U.S. President Donald Trump last week joined a long line of Western leaders straining to break open China's markets for foreign companies. He'll quickly discover that projecting Western hopes and ideals rarely works. No matter how beautiful the chocolate cake.
What can work, however, is recognizing when China could use a foreign partner to help it achieve something Beijing wants, and striking at the right time.
Take the announcement Friday on scrapping foreign ownership limits for banks and asset management firms. As Gadfly's Shuli Ren notes, China is struggling to get financial institutions to scoop up the mountain of bad debt on corporate balance sheets. Foreign companies could help clear some of it out.
A similar idea can be applied to carmakers. China's foreign ministry has pledged to gradually reduce auto tariffs and allow foreign carmakers to set up wholly owned electric-car operations in the nation's free-trade zones on a trial basis by June.
That's a significant departure from a decades-old requirement that joint ventures be formed with domestic players. The move was hailed as a sign of what President Xi Jinping calls "big strides in reform" to liberalize markets.
But let's be clear. China's not easing rules for Goldman Sachs Group Inc., Ford, Trump himself or anyone else. On the cars front, the decision stems from Beijing's practical need to get more electric vehicles on the roads if it's actually going to fulfill a promise to phase out fossil-fuel-powered autos.
Relaxing ownership rules is the carrot to Beijing's stick, which comes in the form of an emissions cap-and-trade plan that penalizes companies falling short of targets with fines or buying credits. These quotas will get more cumbersome come 2019 and 2020 as subsidies are phased out.
While most car companies will face an uphill battle achieving those numbers (and none is likely to do so particularly profitably), homegrown Chinese automakers like Great Wall Motor Co. seem to be the most challenged.
Considering Great Wall's historical focus on gas-guzzling SUVs, it's likely to face an EV credit shortfall in the hundreds of thousands. The cost of compliance could run to billions of yuan, according to Alliance Bernstein analyst Robin Zhu.
Chongqing Changan Automobile Co. will also struggle to meet the EV production hurdles, according to the Bernstein analysis.
Local electric car leaders BYD Co. and Geely Automobile Holdings Ltd. are better positioned to meet China's cap-and-trade targets and benefit from selling credits the way Tesla has done in the U.S. But they still risk a big earnings hit in 2018 when EV government subsidies are cut further and consumer demand will likely slow.
Giving international carmakers a way to speed up development of electric vehicles in China will force local players to dial it up a notch, putting them in a better position to compete. It could also help speed the creation of a much-needed electric car supply chain.
Think of it as Xi's way of saying "help me help you." With an emphasis on the first two words.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
China began to allow foreign companies to set up 100 percent owned motorcycle and battery manufacturing operations in July last year.
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