Letter to Deputy U.S. Trade Representative Ambassador Susan C. Schwab

May 26, 2006

Ambassador Susan C. Schwab
Deputy U.S. Trade Representative
600 17th Street, NW
Washington, DC 20508

Dear Ambassador Schwab,

As you know, China currently places limitations on how much foreign ownership is allowed in various industries operating within its borders.

It is our ardent belief that American financial services firms should have the same access to China's financial markets that Chinese firms enjoy in the United States. Unfortunately, all signs point to the contrary. Today, the Chinese government erects significant barriers aimed at restricting the ability of American financial services firms to compete in an open and fair manner in China. For example, U.S. securities firms are limited to establishing minority-owned joint ventures, with ownership capped at 33 percent.

Aside from the seemingly arbitrary and onerous ownership requirements, U.S. firms also face a number of other troubling impediments in China, including limitations on the scope of business, the inability to trade in derivative markets, and uneven procedures for regulatory transparency such as a process for public notice and comment.

Market access and national treatment for U.S. financial services in accessing China's markets is not merely a matter of fairness; it will ultimately create new opportunities for U.S. firms and increase global economic growth. Given the competitive advantage we enjoy in research, product development, and regulatory structure, a freer market in China would bolster the U.S. economy

While China has promised to eliminate quantitative restrictions on foreign ownership in financial services by the end of this year, their true commitment to openness and reciprocity is still open to question. In fact, according to publications by the U.S.-China Business Council, several Chinese banking officials have hinted that they are looking for ways to slow the entry of foreign banks to the sector without violating China's WTO commitments. Specifically, the mainland press has reported that China was considering restricting foreign banks to the less-prosperous central and western regions, and capping at two the number of Chinese banks in which foreign banks could take a stake. We are very concerned about this, because we have seen before how China can make promises but then find creative ways not to keep them.

In your written responses to questions from your May 16 confirmation hearing before the Committee on Finance, you indicated that USTR has been working diligently to ensure that China keep its WTO commitments to eliminate these restrictions on financial services. However, you also said that the Administration has been "reminding," "stressing," and "emphasizing" the importance of these commitments. Yet it is only rhetoric to verbally push China to do what they have already promised to do.

We have seen first-hand on the currency manipulation issue how limited the rhetorical strategy can be. China has promised time and time again to allow market forces to gradually appreciate its currency, yet the yuan has appreciated by only 1.1 percent since last July. We do not regard this as significant progress, and we do not want the same thing to happen with financial services liberalization.

We would like to learn from you how USTR plans to work with Treasury to ensure that China keeps its commitments in the area of financial services - and what is USTR prepared to do if they fail to do so?

Specifically, we would like answers to the following questions at your earliest convenience.

1. What is your understanding of all of the current quantitative and qualitative restrictions that exist for U.S. financial services firms trying to do business in China, in terms of joint ventures, the ability to operate independently (i.e., to just go into China and start a company or open a branch), and the ability to purchase Chinese companies outright?

2. What is your understanding of the commitments China has made in all of these areas, in terms of restrictions that are due to be liberalized - or lifted entirely - by the end of 2006?

3. What specific initiatives, if any, does USTR have underway to push China to permit U.S. financial services firms to establish wholly-owned securities or banking companies in China?

4. What is the office of the United States Trade Representative doing to lay the groundwork for China's promise to eliminate quantitative restrictions in financial services by the end of 2006? What procedures does your office have in place to monitor their actions and determine if they have kept their promise?

5. Have you or Treasury already had discussions with Chinese officials about how the landscape will look when the restrictions are lifted, in terms of (a) the process for license applications and the length of time before applications will be approved, (b) any restrictions on the number of branches a bank or securities firm may open, (c) any geographic limitations that may be imposed, or other issues? If so, what has been agreed to?

6. Finally, what specific actions does USTR plan to take if it becomes plainly apparent in early 2007 that China is not meeting its commitments?

We appreciate your patience and willingness to respond to these questions, and we look forward to your prompt reply.

Sincerely,

Charles E. Schumer Lindsey O. Graham

http://schumer.senate.gov/SchumerWebsite/pressroom/press_releases/2006/PR180.Schwab%20Nomination%20Hold.052606.html