In the News: Phase One Deal Signed; Online-Only Banking Rules; and US Venture Drop

No timetable has been released for further negotiations, although President Trump has vowed to agree a comprehensive trade deal after the upcoming president election in November. There is still significant issues to tackle, not least the tariffs that still remain on both sides. China is not lifting retaliatory tariffs it has imposed on $110 billion of U.S. imports as part of the phase one deal, while the U.S. still has tariffs on $360 billion or around three-quarters of Chinese imports. According to Chad Brown, senior fellow at the Peterson Institute of International Economics, U.S. tariffs are still six times higher than what they were before the trade war began in 2018. Chinese officials have stressed that the deal does not give U.S. firms special treatment in the accelerated opening up of China's financial sector, but companies from other countries can also tap those benefits. The World Bank's annual report released on Jan. 8 highlighted the negative impact of the trade war on the global economy, largely due to the disruption on exports and cross-border supply chains. In related news, the U.S. dropped China's currency manipulator label two days before the phase one deal was signed.

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China readies regulations for online-only banks

China is finalizing its first ever regulations for online-only banks, Reuters reports. According to various sources, both local and foreign banks operating in China will be allowed to establish separate online banking operations under new rules designed to minimize risk in the sector and attract foreign players. Neither China's banking watchdog nor the central bank have confirmed the report.

One source who has been involved in discussions with regulators told Reuters that around a dozen groups including foreigners have shown interest in launching online-only banks, and that they would be allowed to partner with tech firms as part of their plans. The sources also said that banks are expected to be allowed to own majority stake in the online-only operations.

Only four online-only banks have been licensed since 2014 in China, all of them domestic, including Tencent-backed WeBank, Alibaba-backed MYbank, and Baidu-backed AiBank. Together, they account for just 0.15% of China's total banking assets. That figure looks set to grow in coming years as digital banking and financial technology (fintech) receive increased attention from investors and the authorities. In August, China's central bank published a three-year plan for developing the fintech sector aiming to accelerate the application of science and technology in the financial industry, increase public satisfaction with fintech products and services, and curb industry risks. With Reuters reporting imminent regulations for the digital banking sector, a hugely promising fintech application, early on in its development, the regulators are perhaps looking not to repeat the mistakes they made in their handling of the peer-to-peer lending sector, the growth of which was largely unchecked before high-profile scandals and bankruptcies forced the regulators to intervene – but not before hundreds of thousands of investors had lost their savings.

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U.S. venture investment in China drops to six-year low

U.S. venture investment in China is expected to sink to a six-year low for 2019, according to a new report from Rhodium Group and the National Committee on U.S. China Relations. The report estimates that U.S. venture investment in China fell to under $4 billion for 2019, a drop of 77% from 2018. The report also finds almost 5,000 venture capital (VC) transactions between the U.S. and China worth $66 billion since 2000.

Of the roughly $300 billion raised by Chinese startups since 2000, around $47 billion came from U.S. investors, close to a fifth of all the venture capital raised. The report says that U.S. venture investors traditionally seek exposure to fast growing technology markets, with artificial intelligence (AI), big data and life sciences the fastest growing sectors in terms of U.S. interest in the last three years. In contrast, manufacturing, gaming and financial technologies (FinTech) are less popular for them relative to their Chinese counterparts. Meanwhile, Chinese venture investment in the U.S. remains relatively small, the report says, although it has also stalled since 2018 due to strict capital controls and the government's deleveraging campaign domestically, and tightening inbound scrutiny on the U.S. side.

U.S. venture capital investment has contributed significantly to the development of China's technology sector to the behemoth it is today. In recent years however, domestic Chinese competitors and a slowdown in the technology sector have exerted downward pressure on U.S. venture investment inflows. Of growing significance in recent years is the broader worsening of U.S.-China relations resulting in a "strategic reassessment of China-related risks" in the U.S., which has led to "novel restrictions for engaging with problematic firms and exporting sensitive technologies", the report says. The report's authors call on U.S. policymakers to avoid "unproductive decoupling" with China and to work with its allies to ensure that efforts to combat China are effective. The U.S. has blacklisted several Chinese technology firms and has called on its allies to do the same, including barring the Chinese telecoms giant Huawei from participating in building up 5G networks. On the same day the report was published, the U.S. Treasury Department released the final regulations expanding the review powers of the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investment for national security implications. Any U.S. company with plans to collect data on over 1 million people will have to seek CFIUS approval to receive foreign investment under the new rules.

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