COMMENTARY
Commentary:  Back to Square One on Opening Securities Industry to Foreign Investment
October 5, 2007
Christopher Bjorke, AFP

In China's incremental moves toward opening its securities industry to foreign investment, Beijing has given a little, taken a little back and then given a little back again.

The result looks more like a circle than progress, and the stalling could end up harming China most of all.

According to reports by Bloomberg News and the Financial Times, China will end a two-year moratorium on foreign investment by the end of the year and allow companies to buy stakes of up to 20% in publicly traded brokerages. In effect, the move takes the situation back to where it was before the door closed to investment from overseas.

"To the extent that they've lifted the moratorium, that's good," said John Dearie, senior vice president for policy and research at the Financial Services Forum. "But you couldn't characterize that as progress in the sense that we really feel that they need to not only meet their WTO obligations, but they need to move beyond them. And that's not just in terms of our own interest, but more importantly, in their own interest."

Hobbled giant

China is somewhat of an anomaly as it steadily approaches third place among world economies, but lacks a modern financial services industry. That not only makes it unusual, but also makes it unstable.

"It has one of the most primitive and underdeveloped financial systems on earth, even in comparison with other emerging nations. That is just an unsustainable situation for now," Dearie said.

"You cannot have a world-class economy without a world-class financial system. And you cannot have a world-class financial system without extensive foreign participation."

Other developing countries have embraced foreign know-how while building up their financial sectors, allowing them to leap ahead quickly. China's resistance to further openness to protect its backward domestic companies only reinforces that backwardness.

"In effect, they're making the argument that we can't open up because we don't have a competitive financial system. Well, the fastest way to get a competitive financial system, and an efficient and modern and effective financial system is to import it," Dearie said.

Dropping its ban on foreign investment is a step forward, but until Beijing embraces full competition within the financial sector it will still fall short of its World Trade Organization commitments.

"The moratorium was clearly a violation of their securities-related commitments in terms of their WTO obligations. The recently announced lifting of the moratorium takes us back to compliance with what you might call the letter of their obligations," Dearie said.

"It's good news, but we're still looking for better news."

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