China has steadily lowered barriers in its financial system in recent years, giving Wall Street and European banks an advantage in operating in China. And several new regulations recently announced in Beijing have brought barriers back to the banking sector, severely limiting the ability of foreign banks to do business in China and making them less competitive with local rivals.
A New York Times report on Saturday (April 3) cited people familiar with the matter as saying that a set of rules issued in December and January limited the amount of money foreign banks could transfer from overseas to China; another, which just took effect this Wednesday, requires many foreign banks to cut back on lending and sell bonds and other investments.
The new rules have already raised concerns among global bank executives and foreign companies that rely on those credits to lend. They fear these new rules could make foreign companies in China more dependent on China’s state-owned banks in case they need more capital. The New York Times reports that banks and trade groups are reluctant to speak publicly about their views on the rules for fear of triggering further regulatory measures. But the newspaper saw the European Union Chamber of Commerce in China raise concerns about the remittance limits in a letter to the Chinese central bank. In the letter, the chamber said, “In some cases, the risks associated with such a major structural change could fundamentally upend the strategic direction of the EU.”
The report argues that these new rules create a potential pressure point for Beijing, which is already out of step with Europe and the United States on trade, human rights, geopolitics and other thorny issues.
The new rules could compound already thorny political issues such as the U.S.-China trade war, an impending investment deal between China and the European Union, and longstanding tensions over Beijing’s control of the yuan’s exchange rate. At the moment, President Biden appears to have little interest in changing the demands imposed by former President Trump on trade. The U.S.-China conflict over human rights issues has been intensified by Beijing’s human rights abuses against Muslim minorities such as the Uighurs in Xinjiang and its crackdown on pro-democracy activists in Hong Kong, with some international companies involved, such as Swedish clothing retailer H&M and U.S. sportswear brand Nike, which are being boycotted for taking a stand on the issue of cotton in Xinjiang.
The New York Times reports that the reasons behind the new rules are unclear and appear to have little to do with the tense political environment, perhaps to stem the flow of potentially damaging amounts of money into China that could trigger unexpected inflation.
China’s economy emerged from a pandemic slump late last year when economic activity contracted in various countries, attracting a huge influx of capital. The report noted that the large inflows drove up the yuan’s exchange rate to the detriment of Chinese exporters; but since the new rules were enacted, the yuan has begun to depreciate.
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