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Sunday, October 16, 2005

U.S. Offers Plan for Open Markets in China - New York Times

U.S. Offers Plan for Open Markets in China - New York TimesOctober 16, 2005
U.S. Offers Plan for Open Markets in China

XIANGHE, China, Oct. 15 - The Bush administration is expected to present China's political leaders on Sunday with a sweeping plan to overhaul China's financial markets and open the country to foreign banks, investment firms and insurance companies.

Administration officials say the plan is part of an effort to put the yuan into a broader debate over China's lopsided reliance on exports as the main source of economic growth.

The plan, to be discussed in two days of talks here and in Beijing, calls for China to speed up the privatization of state-owned companies, including banks; to develop a Chicago-style futures market for currency trading; to establish an independent credit-rating agency; and to crack down on bailouts for banks left holding bad loans.

"What we tried to do is take a quantum leap in sophistication and scope," said Timothy D. Adams, undersecretary for international affairs at the Treasury Department. "It gives you a picture of the truly complex nature of what we are trying to do."

Though many of the ideas are familiar, and often supported by Chinese leaders in principle, the list reflects an increased effort to lecture China about internal financial issues.

That could backfire. Chinese leaders invariably bristle at pressure from American officials, and they could view the new American "priorities" as an unwelcome intrusion.

The new tack comes as Treasury Secretary John W. Snow continues to show little progress on the volatile economic dispute with China over exchange rates.

Republican and Democratic lawmakers in Congress have long complained that the yuan has been pegged at an artificially low value against the dollar, making Chinese exports to the United States cheaper than they would otherwise be.

China announced a 2 percent revaluation in July, but have yet to follow with any additional changes. Based on signals from senior Chinese officials on Friday and Saturday, Mr. Snow is unlikely to return to Washington next week with any evidence of new progress.

Mr. Snow has been arguing that China needs to get people to spend more and save less. Administration officials say that a financial overhaul would help make that happen.

Many economists agree with that assessment, but they caution that there are limits to what the United States can do to speed up change.

"They are doing a smart thing, because the exchange rate is a small part of the overall economic relationship," said Andrew Rothman, a Shanghai-based strategist at CLSA Asia-Pacific, a brokerage firm. But he added, "This is not the kind of thing where someone flips a switch and it happens overnight."

Mr. Rothman said that China had already embraced many of the ideas that Mr. Snow was promoting and that consumer spending has grown sharply in the past few years.

Retail sales in China have been climbing about 10 percent a year for the past several years, he said. Household credit, virtually nonexistent five years ago, now accounts for 16 percent of all outstanding credit.

But many of the Bush administration's proposals would encounter fierce political opposition from many quarters.

China's state-owned banks and far-flung rural credit cooperatives have many defenders in the ruling Communist party, and they are certain to oppose well-financed competition from Western banks.

Even without opposition from vested interests, many Chinese leaders are likely to fret over giving more freedom to foreign financial institutions to enter Chinese markets.

Under current laws, foreign investors are usually prohibited from owning more than 25 percent of a commercial bank, and no single foreign investor can own more than 20 percent.

According to a document that Treasury officials plan to circulate among Chinese leaders, the Bush administration would remove the limits on foreign ownership as well as a host of other restricitons.

Foreign financial institutions that want to buy Chinese securities would be freed from having to have at least $10 billion in assets and to have been in business at least five years.

Foreign-affiliated banks, brokerage firms and insurers would be freed from restrictions on setting up multiple branches at one time.


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