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Trade war diaries: phase one deal appeals to the financial industry

By Rebecca Feng
17 Jan 2020

In the phase one trade deal signed on Wednesday between the US and China, the majority of the agreements focusing on the financial sector are simply reiterations and elaborations of what the Mainland government has already said. But there are now some concrete deadlines in place to open up the domestic market further to foreign firms.

A trade truce was finally signed between the US and China this week after about two years of tariffs and tit-for-tat retaliation.

But what does the agreement mean for the financial industry in both the countries? In this round-up, GlobalCapital China sets its sights on some of the noteworthy parts of the deal.

One thing is clear, though. The measures of opening up the financial market detailed in the trade deal are consistent with the country’s policy goals in the past two years, the People’s Bank of China said in a Thursday statement.

But there are a handful of promises that will require the Chinese financial regulators to tweak existing policies. And in a number of other cases, there are now explicit deadlines in place.

Credit rating

All three international credit ratings agencies have applied for the licence to rate Chinese domestic issuers and deals. So far, only S&P Global Ratings has got the nod from the PBoC to do so. Moody’s and Fitch applied for the licence in July 2018 and August 2018, respectively. But neither has been granted approval yet.

In the deal, China has given itself three months to “review and approve any pending license applications of US service suppliers” to provide credit rating services onshore. This suggests that the approvals for Moody’s and Fitch will be given within three months.

“We applaud the efforts by China to open up its markets by allowing US rating firms to rate Chinese domestic debt,” Paul Taylor, chief executive officer of Fitch, said in a press release. “Fitch Group is committed to supporting the development and internationalization of China's capital markets. We want to express our appreciation to [US] president [Donald] Trump, vice premier Liu [He], and the US and Chinese negotiating teams for this important agreement.”

“China has taken important steps on credit rating agency market opening," Raymond McDaniel, president and chief executive officer of Moody's, said in an email to GlobalCapital China

"The US-China Phase I Agreement acknowledges and enshrines those commitments in a bilateral trade agreement, which we support. Moody’s views the trade deal as positive for both Chinese and US growth. We look forward to continuing to contribute constructively to China’s sustainable growth and further development of its capital markets.”

Non-performing loans

China will, for the first time, also allow US financial services suppliers to apply for asset management company licenses. These licences are important since they will allow foreign firms to acquire non-performing loans directly from Chinese banks, something they are currently unable to do.

The deal specified that the the China Banking and Insurance Regulatory Commission will start by giving out “provincial licences” to US financial services suppliers.

A level above that are the “national licences”, which have only been given to the four large state-owned asset management companies — Great Wall Asset Management, China Orient Asset Management, Cinda Asset Management and Huarong Asset Management. The four were set up in 1999 directly by the Chinese government to acquire NPLs from the big four banks.

Underwriting business

China agreed that US financial institutions applying for the type-A lead underwriter licence will be evaluated while taking into account these applicants’ “international qualifications”. It did not specify what these “international qualifications” are.

The type-A licence is a full licence that allows holders to be the lead underwriter on all kinds of bonds by non-financial issuers in the Chinese interbank market.

So far, there are only two type-A licence holders — BNP Paribas and Deutsche Bank. Standard Chartered and HSBC hold a type-B licence, which limits their lead underwriting scope to deals by offshore non-financial issuers. US banks JP Morgan and Citi and Japan’s MUFG and Mizuho hold type-C licence, which only allows them to participate as an underwriter on domestic deals issued by non-financial corporations.

Securities services

China has kept the deadline to eliminate foreign ownership caps in the fund management, futures and insurance sectors unchanged. All three sectors will see their foreign ownership caps lifted by April 1 this year.

However, the country brought forward the deadline for allowing 100% foreign ownership in the securities sector by eight months. Instead of the original deadline of December 1, 2020, foreign securities houses can now set up wholly-owned onshore securities firms or increase their shares in their existing onshore joint ventures by April 1.

China will also ensure that there is no prohibition on US private fund managers investing in H-shares — shares of mainland companies listed in Hong Kong — and that they “may be approved to provide investment advisory services on a case-by-case basis”.

Finally, the Mainland agreed to “take into consideration” US financial institutions’ parents’ overseas assets when deciding whether or not to grant them securities investment fund custody licence.

China also vowed to allow branches of US financial institutions to provide securities investment fund custody services within five months from the deal signing ceremony.


On the currency exchange rate front, both the US and China agreed to refrain from competitive devaluations of their currencies.

However, China will not disclose any more than what the PBoC already does. This includes quarterly reporting to the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (Cofer) database and monthly reporting of public FX reserves data and forward positions no later than 30 days after the end of each month.


China will import an additional $200bn of US goods and services over the next two years. The $200bn is on top of the amounts that it imported in 2017.

Among the sub-categories, China will import US manufactured goods of at least $120bn in 2020 and $131.9bn in 2021, agricultural products of at least $80bn over the next two years, energy products of $30.1bn in 2020 and $45.5bn in 2021 and services of $99.9bn this year and $112.2bn in 2021, according to a fact sheet published by the Office of the United States Trade Representative.

“We think meeting the target for agricultural and energy products should be relatively easy, since these purchases can be made by the state-owned enterprises,” Plenum, a political consulting firm, said in a Friday research note. “However, we are uncertain about manufactured goods, especially since the US is still restricting some equipment sales.”


For now, the US will keep the existing tariffs on Chinese imports unchanged, according to remarks by US president Trump at the signing ceremony.

“We’re leaving tariffs on, which people are shocked, but it’s great,” Trump said. “But I will agree to take those tariffs off, if we are able to do phase two. In other words, we’re negotiating with the tariffs. We have 25% on $250bn worth of goods. And then we’re bringing the 10% down to 7.5% on $300bn worth of goods plus.”

The deal did not address government subsidies and state-owned enterprises. 

By Rebecca Feng
17 Jan 2020