In the News: Partial Trade Deal Agreed; U.S. Blacklists Chinese Tech Firms; and CSRC Releases Timetable Removing Foreign Ownership Caps

As always, the devil is in the details – or the lack thereof in this case. No specifics were given about China's reported increase in purchases of U.S. agricultural goods. If China increases its purchases to up to $50 billion in a year, that would be a substantial gain from the $24 billion of purchases it made in 2017 before the trade war started. The significance of the increase would diminish the longer time period it is spread over, although recent figures provide reason for optimism. China bought more than 1.5 million metric tons of U.S. soybeans in the last week of September, some of the biggest purchases in more than a year, and almost $1.5 billion in total agricultural exports in August, the best month since January 2018, according to U.S. data. Under the plan laid out by President Trump to finalize the details of a phase one deal, there will be one or two more rounds of talks taking place over an unspecified period of time which will finalize rules on IP protection and forced transfer of foreign companies' technology in China. President Trump said he and Chinese President Xi Jinping could sign the phase one deal in mid-November at the Asia-Pacific Economic Cooperation summit in Chile.

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U.S. blacklists Chinese entities over treatment of Muslim minorities

The U.S. Commerce Department has blacklisted more than two dozen Chinese entities which it says are being used to suppress China's Uighur Muslims and other ethnic minorities. The revised Entity List added 28 technology companies and state security bureaus in China days before the latest round of trade talks, thereby blocking them from doing business with U.S. firms. Although the move is highly symbolic, it is unlikely to have a major impact on the companies which source crucial parts for their products from many non-U.S. suppliers and have had months of advance warning to reduce their reliance on U.S. suppliers.

Several of the blacklisted security bureaus have jurisdiction in China's western Xinjiang region where China's Uighur population is based. Meanwhile, technology firms such as Hikvision and Dahua Technology which are leading providers of video surveillance equipment have also been added to the blacklist, joining the high-profile telecommunication company Huawei. The Commerce Department said that the entities have engaged in "China's campaign of repression, mass arbitrary detention, and high-technology surveillance against Uighurs, Kazakhs and other members of Muslim minority groups". China responded by demanding that the U.S. revoke its decision but stopped short of saying whether it would retaliate.

Although U.S. officials said the blacklistings were not tied to the resumption of trade talks with China, it does show the breadth of disagreement between the two countries. Despite the latest trade talks indicating a cooling in tensions with concessions on both sides, there are still myriad points of contention which are yet to be resolved between the two countries, including:

• Existing tariffs from both sides 
• Tariffs of 15% scheduled to be imposed on $156 billion of Chinese imports on Dec. 15
• U.S. blacklisting of Chinese telecommunications giant Huawei on Entity List
• China's rules for protecting IP and enforcing laws against IP theft by Chinese entities
• China's alleged currency manipulation
• U.S. companies forced to share technology with Chinese partners in exchange for access to the market
• China's backing of state-owned enterprises who dominate domestic markets
• China's rules on information security, cross-border data flows and high-tech sectors such as cloud computing which the U.S. wants relaxed

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China releases timetable for removal of foreign financial services ownership caps

China is set to give foreign financial firms a bigger role in its financial market, one of the world's largest. The China Securities Regulatory Commission (CSRC) announced it will remove limits on foreign ownership next year of futures companies starting from January, fund management companies from April, and securities companies from December 2020. It did not, however, specify whether this means companies can submit applications for relevant licenses or whether licenses will begin to be handed out in those months.

The announcement came as China and the U.S. were negotiating in the latest round of trade talks. According to President Trump, one of China's pledges from the talks was to further open up its financial market to international firms. In 2017, China announced it was relaxing limits on foreign ownership of joint-ventures (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 said that the caps will be removed one year ahead of schedule by 2020 to allow foreign financial firms to wholly own their Chinese businesses. This latest announcement provides an official timeframe for those changes to take effect.

The lack of control over their Chinese JVs has long been a source of frustration for foreign financial firms in China who say that majority control would increase the services they could provide through their JVs. In August, the U.S. investment bank JP Morgan paid its Chinese partner Shanghai International Trust Corp. $34.3 million to gain a controlling stake in their asset management JV, China International Fund Management. The deal is still pending regulatory approval by the CSRC. Swiss bank UBS was the first to be approved under the new rules in November 2018 to take a majority stake in its securities JV, while Morgan Stanley and Credit Suisse are also waiting for approval to take control of their existing securities JVs.

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