As China claims to liberalize its financial system, western banks are rushing to cash in on China’s trillions in consumer savings. On May 25, the Financial Times reported that Goldman Sachs won “initial approval” from China’s regulatory authorities for a joint venture (JV) with the Industrial and Commercial Bank of China (ICBC) to conduct wealth management. ICBC, one of China’s largest banks, will hold 49 percent of the venture, with Goldman Sachs Asset Management holding a 51 percent “controlling” share.
The word “controlling” is in quotes because ICBC is state-owned, and the success of Goldman’s 51 percent of the venture will continue to be dependent upon Beijing’s approval. If the venture falls out of favor, for whatever reason, the Chinese Communist Party (CCP) can through regulations, taxation, or control of the local banking network, make it impossible to operate profitably.
The CCP often pressures businesses, even foreign-owned public businesses, to include Chinese nationals on their boards of directors, and the CCP had cells within about 70 percent of China’s 1.86 million private businesses in 2017. That figure was “destined to grow” according to The Diplomat.
“Even if Chinese Company Law regulates the establishment of Party units in foreign invested enterprises (both JVs and fully owned) without requiring governance roles for their members, recent trends in officials’ attitude, which are oriented toward the demand for more power, indicate accelerating interference,” according to The Diplomat. “That suggests that these positions are not merely symbolic, but rather an eventual source of political pressure around the boardroom.”
The CCP has leverage over international business because it controls their access to China’s massive market. The Financial Times article yesterday quoted a Goldman head who sees China’s market as “one of the world’s largest, fastest-growing, wealth management opportunities.”
So, Goldman will be incentivized to comply with CCP demands. There is no guarantee that the bank will not be responsive to a CCP cell within its own venture in China, for example. That could include anything from pressure to pay higher taxes within China, to pressure for political favors delivered in the United States. The CCP seeks to lower tariffs on China’s goods in the United States, and wants lighter export controls on sensitive technologies that Beijing seeks to acquire. Goldman is optimally positioned for such pressure, as many of its alumni become Treasury Department officials in Washington, and Treasury has extensive input into tariff and export control decisions. Treasury is also known as being consistently soft on China, including, according to one source, on the issue of the Uyghur genocide.
Steve Mnuchin, when he was secretary of the treasury for President Trump, was known to be one of the softest-on-China of Trump’s cabinet. Mnuchin and his father were both Goldman alums. Gary Cohn, a Goldman alum, served as National Economic Council head under Trump.
Other former treasury secretaries (and their years of service) with financial links to Goldman include Henry Fowler (1965–1968), Robert Rubin (1995–1999), Larry Summers (1999–2001), and Hank Paulson (2006–2009). When Hillary Clinton completed her stint as secretary of state, she reportedly accepted $675,000 in speaking fees from Goldman for just three engagements in 2013. Was it a payoff, was she really worth that much, or was it a means to influence future secretaries of state by huge payouts to former secretaries of state?
China is positioning other big banks in a manner that could incentivize pro-Beijing political pressure. This month, BlackRock received permission for a joint venture with China Construction Bank and Singapore’s Temasek to begin wealth management. BlackRock is the world’s biggest asset manager, with approximately $9 trillion in assets under management (AUM). France’s Amundi asset manager ($1.8 trillion AUM) was the first foreign company to win approval for a majority foreign-owned wealth management business. It partnered with the Bank of China last year to launch the venture. Also in 2020, JPMorgan Asset Management unveiled plans for majority ownership in its mutual fund through buying out its JV partner.
While western governments have long pressed for “liberalization” of China’s financial services sector, it is arguably impossible to truly liberalize a country in which a communist government has total control of the economy and there is no genuine rule of law. International investing in dictatorships almost always includes an ongoing political transaction, rather than simple investment in actual assets that can be easily sold, and the profits repatriated.
As long as our banks are operating in China, they should be firewalled more thoroughly from our democratic political systems. Not doing so leaves an avenue for Beijing’s increasing economic influence, which in democracies, translates into political clout. This includes pre- and post-government positions and revenues from banks like Goldman Sachs. Democracy is by design porous to political influence from the business community. The more the business community becomes dependent on China for its profits, the more democracy will need protection against business-mediated CCP influence.
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