New Chinese rules worry foreign banks and companies

SHANGHAI – To defend against accusations by Washington and others that it does not play trade fairly, Beijing could point to the banks. Chinese leaders were regularly lowering barriers they had built around the country’s vast financial system, giving Wall Street and European lenders a better chance of gaining business in the world’s second-largest economy.

Now the walls are going up.

The new Chinese rules have severely limited the ability of foreign banks to do business in the country, making them less competitive against their local rivals, according to three people familiar with the guidelines. A set of rules enacted in December and January limits the amount of money foreign banks can transfer to China from overseas. Another, which went into effect Wednesday, forced many foreign banks to make fewer loans and sell bonds and other investments, two people said.

The new rules have caused a stir among executives of global banks and foreign companies in China that depend on these lenders for their money, people said. Among other concerns, they fear the rules will make foreign companies more dependent on China’s public banking system for the money they need to grow. This dependence could give Beijing another potential pressure point to use as it clashes with Washington and others over trade, human rights, geopolitics and other thorny issues.

Banks and commercial groups have been reluctant to speak out publicly for fear of triggering new regulatory measures. But in a January letter to China’s central bank that was reviewed by The New York Times, the European Union Chamber of Commerce in China raised concerns about money transfer limits.

International companies have been caught in the middle. In the past two weeks, Chinese state media and the country’s online community have encouraged the boycott of foreign companies like H&M, the Swedish retailer, and Nike, the American sports brand, after vowing not to use cotton made by forced labor in Xinjiang.

The reasons for China’s new banking rules are unclear, although they seem to have little to do with the tense political environment. Rather, they appear to be aimed at stemming potentially disruptive large flows of money into the country.

“I can understand how it comes to protecting financial stability,” said Mark Sobel, a former US Treasury official. “I can also understand how you could say that this discriminates against foreign banks.”

The People’s Bank of China, the country’s central bank and rules maker, did not respond to requests for comment.

China, which maintains tight control over the flow of money in and out of the country, may fear that a surge of funds into the country could lead to unpleasant surprises like inflation. Money poured into the country in the second half of last year as the Chinese economy ended its pandemic slump as activity in much of the rest of the world declined.

It is difficult to measure the flows, but foreign investors last year increased their holdings of Chinese bonds by around $ 150 billion. China too overtook the United States last year by taking $ 163 billion in direct investments in factories, office buildings, businesses and other assets.

Large flows of money into a country can also increase the value of its currency – and China appears to be working hard to counter this.

The Chinese currency, the renminbi, rose sharply against the US dollar in the second half of last year. In May, 1 dollar was worth about 7.15 renminbi. By the end of the year, $ 1 was buying about 6.5 renminbi. This increase was bad news for Chinese exporters, as it made their products less competitive abroad.

But since the Chinese government enacted its new banking rules, the currency has started to weaken. It now stands at around 6.6 renminbi to the dollar.

The new rules alone are probably not important enough to explain the sudden halt in the renminbi’s rise. But they are joining other initiatives by the Chinese government in recent months that have made transferring money to China a little more difficult and a transfer a little easier. Together, they could put pressure on the renminbi to weaken.

“It started last October, and they’re all on the same side,” said Michael Pettis, a finance professor at Peking University.

External factors likely contributed to the renminbi’s shift, including the resurgence of the US economy, which could lead investors to direct their money there instead.

Chinese officials have stressed in recent months that their country is open to foreign investment, especially banking.

“The influx of foreign capital is inevitable, but so far the scale and speed are still under our control,” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, who has worked closely collaboration with the central bank on new policies. , said at a press conference on March 2. “We continue to encourage foreign financial institutions to enter China for shared development.”

In an unsuccessful attempt to stave off a trade war with the Trump administration, China has gradually relaxed or removed limits on banks, insurers, and foreign fund management companies. Big banks have responded by expanding their operations on the continent, including Citigroup, Credit Suisse, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley and UBS.

The global financial environment has encouraged the flow of money to China. With interest rates close to zero elsewhere, international banks have borrowed cheaply abroad. Until the new rules come into effect, they could send that money to China and loan it or invest it there, reaping higher returns.

The first of the new rules, published in a note to banks in December, appeared to target this trend. This rule limited the ability of global banks to raise funds abroad and transfer them to China. The rule is phased in through November, but was drafted in a way that has already had a big effect on financial contracts involving bets on the direction of the renminbi, people familiar with the notice said.

Another measure communicated directly by Chinese regulators to foreign banks three weeks ago concerned the size of bank balance sheets, two people said.

Concerned about the rapid growth of credit in the Chinese economy, regulators have ordered domestic and foreign banks to limit their balance sheets by Wednesday evening to show only slight growth compared to last year. As China recently eased the limits on overseas bond purchases, many foreign banks have bought more bonds to sell to overseas clients, thereby expanding their balance sheets.

The full impact of the new rules will depend on how long they stay in place. Eswar Prasad, an economist at Cornell University, predicted that China would eventually resume opening up to foreign financial institutions.

“They don’t want to scare foreign investors in the medium and long term,” he said.

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