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Sino-US talk opens door wider for economic exchange
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The fifth China-US Strategic and Economic Dialogue concluded on July 11. Unlike previous meetings, the emphasis was not on the value of the yuan. With the US less focused on the exchange rate, other issues have come to the fore, including the participation of US banks in yuan cross-border business, and fostering an opener investment relationship.
In the first half of 2013, cross-border yuan business conducted by banks in Shanghai exceeded 370 billion yuan (US$59.7 billion). Chinese banks were among the top three collectively processing 175 billion yuan, followed by a UK bank and a Singapore-based lender. Only one US bank is included and ranked second-to-last on the Top 10 list. As the yuan is being increasingly used in global transactions, it is clearly a disadvantage for US banks to lag behind their global peers in yuan business.
China acknowledged US concerns and pledged to “welcome the participation by qualified locally-incorporated foreign banks in yuan settlement of cross-border trade and investment transactions” and will “actively consider reducing the waiting period for a foreign bank branch to apply for an yuan license.”
That will lubricate US banks’ yuan business, while we are lukewarm on the prospects for any rapid growth given the low yuan adoption by the US corporates. Without a doubt, many challenges need to be overcome before the yuan’s use in China-US trade can take off. That includes the US dollar-only invoicing systems and corporates’ inertia use in the US dollar — a traditional and primary international currency.
On the investment front, China announced its intention “to pursue a bilateral investment treaty with the US that will cover all phases of investment, including market access, and sectors of the mainland economy.” In particular, China committed to further open up its services sector, including through the establishment of the Shanghai Free Trade Zone pilot. While detailed guidelines are forthcoming, the pilot is expected to permit foreign enterprises to compete on the same terms as Chinese firms across a wide range of services sectors.
China also identified the e-commerce and commercial factoring sectors as areas for future liberalization to foreign investment. Equally impressive, China pledged “to ensure that enterprises of all forms of ownership have equal access to inputs, such as energy, land, and water.” The ultimate goal is to develop a market-based mechanism for determining the prices of those inputs. This will help level the playing field for foreign enterprises competing with Chinese state-owned enterprises that often pay below market cost for their inputs.
For the US, it “commits to maintain an open investment environment for Chinese investors, including state-owned enterprises, as with investors from other countries.” That demonstrates the US’s eagerness to improve its relationship with China. In the past, Chinese direct investment was often viewed with suspicion because it was dominated by SOEs. These were considered a threat to competitive markets and, occasionally, to national security.
Encouragingly, the share of private firms is growing. Investment made by non-SOEs accounted for 9.5 percent of China’s overseas direct investment in 2012, compared with 4 percent in 2010. As the role of private sector grows, US suspicions may gradually subside.
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