Treasury Secretary Steve Mnuchin and a team of White House heavies are expected to visit Beijing, possibly as early as this week, for talks aimed at defusing a tense, U.S.-China trade standoff. The delegation comes amid optimism in Washington that its get-tough strategy is working after Beijing announced a slate of reforms to open up sectors including automobiles, finance and aerospace.<\/p>\n
But as is often the case in China, how things appear on the surface is not actually how they are. That\u2019s especially true with China\u2019s recent market reforms. Beijing isn\u2019t\u00a0groveling before a tariff-rattling Washington, nor honestly addressing the frustrations of international CEOs. That\u2019s just not how China works.<\/p>\n
The real beneficiary of China\u2019s proposals is China. The goal is to marshal foreign companies, foreign capital and foreign technology to help China defeat foreign competitors in the global economy.<\/p>\n
A classic example is the recently announced<\/a> deregulation in\u00a0the automobile sector. Beijing promised to eliminate\u00a0a requirement that overseas\u00a0carmakersform joint ventures with Chinese partners to manufacture cars locally. For electric vehicles, that restriction could be dropped as early\u00a0as this year. Some international firms\u00a0will benefit<\/a> by being able to set up wholly owned operations,\u00a0most of all Tesla Inc.<\/p>\n But that\u2019s not the real purpose of the change. Electric vehicles are a targeted industry in China, marked for special support in the nation\u2019s\u00a0\u201cMade in China 2025\u201d industrial program. The Chinese want to dominate\u00a0the production of electric vehicles, and this \u201creform\u201d is a necessary step to get there.<\/p>\n I\u2019ll let Bill Russo, founder of Shanghai consultancy Automobility<\/a>, explain: The reform \u201celiminates the only reason that may block global EV manufacturers and\u00a0suppliers from investing in China capacity, making China the odds-on winner in the global race to electric transportation.\u201d<\/p>\n It\u2019s\u00a0notable that the joint-venture rule for regular cars will be lifted far more slowly. Unlike new energy vehicles, old-fashioned combustion engine cars aren\u2019t\u00a0a\u00a0priority. And even when the reform actually happens, it won\u2019t make much difference. The JVs have been so entrenched for so long that,\u00a0at this stage, it probably isn\u2019t in the interests of foreign companies to change the status quo.<\/p>\n \u201cThe Chinese market might not necessarily justify the investment and risks for foreign manufacturers considering setting up their own operations,\u201d Fitch Ratings noted<\/a> in a recent report. \u201cThe potential for sales growth has weakened as the market has matured.\u201d In other words, China has already got\u00a0what it wanted.<\/p>\n The situation is all too similar in finance. Last year, the Chinese government announced<\/a> it would ease ownership limits on offshore investors in banks, brokerages, insurance companies and other financial institutions. Again, these measures are good news for\u00a0foreign financial firms that want to beef up their operations in China, especially in fund management and securities, where they will be able to gain majority control.<\/p>\n With a financial sector riddled with bad loans and worse practices, China\u00a0will be happy to gorge<\/a> on fresh capital from international investors. How much progress those investors will make in China\u2019s market is another matter. Foreign banks can already operate wholly owned businesses in China, but they\u2019ve made\u00a0almost no inroads, commanding\u00a0less than 2 percent of total banking assets. The problem is similar in insurance, where\u00a0existing JVs have a minute share of the market.<\/p>\nBut again, the ultimate winner may be China.<\/h4>\n