Did the US-China phase one deal deliver a win for US financial services?



An inconspicuous but important element in the “phase one” trade agreement between the United States and China promises greater access to Chinese consumers and businesses for Visa, Mastercard, JPMorgan Chase, and other US financial and insurance companies. The United States has tried and failed for years to get China to open up in this area, while the United States has itself erected barriers to Chinese financial firms operating here. But will the deal, signed on January 15, 2020, fulfill its promises on financial services? The deal does embody some gains, but it is too soon to tell whether they will deliver the goods.

China did promise greater access as part of the “phase one” accord. But Beijing had announced or implemented almost all of its concessions already, in part because Chinese officials increasingly understood that foreign competition in these areas was in China’s own interest.

But unfortunately, entry of US credit card firms into China may have come too late for some. China’s financial firms are far more competitive than they were when its financial markets were supposed to open in 2006, and mobile payments from Alipay and WeChat have led Chinese consumers to mostly skip credit cards offered by Visa and Mastercard altogether. China may have agreed to the latest deal simply because it judged that its players no longer had much to fear from foreign competition. In addition, some of the most important barriers to financial integration with the rest of the world come from China’s capital controls, along with restrictive rules on data flows and data localization, none of which show signs of easing up. A wait-and-see approach to these steps forward remains appropriate.

China’s agreement to loosen restrictions on foreign financial services companies nonetheless must be seen as one of the only bright spots in a process of “reform and opening up” that has generally stalled or been reversed since President Xi Jinping took power in 2012. In 2017, the Chinese government laid out its roadmap for large-scale financial market opening. Trump administration pressure appears to have broken bureaucratic logjams that delayed the opening that China originally agreed to do by 2006. Opening up finance appears to have been less costly politically for China than making concessions such as ending subsidies to state firms, which would have required it to make more fundamental changes to its growth model.

Advocates of financial reform in China argue that such opening brings in both capital and expertise that benefit China—thus not being a pure concession to the United States. Vice Premier Liu He said that “other countries should receive the same standard of treatment” as that agreed in the phase one deal, further reinforcing that point.

Mixed history in financial services

When it joined the World Trade Organization (WTO) in 2001, China promised that “foreign financial institutions will be permitted to provide services to all Chinese clients” by December 2006. It followed through in many areas, but payment services were not one of them. Every year since, the United States Trade Representative (USTR) complained that negotiations concluded “without making progress” in electronic payments. The United States finally sued China at the WTO in 2010. Though the United States largely won the case, applications from firms like Visa and Mastercard were kept like Schrodinger’s cat in a regulatory black box process for years, neither alive nor dead. In other financial services sectors, China enforced joint venture requirements with foreign ownership limits of 49 percent, below the threshold for control. Any Chinese reformers hoping to open the market to foreign competition appear to have been overruled.

These and other restrictions kept foreign banks on the margins of Chinese finance. As of June 2018, foreign-funded banks held a paltry 1.7 percent of bank assets there, just over half the average in the region and far below both other emerging markets and the United States (see figure).[1]

Foreigners have barely cracked China’s banking market

Opening jumpstarted in 2017

In retrospect the real turning point is not the phase one trade deal but the last day of President Trump’s visit to China in August 2017. Then Vice Minister of Finance Zhu Guangyao announced that China would phase out the 49 percent foreign ownership caps in securities firms, futures, and funds. Zhu laid out an explicit timetable: China would start drafting rules that raised the caps to 51 percent, while all ownership limits in those three sectors would be gone in three years. Ownership limits in insurance would end in five years. Since the announcement, both Mastercard and American Express have received permission to set up Chinese joint ventures.

It is impossible to know how much the Trump administration’s hardball approach contributed to the opening that China started without waiting for a deal. Rules for foreign investment permitted the new 51 percent stakes in June 2018. In July 2019 Premier Li Keqiang even accelerated the timetable, promising to eliminate ownership caps by 2020 in insurance, futures, and securities.

Much of opening this time was real, not just a theoretical possibility. Some foreign financial firms received timely approvals to take majority stakes in joint ventures or set up wholly foreign-owned operations.

Limited new opening

After the phase one deal was signed, China’s central bank put out a statement that it, “reflects the orderly, broad progress in opening up financial services on our own initiative and will strengthen our financial system’s competitiveness and resilience.” The deal mostly reaffirms and codifies what was under way, as can be seen in the table. The specific deadlines for China to allow full foreign ownership have apparently been moved up only for securities firms.

There’s less to the phase one deal than meets the eye

Timing in phase one deal

Previous timing

Foreigners allowed in already?

Securities fund custodian services

5 months (June 2020)

Already open

Standard Chartered (received license in October 2018)

Type-A lead underwriting

3 months (April 2020)

Already open

BNP and Deutsche Bank (received license in September 2019)

Credit rating

3 months (April 2020)

Already open

Standard & Poor’s received license, already issued ratings


April 2020

December 2020

JPMorgan approved for majority ownership, not full foreign ownership

Fund management

April 2020

April 2020

JPMorgan awaiting approval for 51% stake in China venture, seeking 100% in another


April 2020

January 2020

UBS has fully owned futures business since 2016 


April 2020

January 2020

Allianz approved for wholly foreign-owned unit in November 2019

Payments/bank card clearing

Maximum delay between most approval steps


PayPal approved for 70% stake; Mastercard and American Express approved to set up joint ventures

n.a. = not applicable
Sources: Caixin, CNBC, Reuters, US Trade Representative, Financial Times, Allianz, and Bloomberg.

Beyond a headline opening of a sector are the multitude of rules that can keep foreign firms from entering or expanding. The agreement’s approach to eliminating these barriers is strangely uneven. In insurance, China’s promises are broad: “remove any business scope limitations, discriminatory regulatory processes and requirements…”, but that language is missing in the other sectors, where only specifically identified barriers are slated for removal. Chinese officials could easily add new discriminatory rules in the other sectors to replace those they promised to eliminate, without violating the deal’s provisions.

The section on electronic payment services, attempting to right one of China’s most frustrating WTO violations, also left loopholes. China’s promises apply only to card payments, not fintech payment providers that dispense with cards—though importantly US-based PayPal was unexpectedly granted a license, before the deal was signed, by acquiring a 70 percent stake in a Chinese payment company. The deal states, “China shall accept the license application of…Mastercard, Visa, or American Express,” and sets time limits on the acceptable delay between the early steps of the approval process. A time limit for the final approval, however, is missing, leaving China room to stretch it out indefinitely. Even if there were a time limit, China’s central bank could always find a pretext to deny a license. Yet another apparent breakthrough is a partial victory: Foreign firms will also be able to buy nonperforming loans directly, at least with provincial licenses, but many are already operating in the sector.

All these openings are long overdue, but China’s financial system will need deeper reforms—especially in its capital account—to benefit fully from foreign firms’ expertise. The openings constitute a big step forward for reform in China, overcoming resistance from domestic financial firms whose preference for less competition kept foreigners largely at bay for over a decade. Most of China’s promises in the deal reiterate what it has already done, but that is a sign of real progress, not a dud result for the negotiations. Progress in the next phase in US-China commercial relations will have to be monitored vigorously.


1. According to data from the People’s Bank of China, accessed through Wind Information Services, foreign-funded banks in China had RMB4.2 trillion in assets as of June 2018 versus RMB256 trillion in assets for all banks in China. Banking asset data for other countries shown in the figure are for 2013, the most recent cross-country data I could find (Claessens and van Horen 2014).

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