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Trade war

China opens economy faster over fears of slower foreign investment

Premier Li announces deregulation for finance, transport, telecom and internet

DALIAN -- China's decision to fully open up foreign ownership of financial firms in 2020, a year ahead of schedule, reflects Beijing's concerns toward the growing number of companies moving out of the country to escape the fallout of the U.S.-China trade war.

China will "become more open, transparent and predictable for foreign investment, and its business environment will further improve," Premier Li Keqiang said in his speech at the World Economic Forum meeting here, an event also known as "Summer Davos."  

Foreign investors' access to value-added telecommunications and transportation will also face fewer restrictions, Li said.

The announcement came just days after Chinese President Xi Jinping and U.S. President Donald Trump agreed to resume trade talks after a lengthy deadlock. In the year since the first U.S. round of tariffs on Chinese goods, foreign companies have increasingly shifted production out of China to avoid them.

The resulting economic pressure could have driven Beijing to compromise on American demands for more open markets, in hopes of both mitigating the damage and potentially bringing the trade war to a speedier close.

Chinese Premier Li Keqiang speaks at the World Economic Forum - Annual Meeting of the New Champions in Dalian, China on July 2. (Photo courtesy of the World Economic Forum)

Li said foreign ownership limits in securities, life insurance and futures would be removed next year. China started allowing majority ownership in 2018 and had planned to allow full ownership in 2021.

His promise to relax investment restrictions in transportation, telecommunications and internet industries are scheduled for 2020. Under current regulations, airlines must be majority Chinese-owned, and their representative officers must be Chinese nationals. Chinese ownership is also required for phone carriers and other telecom companies, and the fast-growing internet sector has a 50% cap.

The premier also stressed that China will not discriminate between domestic and overseas players in credit cards and credit ratings -- areas where Beijing has pledged to open up, but foreign companies have been slow to enter the market. "Foreign-funded institutions will receive national treatment in credit investigation, credit rating and payment," he said

With these services-oriented reforms, China hopes to attract job-creating foreign investment in the sector to fill the gap left by tariff-burned manufacturers.

A report compiled by Tsinghua University last month cited major Taiwan-based Apple suppliers relocating manufacturing bases to Southeast Asia and warned that tariffs have accelerated the trend. A survey conducted in May by the American Chamber of Commerce in China found that 40% of member companies were considering moving production out of China or had already done so.

The regulatory changes could also be seen as concessions to Washington, which has pressed Beijing to open up its finance and internet sectors to overseas participation. Treasury Secretary Steven Mnuchin has complained that he cannot understand why scrapping foreign ownership limits in the finance sector would take three years.

In his meeting with Xi last week, Trump agreed to resume trade talks and hold off on additional tariffs on another $300 billion in Chinese imports, and hinted at a reprieve for black-listed telecom equipment maker Huawei Technologies. These moves are substantial enough to make trade war watchers speculate that China must have offered concessions in return beyond the announced agricultural purchases.

Li also sought to use Tuesday's speech to allay doubts about China's economic outlook that have intensified with the recent departures of foreign retailers such as French multinational Carrefour and Japan's Takashimaya. He called the economy stable overall, pointing to an array of positive indicators including low unemployment and brisk startup activity.

But the premier seemed to have lost his bullishness from the Boao Forum for Asia in March, where he said the Chinese economy's recovery in the first quarter had exceeded Beijing's expectations. Here, he directly acknowledged damage done by the trade war, saying the economy faces new downward pressure and that slowing exports and investment by foreign companies are having an impact.

Still, Li made no mention of specific plans for further stimulus, hinting at wariness in Beijing about pumping more money into the economy. He predicted monetary policy will remain moderate, and on the fiscal side, noted contradictions in China's finances that have emerged with the large-scale tax cuts that have already been implemented.

China's manufacturing purchasing managers index came in below the boom-or-bust mark of 50 in both May and June. Xi may have succeeded in averting an escalation of the trade war, but he has yet to make headway on the existing tariffs that continue to weigh on the economy.

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