Paulson takes open-markets message to China

Scott Tong Mar 7, 2007

Paulson takes open-markets message to China

Scott Tong Mar 7, 2007

KAI RYSSDAL: The president’s going to South America to talk trade, as we mentioned a moment ago. Treasury Secretary Henry Paulson’s already in Asia doing the same thing. He had some quick meetings in Beijing today. Tomorrow, Paulson will make a big speech at the Shanghai Futures Exchange, where he’s expected to say it’s time for China to get serious about opening its markets.

Marketplace’s Scott Tong is in Shanghai. Hi Scott.

SCOTT TONG: Hello Kai.

RYSSDAL: You know, we had the show in Shanghai a year ago, and you and I have both spent some time in there. And we both know that you can get almost anything you want in that city. So what is Henry Paulson talking about when he says China is closed to foreign competition?

TONG: What he’s talking about is banking and financial services. As you say, you can get all manner of foreign products here — consumer products and clothes and cell phones and watches. A big exception is banking. If you look up and down the streets, there are a whole lot of ATMs in Shanghai, but almost all of them are Chinese domestic banks. And Mr. Paulson’s point will be, look, competition has served China well in so many areas of the economy. It will serve China well in banking as well.

Here is how Lester Ross puts it — he’s an attorney up at Beijing and he works for multinational companies.

LESTER ROSS: If China really wants to move into the major leagues, if it wants Shanghai to become an international financial capital, it can’t say, “Well we’re only going to let you in in baby steps.” You have to do it all the way. And places that don’t do so remain secondary cities.

RYSSDAL: Well Scott, what does the Chinese government say when people accuse them of maintaining closed markets?

TONG: Well, they deny the accusation. They say that as of this past December that they’ve lifted all the legal restrictions. Now, the foreign banks come back and say, well in reality, if you think about how the bureaucratic process works in China, that’s not the case. Just give you an example: if a Chinese national walks into a foreign bank branch in Shanghai and wants to open up a checking account. That person has to cough up $120,000 U.S. dollars just to kind of get in the door. Which means that there’s not gonna be a whole lot of people who are gonna want to set up these accounts, because they’re just not wealthy enough. That’s just one example where the door is barely open.

RYSSDAL: What’s the government afraid of then?

TONG: They’re afraid that their banks won’t be able to compete with foreign banks. And at the center of all this is Chinese lending practices. Did you ever have any friends who you loaned money to and they promised they would give it back because they’re your friend, and they never did? Well there’s a whole lot of that going on in China. And the economists call it “Non-performing loans,” where their loans go bad. And it’s because a lot of the lending is based on personal relationships.

RYSSDAL: Let’s get this back to Henry Paulson. Frame this for me in terms of the bilateral U.S. relationship, the trade gap and worries in this country about the reevaluation of the yuan, the Chinese currency.

TONG: Well, Mr. Paulson has said in recent days that the U.S. is dissatisfied with the pace at which China is reevaluating its currency. He’s thrown out the word “protectionism” when it comes to the trade relationship. There’s just a sense, and there’s always a sense, that it’s not happening fast enough. Now the answer from China and China-watchers is economic reform has always gone kind of slow and steady in China, and it’s worked very well. So they’re not going to want to introduce a whole lot of economic shocks

and then just fling open the doors to the banks or jack up the value of the currency very quickly. That, in their minds, translates into potential economic instability, social and political instability, and at the root of all this is political self-preservation for them.

RYSSDAL: Scott Tong is Marketplace’s man in Shanghai. Thank you, Scott.

TONG: Thanks, Kai.

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