US risking slide in finance, Paulson says

China will continue to grow as a global financial player in the coming years, according to former US treasury secretary Hank Paulson.

"Traditionally, challenges to American leadership have come from well-established financial centers like London, Hong Kong and Tokyo,"Paulson wrote in an op-ed published on The Wall Street Journal website on Wednesday. "But (the Chinese mainland) will be an increasingly formidable challenger in financial services in the next few years."

Paulson, 74, ran the US Treasury Department during the subprime-mortgage lending crisis of 2008 which shook global financial markets.

He said the US is still the "dominant force" in the financial services industry. "The liquidity and scale of US capital markets support the primacy of the dollar, which allows Americans to pay less for foreign goods and helps finance US government spending," he wrote.

But Paulson said that the United States' financial leadership "is increasingly being challenged by fierce competition from abroad and by shortsighted and counterproductive policies at home. Maintaining US financial preeminence should be a priority for the (Joe)Biden administration".

Paulson added:"Beijing is working to enhance its regulatory structure to meet global standards and provide greater transparency and better enforcement. China's relatively quick recovery from the COVID-19 pandemic without a major fiscal stimulus has also allowed it to maintain higher interest rates and a stronger currency.

Regulatory reforms

"This is attracting large investment inflows to Chinese stocks and other securities. Shanghai ranked first among global exchanges for number of IPOs and capital raised through the first nine months of 2020. These IPOs show that major fundraising can take place outside the US financial ecosystem," he said.

China has accelerated its financial opening-up since 2017.

Foreign securities, fund and futures firms were allowed to hold a maximum 51 percent stake in joint ventures, according to regulations announced in November 2017. The limit was removed on April 1.

In early May, China's top financial regulators announced the removal of the quota limit on the trading of domestic securities for qualified foreign institutional investors and qualified domestic institutional investors, which will draw more overseas capital into the A-share market.

Paulson surmised, however, "the US government has undermined this trust through shortsighted actions and long-term fiscal negligence. Efforts to delist legitimate Chinese companies from US exchanges make for good politics, but bring serious and underappreciated risks".

The US House of Representatives on Dec 2 passed a bipartisan bill that would delist Chinese companies from US stock exchanges if they did not comply with US financial auditing rules. The move was widely seen to politicize securities regulation.

Paulson said it comes "at exactly the wrong time, driving away Chinese demand for dollars at a moment when the US is taking on large amounts of debt. Let's hope that China doesn't rethink the wisdom of its Treasury holdings."

While China is the second-largest holder of US Treasury debt after Japan, its holdings have fallen to their lowest level since February 2017, following a fifth successive month of net US Treasury sales in September, a US government report said.

The Trump administration has also put tariffs on billions of dollars of Chinese imports amid a nearly three-year long trade conflict.

"While investors from around the world are benefiting from investing in equity securities from China, Washington is making it more difficult for US investors to do so," he wrote.