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Paulson tells China: Let Goldman Sachs, Morgan Chase take over your banks

Section: Daily Dispatches

Paulson Urges China
to Deepen Reforms

By Geoff Dyer
Financial Times, London
Thursday, March 8, 2007

Hank Paulson, U.S. treasury secretary, outlined a new approach to economic and trade relations with China on Thursday in a speech calling on authorities in Beijing to deepen reforms of financial markets and let in more foreign investors and investment banks.

In a 45-minute address to financial executives in Shanghai, Paulson made only one indirect reference to China's policy for the renminbi, the economic issue that has dominated debate between the two countries in recent years.

Instead, he used his only public comments of a two-day trip to China to urge the country's leaders to speed financial reforms in order to create more balanced economic growth, encourage innovation, and make better use of natural resources -– all objectives that Beijing has itself recently emphasised.

"The risks for China are greater in moving too slowly than in moving too quickly toward transparent, liquid, stable capital markets," said Paulson, on the last leg of a three-country trip to Asia.

He added: "China is a large and powerful country and you should not limit your own potential by restricting your access to world-class financial expertise that can enhance your capital markets."

The message Paulson was sending, according to Andy Rothman, a Shanghai-based economist for CLSA, was: "If you give foreign firms much more access to your capital markets, that will enable us to dampen down protectionist sentiment in Congress and take a bit of pressure off the exchange rate issue."

Rothman said China might take some steps to open up its financial services market further before the next round of bilateral talks in Washington in May in order to reduce political pressure for measures against Beijing.

Since he became treasury secretary last summer, Paulson has repeated calls by other U.S. officials for China to allow the renminbi to appreciate more quickly against the U.S. dollar as pressure on Capitol Hill for retaliatory legislation against China has been mounting. But Thursday's speech, which detailed a set of capital markets reforms he said China should adopt, was part of an effort by Paulson to shift debate away from the short-term focus on Chinese currency policy, where pressure from the United States has so far had only modest results.

As well as letting in more foreign financial expertise, Paulson said China should take steps to boost its bond market, improve financial disclosure, and strengthen the base of institutional investors in its capital markets.

Paulson, a former Goldman Sachs chairman, urged China to let foreign companies take majority control of domestic investment banks and asset management companies -– where they were currently limited to 33 percent and 49 percent stakes respectively in joint ventures. He said Brazil, Russia, and India had all eliminated ownership caps in the securities industry.

"Experience demonstrates that the joint venture model does not work in the securities sector because investment banks are difficult to manage and control," he said. By letting foreign banks take controlling stakes in Chinese small and medium-sized banks, credit analysis skills in the banking sector would be also improved, he said.

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