HONG KONG (Reuters Breakingviews) - China is aiming its retaliatory trade war salvos away from Wall Street. Goldman Sachs has applied to take a majority stake in its local joint venture, and it may well get it. Despite tensions, Beijing appears open to U.S. banks boosting their mainland presence. Their lack of market heft means they don’t threaten local rivals much, and China may need their help in the future.
Even as the central government continues its tariff battles against the United States, officials have brought forward plans to allow foreign firms to control mainland JVs. Americans have not been excluded: JPMorgan was given the nod in March, and Goldman and Morgan Stanley are awaiting approval to control their own.
Wall Street financiers haven’t turned out to be the wolves that local rivals had feared. Goldman set up its JV with a swagger in 2004, partnering with famed Chinese rainmaker Fang Fenglei. It got full managerial control, a privilege not granted to most of its foreign rivals. Hank Paulson, the former U.S. Treasury secretary who led Goldman at the time, said he was looking forward to building China’s “leading investment bank”.
That hasn’t happened yet. The venture may generate deal flow that doesn’t show up in the numbers, such as entrées to Hong Kong initial public offerings. But the standalone entity made just 69 million yuan ($9.6 million) in net profit last year. The top eight securities JVs averaged losses of 10 million yuan in 2018, according to consultancy Quinlan & Associates. The top eight locals, by way of contrast, averaged profits of 5.4 billion yuan.
Even so, having friends on Wall Street still serves China’s purposes. Big American banks can facilitate access to American capital that the People’s Republic could use to reduce its $2 trillion of external debt. That represents only 14% of GDP, but rose at a double-digit pace last year. Officials seem to be preparing for a future in which a current account deficit pushes it even higher.
At the same time, bankers also function as go-betweens with American policymakers. Paulson later started a China-focused think tank, for instance, which now regularly opines on the trade war. Beijing does far better with such harmless, yet potentially helpful, people on its side.
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