In the News: China's Currency Devalues; Shanghai FTZ Expands; Chinese JVs Set for Foreign Control; and UN Mediation Convention Signed
August 11, 2019 | BY
Vincent ChowThe U.S. Treasury labels China a currency manipulator after China's currency falls below seven to the dollar; China announces plans to double size of Shanghai FTZ and reduce restrictions on foreign businesses; JP Morgan and Morgan Stanley one step closer to taking control of respective JVs; and China and U.S. sign U.N Convention on Mediation in Singapore
US Labels China a Currency Manipulator after Yuan "Breaks 7"
China's currency fell below seven to the U.S. dollar last week, prompting the U.S. Treasury Department to call China a currency manipulator in another escalation of trade war tensions between the world's two largest economies. Last breached in 2008, the seven-to-the-dollar level carries no economic significance but is symbolically important. A weaker yuan makes China's exports more competitive in international trade.
The yuan's devaluation came days after U.S. President Donald Trump announced a new round of tariffs on virtually all remaining Chinese imports not currently taxed. China announced it had halted U.S. agricultural imports on the same day its currency fell to an 11-year low, leading to accusations that it is "weaponizing" its currency in retaliation against U.S. tariffs. In a statement, China's central bank dismissed accusations that it is deliberately devaluing its currency and accused the U.S. of protectionism. Meanwhile, foreign manufacturers including a trio of large Japanese companies — Sony, Ricoh and Asics — are shifting production away from China due to U.S. tariffs, the South China Morning Post reported.
In June, more than half of the U.S.'s $6 billion revenue from tariffs was collected from Chinese imports. It is also continuing efforts to freeze out Chinese telecom giant Huawei with new rules issued Aug. 7 barring government agencies from doing business with Huawei and other Chinese technology companies. The Committee on Foreign Investment in the United States (CFIUS) is making it more difficult for Chinese entities to invest in the U.S. with increased screenings. The Foreign Investment Risk Review Modernization Act passed in 2018 has expanded CFIUS powers and was driven by concerns of China's acquisition of advanced U.S. technologies.
China expands Shanghai FTZ while loosening restrictions
China's State Council unveiled plans to double the size of the Shanghai Free-Trade Zone (FTZ) by adding the area of Lingang. Corporate income tax rates there will also be cut from 25% to 15% for the first five years for companies operating in preferred industries such as artificial intelligence, civil aviation and biomedicine.
Launched in 2013, the Shanghai FTZ was the first free trade zone in mainland China, with several others established since including zones in Fujian and Guangdong. Compared to other parts of the country, FTZs have policies that are less restrictive on foreign companies including looser financial requirements and simpler establishment procedures. There are even plans to drop all duties in the Shanghai FTZ which could be announced as soon as this year, according to Reuters' reporting.
Roughly the size of Hong Kong, Lingang is where the pioneering American car company Tesla's first gigafactory outside the U.S. is being built – an example of the high-tech companies China is looking to attract to the Shanghai FTZ. In June, the newly expanded "encouraged catalogue" supported increased foreign investment in high-end manufacturing, green manufacturing and intelligent manufacturing, issued at the same time as a shortened FTZ Negative List opening up more sectors to foreign investment. More recently, the State Council announced 11 measures to further open up China's financial sector; they will be implemented first in Lingang, Caixin reported.
JP Morgan and Morgan Stanley Set to Take Control of Chinese JVs
U.S. investment banks JP Morgan and Morgan Stanley are set to become majority owners of their respective Chinese securities joint ventures (JV), pending regulatory approval. Both banks secured the 2% stake needed from their Chinese partners to gain a controlling stake in their JVs, with both banks currently owning 49% respectively.
Morgan Stanley signed an equity transfer contract on Aug. 1 with its Chinese partner Huaxin Securities for $54 million according to exchange filings. Their JV, Morgan Stanley Huaxin Securities, offers underwriting and sponsoring of stocks and bonds. JP Morgan meanwhile paid its Chinese partner Shanghai International Trust Corp. $34.3 million for the additional stake. Their JV, China International Fund Management, offers asset management services. Both deals are awaiting regulatory approval by the China Securities Regulatory Commission, a process which could be complicated by the ongoing trade war between China and the U.S.
In 2017, China announced it was relaxing limits on foreign ownership of JVs in its financial services sector, allowing foreign investors to own up to 51% of their securities, investment manager and life insurance JVs with a view to removing caps entirely in 2021. On Jul. 30, the State Council announced that the caps will be removed one year ahead of schedule by 2020 to allow foreign financial firms to wholly own their Chinese businesses. If their deals are approved, JP Morgan and Morgan Stanley will join HSBC, Nomura and UBS Group in having majority control of their respective securities JVs in China.
More from CLP: China Introduces More Measures to Open Up Financial Sector
China signs mediation convention to settle trade disputes
Last week, 46 U.N. members, including China and the U.S., signed the Singapore Convention on Mediation. The U.N. Convention on International Settlement Agreements Resulting from Mediation, its full name, is designed to settle cross-border commercial disputes.
The Convention facilitates enforcement of international mediated settlement agreements and promotes mediation as an international dispute resolution tool by setting out a common legal framework for different jurisdictions to apply. It is expected to increase the use of mediation rather than litigation in trade disputes and has been compared with the 1958 New York Convention which promoted the use of arbitration.
A survey conducted by the International Mediation Institute in 2018 indicates that many dispute resolution stakeholders, particularly in Asian jurisdictions, wanted to see legislation enacted which will support enforcement of mediated settlement agreements. The new convention addresses their demand directly. In 2018, China established the China International Commercial Court to handle cross-border commercial disputes, the first of its kind in China. It was designed especially with potential international commercial disputes arising from the Belt and Road Initiative in mind.
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