The market sentiment has recently been boosted by the U.S. and China, as a trade deal between the two countries seems imminent. China’s leaders have also set the tone to further open its economy. But a former U.S. ambassador to China warns the real challenges may lie in what happens after a deal.
Max Baucus, who returned from Beijing after a three-year tenure as the U.S. ambassador to China in 2017, believes internal resistance to reform and local governments’ ability to carry out the central government’s policy put a big question mark on any trade agreements. And if a trade deal is reached it will likely take a long time — up to six years — to see any real changes.
“I think that China knows that it must open up economically to grow and develop,” Baucus told Yahoo Finance at the C100 Annual Conference on Saturday. “However, there are very strong forces within China that put limits to that. They don't want the reform and they can stop it.”
Baucus points out there is resistance to reform in China, from the government to state-owned enterprises and the private sector. The sentiment is echoed by some top Chinese officials. Speaking at the China Development Forum in March, Yi Gang, the governor of China’s central bank, admits the financial sector reform faces opposition from people who worry that opening China’s doors to foreign players could pose more risks to its financial system.
China has made some welcome moves this year, including passing the new Foreign Investment Law in March, aimed at leveling the playing field for non-Chinese companies. It's widely seen as a step forward compared with previous laws passed decades ago, but U.S. business groups say the language is still too vague and contains restrictive clauses for foreign players. It’s expected to go into effect next year.
“Is it enforceable, can we trust it, and how long it will be, are the big questions,” Baucus said.
The U.S. wants to set an enforcement structure that ensures Washington gets what it wants and reserves the right to retaliate. The time frame for change could reportedly be delayed to 2025. Baucus warned any structural changes in China could be slow. He says one common misunderstanding is that people outside China think the government can direct changes over a short period of time.
“Americans think with the leadership, because of the one-party rule, they assume that,” Baucus said. “But it's not necessarily true.”
“It's the old thing in China. The mountains are high, the emperor is far away,” he said, referring to a Chinese proverb meaning the central authorities’ policy and intentions don’t always get carried out well on the local level.
“When I was traveling around the country... it was clear to me, the farther I got away from Beijing, the more local provincial governors and party officials were doing their own thing, you [can] just tell,” Baucus said. “And also because it's not a rule of law country, people can do their own thing.”
Krystal Hu covers technology and China for Yahoo Finance. Write to her via krystalh@yahoofinance.com
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