helpful and moved the ball forward, but not nearly enough.”
On a question asked by Miller concerning Federal Reserve licenses, Nichols said “we’re not satisfied… it’s not a level playing field.” He added that the reason the Federal Reserve granted the branch licenses to the Chinese banks is due to the fact that the home country supervision has improved, which is “actually a good thing.” Miller agreed and said “we need to aggressively encourage [China] to do the right thing.”
Rep. Andre Carson (D-Ind.) asked the panel to what extent China’s capital reserve requirements are a barrier to U.S. firms seeking access to the banking sector.
Lardy said he did not see it as a barrier, but said “the fact that they rely so heavily on the required reserve ratio reflects the fact that they don’t have market determined interest rates for the most part.” He added that this is a “very quantity controlled mechanism rather than a price-oriented mechanism.”
Strongin said the key is to focus on ownership restrictions. “Whether you go through insurance, banking, securities and other types of financial products, it always starts with the inability to run your business the way you want to run it.”
For more on the hearing, please click here.
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The House Financial Services Subcommittee on International Monetary Policy and Trade held a hearing to examine the market access opportunities for financial services firms in China. The hearing was timely considering last Friday’s announcement by Treasury on the progress made during the fourth meeting of the U.S.-China Strategic and Economic Dialogue (S&ED).
David Strongin, SIFMA’s Managing Director for International Policy, testified at the hearing.
In his opening statement, Subcommittee Chairman Gary Miller (R-Calif.) called for a level playing field in China, saying it is in both the U.S. and China’s interest. He added that while China “might be meeting the letter of the World Trade Organization (WTO) obligation, U.S. firms have complained that China is not meeting the spirit of those obligations.”
Referring to past dialogues with China, Miller said “while we make commitments, they only make comments,” and stressed the need to hold them accountable for changes they have agreed to.
Ranking Member Carolyn McCarthy (D-N.Y.) echoed Miller’s statement and said that while the S&ED is not a binding agreement, it is important to follow through and enforce the agreement.
Panel I Testimony
In her opening statement, Treasury Under Secretary Lael Brainard said she believed the administration has made important progress on economic, trade and financial issues following the fourth S&ED.
“We secured commitments that will expand market access and help level the playing field for U.S. companies in China,” she said, and China agreed to take concrete steps to shift away from exports and relying more heavily on its own domestic consumption for growth.”
Brainard stressed that “a more open and market-based financial system is also central to achieving more balanced Chinese growth and a more level playing field … China’s financial sector, which remains dominated by government-owned banks and subject to extensive government controls on the price and quantity of credit, generates massive distortions that filter through the whole economy. That is a problem for China, and for us.”
Brainard reviewed the commitments made at the S&ED but did not expand into any detail on the timing of their implementation.
She characterized financial sector commitments as “tangible, significant gains that will benefit the United States… But they are not enough.”
Panel I Q&A
Rep. Robert Dold (R-Ill.) asked what is being done to decrease regulatory barriers and restrictions for U.S. business. Brainard said they are pushing to raise issues associated with equity ownership restrictions and investment allocations across the board and are looking to further revisions to China’s investment catalogue.
Rep. David Scott (D-Ga.) asked whether China is impressed by our financial resilience since 2008. Brainard said they have “heightened interest” in having our firms participate in their society and are pushing their financial institutions to implement the same safe guards, such as capital buffers and surcharges.
Scott argued that, because of China’s large debt holdings, it is difficult to understand why China has such restrictive policies in place. Brainard said firms are “just now starting to increase their investment” and noted that U.S. firms still have a larger amount of branches and subsidiaries in China that there are Chinese branches in the U.S.
Rep. Don Manzulllo (R-Ill.) expressed concern about the Federal Reserve’s approval of licenses for three Chinese banks earlier this week. Brainard said that while foreign institutions must undergo a review by the Federal Reserve, the U.S. does not impose equity cap restrictions.
Manzullo said it is problematic to allow full access to the U.S. market for Chinese firms but not requiring the same for U.S. firms in China. Brainard reiterated that there was some progress made to raise equity caps and argued that the move is an important step forward that will “expand meaningfully beyond their WTO commitments.”
Rep. Bill Huizenga (R-Mich.) agreed with Manzullo and said negations with China are “like the U.S. taking two steps forward, China taking one step forward and declaring a tie.”
With respect to the Fed’s decisions, Brainard said she believe the approval of licenses was made on “the basis of prudential requirements.”
Panel II Testimony
In his testimony, Robert Nichols, Chairman of Engage China Coalition and President and CEO of the Financial Services Forum, said the modernization of China’s underdeveloped financial system is “one of the most fundamental and important reforms necessary for the United States.” A more developed and sophisticated financial sector brings more efficient, effective, and diverse capital formation and increases the means and expertise for mitigating risk and weathering any economic difficulties and adjustments, he said. Nichols added that a shift to a more consumption-based Chinese economy requires “a more modern and sophisticated financial sector.”
Nichols identified a number of U.S. financial sector challenges in China, including a limit on investments in Chinese financial institutions to a capped minority interest. The limitations “are among the most restrictive of any large emerging market nation and stand in the way of a level playing field for financial service providers.” Other barriers include arbitrary limitations of permitted products and services, discriminatory regulatory treatment, and restrictions on licensing and corporate form.
Despite the challenges, Nichols said the Chinese leadership “recognizes the connection between faster financial reform and a more consumption-based economy,” and detailed a number of recent speeches by Chinese political and economic leaders, including the U.S.-China Strategic & Economic Dialogue (S&ED) talks that took place last week. Those talks produced “additional progress” including allowing foreign investors to take up to 49 percent equity stakes in domestic securities joint ventures, agreeing to allow investors from the US and other economies to establish joint venture brokerages to trade commodity and financial futures, and China reaffirming its intention to promote a more market-based interest rates.
Nichols said future talks both within and outside of S&ED should focus on the “critical importance” of opening up the Chinese financial sector to promote the services and consumption-led economic growth that China’s leaders seek; increased market access for foreign financial services firms; the discriminatory national treatment towards foreign firms; regulator and procedural transparency, and further expansion of QFII and Qualified Domestic Institutional Investor (QDII) programs, amongst other issues.
In his testimony, David Strongin, Managing Director at the Securities Industry and Financial Markets Association (SIFMA), said SIFMA “has long supported more open, fair and transparent markets, and liberalization of the national treatment of financial services in U.S. multilateral and bilateral trade forums.”
Strongin identified five key and inter-connected industry priorities to ensure a more level playing field including: 1) Permit 100 percent ownership and right to establish in corporate form of choice; 2) Allow same scope of business; 3) Further develop QFII/QDII programs; 4) Improve bond market depth/liquidity/efficiency; and 5) Promote regulatory transparency.
SIFMA highlighted the “most notable outcomes” from the S&ED including increased equity caps from 33 percent to 49 percent for securities joint-ventures (JVs), reduction of the “seasoning period” to two years, increased QFII quotas, and a commitment to continue the Bilateral Investment Treaty (BIT) discussions. SIFMA also made recommendations under each of these notable outcomes for U.S. policymakers to continue to pursue during future discussions.
In closing, Strongin said in light of the Committee’s central role in ensuring the timely implementation of China’s current S&ED commitments, whilst pursing a level playing field for U.S. firms, SIFMA offered two recommendations: 1) An annual report from the Treasury to Congress demonstrating China’s implementation of commitments agreed to at each S&ED; and 2) Increasing the frequency of the economic portion of the dialogue to twice per year.
In his testimony, Clay Lowery, Vice President at Rock Creek Global Advisers LLC, said the time is right to further open China’s market to foreign financial firms “because such liberalization is an essential part of China’s broader effort to rebalance its economy.” Lowery noted the challenges to this including entrenched interests (both private and public), Chinese firms’ unwillingness to compete, potentially captured regulatory entities, or “just pure politics and inertia at local levels” that will work to maintain the status quo.
Lowery said “it is becoming in China’s interest” to allow foreign firms with decades of experience to compete and offer their services. Other recent important steps include the recent U.S.-China decision to resume BIT negotiations, adding that the Committee “should bring the same intensity and oversight to pushing for strong deliverables at the S&ED and in BIT negotiations as Members of Congress have shown on exchange rate issues.”
Lowery said the Trans-Pacific Parternship talks currently being held in Dallas “are very positive for the U.S.” and will “truly help our competitiveness in the region” while bringing “even more pressure on China to rebalance its economy and allow for greater market access.”
In his testimony, Nicholas Lardy, Senior Fellow at the Peterson Institute for International Economics, said the current disappointment expressed by foreign firms in not being able to expand their financial sector presence in China stems from three factors: 1) The bilateral negotiations for China’s entry into the World Trade Organization (WTO) saw the U.S. fail to press “very hard” for market opening in financial services; 2) Both U.S. and Chinese negotiators are constrained in their ability to make reciprocal concessions so further market opening measures flowing from recent dialogues “has been painfully slow; and 3) The U.S. argument that China would benefit from further unilateral opening of its market to U.S. and other foreign financial services firms “is far less compelling today than it was prior to 2008.”
Lardy went on to discuss factors behind the limited role of foreign financial institutions in China, the limited access of foreign firms to the domestic insurance market, and whether the recent SE&D talks “will be sufficient to erode the dominance of the securities market in China by indigenous firms.”
Panel II Q&A
Miller discussed the 2010 Organization for Economic Co-operation and Development (OECD) financial markets restrictiveness index and asked how the pace of growth for financial services can be accelerated when Chinese officials “just talk” instead of entering into firm commitments.
Nichols said there is a “huge group” of Chinese citizens that do not have access to the financial marketplace. He added that “it is in their best interest to change their economy.” However, Nichols reiterated that “we’re not satisfied… there’s much more to do to get them to open their markets.”
Strongin told the subcommittee not to “discount the importance of continued outside pressure,” including the S&ED discussions, the BIT negotiations, and the subcommittee’s commitment to the issue. “They all provide us with both pressure and some leverage,” he said.
In a follow up question, Miller asked whether the S&ED meetings are helping to move China in the right direction.
Strongin said “from a securities industry perspective they’ve been helpful and moved the ball forward, but not nearly enough.”
On a question asked by Miller concerning Federal Reserve licenses, Nichols said “we’re not satisfied… it’s not a level playing field.” He added that the reason the Federal Reserve granted the branch licenses to the Chinese banks is due to the fact that the home country supervision has improved, which is “actually a good thing.” Miller agreed and said “we need to aggressively encourage [China] to do the right thing.”
Rep. Andre Carson (D-Ind.) asked the panel to what extent China’s capital reserve requirements are a barrier to U.S. firms seeking access to the banking sector.
Lardy said he did not see it as a barrier, but said “the fact that they rely so heavily on the required reserve ratio reflects the fact that they don’t have market determined interest rates for the most part.” He added that this is a “very quantity controlled mechanism rather than a price-oriented mechanism.”
Strongin said the key is to focus on ownership restrictions. “Whether you go through insurance, banking, securities and other types of financial products, it always starts with the inability to run your business the way you want to run it.”
For more on the hearing, please click here.