By now, we’ve all heard the news that Treasury had to extend the FATCA deadline by six months, a development which they attributed to a “groundswell of international interest”. But there’s another piece of news you probably haven’t heard: the day before the delay was announced, the U.S. and China concluded the fifth round of their roughly-annual Strategic and Economic Dialogue, attended by government officials and businesspeople from both sides. As always, they issued a joint statement about the matters discussed, which for the second year in a row included FATCA, described this time in the following terms:

If we take this paragraph at face value, it looks like a major win for Treasury: the second-largest economy in the world — the one which everyone has been predicting for more than a year and a half would resist FATCA, and the one whose central bankers previously implied they saw it as a violation of their sovereignty — is now publicly committed to making “best efforts” to sign an IGA. Yet oddly enough, even with such an apparent victory for their narrative of “overwhelming interest” in FATCA, Treasury didn’t breath a word about it in their press release summary of the event or in their announcement of the FATCA delay. So just like Sherlock Holmes, we have a mystery on our hands: why didn’t Jack Lew’s dog bark?

How is the news being spun in China?

In a world where the IGA signings of island nations of a few hundred thousand people like Malta are considered to be major economic events worthy of global news blasts, I only ran across this news about a country of 1.3 billion people accidentally — I was tracking press mentions about one of the people who attended the meeting. Out of all the global Anglophone finance media, only International Finance Corporation Review appears to have even noticed. King & Wood LLP (not to be confused with Wood LLP run by Forbes contributor Robert Wood) also issued a press release claiming that this means an IGA is inevitable.

In contrast to the U.S. Treasury, China’s Ministry of Foreign Affairs thought FATCA was worth at least a one-clause mention in the press release they issued for domestic consumption:

 
But other than that, they’ve been playing it very low key. Not a single government official has emerged to comment publicly on FATCA since Liu Xiangmin complained last November that it violates Chinese law and unnecessarily increases costs. The state-run Xinhua News Agency’s sole recent mention of FATCA has been to quote Singapore’s United Morning News, which made Chinese translations of English-language reports noting the connection between FATCA and the recent spike in U.S. citizenship renunciations.

In the absence of any word from the government, the Compliance-Industrial Complex gets center stage, particularly its branches down in Hong Kong which can speak comfortably to both English-language and Chinese-language media. Both the South China Morning Post in Hong Kong and Caijing up in the mainland have recently produced long press hits for Patrick Yip of Deloitte, who feels that signing FATCA would be a “brand-enhancing move” for the mainland & Hong Kong and that it will “only” increase costs by one to two percent. In fact, Yip is pretty much the only person who’s had anything to say about China & FATCA in the past month; even Jennifer Wong over at KPMG has been quiet.

Hong Kong’s finance industry is clearly listening to Yip — Standard Chartered, for example, has revised its account-opening procedures to ask new customers about their U.S. Person status, an act which is sadly legal under Hong Kong’s Swiss cheese anti-discrimination laws (unlike the much stronger Canadian Charter of Rights and Freedoms, which may bar FATCA compliance). However, it’s not certain whether even the Hong Kong government is listening to him, let alone the government in Beijing — in the most recent round of information exchange amendments to Hong Kong’s Inland Revenue Ordinance, the government chose not to include any provisions that would enable the Inland Revenue Department to participate in automatic information exchange of the type that would be demanded under a hypothetical Hong Kong–U.S. inter-governmental agreement, and a major pro-government legislator made a rather negative speech even about the limited amendments which did pass.

The Chinese government is apparently happy to let Deloitte grab all the attention for now — otherwise they would suck all the air out of the room by letting a few “unscripted” sentences slip out in some random press conference — but of course, that says nothing about whether they agree or disagree with the accountants’ positions. Silence is also a negotiating tactic.

Does China really want reciprocity?

The standard Washington line is that Beijing’s desire for increased reciprocity has caused these delays. Of course, if Beijing really wants this, the fact that it’s causing delays is an even worse sign for FATCA. More than a year ago, in the last round of the Strategic & Economic Dialogue, both sides committed to “provide an opportunity to discuss China’s concerns” about FATCA. Why might a year of discussions followed by six months of “best efforts” by negotiators on both sides fail to reach an agreement on something which has allegedly been promised to every “FATCA partner country” in the world? The very language of the most recent Dialogue’s joint statement should lead a reasonable observer to question to the whole shaky edifice of IGAs and purported U.S. commitment to bilateral information exchange. This is quite likely one reason why Treasury is keeping very quiet about the Pyrrhic victory of getting China to pretend to say something positive about FATCA in public.

Personally, I’ve previously expressed my doubts that China wants reciprocity. Sources which praise the Chinese government and sources which criticise it reach the same basic conclusions about Beijing’s lack of interest in financial transparency; they differ only in the motivations they ascribe to this attitude. As an example of the critical type of source, an article in the Wall Street Journal a few weeks ago stated:

Almost no Chinese official tallies his investments and net worth in ways that make the information accessible to the public. Now, there are indications that Mr. Xi’s government is stepping up efforts to keep it that way. In addition to the apparent resealing of once-available data, Chinese authorities also appear to be cracking down on transparency advocates as political dissidents.

This doesn’t quite sound like an environment conducive to Chinese FATCA proponents’ career chances.

Guess who’s coming to dinner?

Whether or not China wants reciprocity, it’s pretty clear that the FATCA negotiations are at an impasse: the U.S. has proposed a bog-standard Model I or II IGA for mainland China (and possibly Hong Kong and Macau as well), China has made some sort of counteroffer with a mix of partial concessions and its own demands, and further discussions have failed to produce an acceptable compromise, probably because the U.S. cannot find any way to grant China’s demands without triggering the “most-favoured nation” clauses in earlier IGAs. We could act like the mainstream media and engage in some unbridled and uninformed speculation on what those demands might actually be, but for now let’s stick to a more basic problem which arises directly from the text of the Dialogue’s joint statement: who are the players in these discussions?

An interesting aspect of the upcoming China–U.S. “best effort” FATCA negotiations is the guest list. In addition to the tax collectors and finance chieftains of the two sides, there’s a fifth wheel: the People’s Bank of China (PBOC), China’s central bank. This contrasts oddly with earlier IGAs: the Bank of England doesn’t seem to have had anything to do with the United Kingdom’s IGA, for example. Even more curiously, there is no sixth wheel: the Federal Reserve is not invited, even though both sides tend to be rather picky about dispatching equally-sized delegations of people at equivalent ranks during these kinds of hostile negotiations.

The two Strategic and Economic Dialogue participants who brought up FATCA were probably CITIC chairman Chang Zhenming and Bank of China chairman Tian Guoli. The U.S. didn’t have any bankers in attendance; the closest analogue they brought was Laurence Fink of Blackrock, while the rest of their delegation comprised manufacturing CEOs. Institutionally, the “Big Four” state-owned banks in China — including BOC — are all descendants of the PBOC; they were spun off in the early 80s when the PBOC gave up its monopoly on deposit-taking in order to focus purely on monetary issues.

The presence of the PBOC at the proposed negotiations is quite likely related to whatever demand has been made by one side that the other is unwilling to meet, but it’s impossible to be sure precisely how. The U.S. Treasury is trying to preserve the unconstitutional fiction that IGAs are merely interpretive agreements between tax authorities and not treaties between countries; whatever compromise the U.S. and China are trying to reach, it may require a commitment from the PBOC in addition to one from the State Administration of Taxation & the Ministry of Finance, neither of which can bind the PBOC. Alternatively, the PBOC’s presence might be related to China’s “best alternative to negotiated agreement”: they will attend the negotiations in order to inform the U.S. of the general outlines of their backup strategy in case no IGA can be reached and Chinese banks become FATCA non-compliant. Presumably this will have something to do with one of the PBOC’s areas of competence (such as capital controls), and may involve some sort of retaliatory treatment of U.S. investments in China.

Conversely, the narrower composition of the U.S. delegation tells us something about what China is likely to be seeking: a concession in the area of taxation or tax information exchange, whether that might comprise heavier burdens on Washington or lighter burdens on Beijing. This may seem obvious and unremarkable, but it suggests that China is not trying to strike some sort of “grand bargain” of committing to full FATCA compliance in exchange for U.S. concessions on some other Chinese geopolitical objective in an area outside Treasury’s competence — such as anything related to U.S. interest rates, trade barriers, or arms sales to Taiwan.

Conclusion

Like the old joke goes, don’t believe anyone claiming to be a China Expert unless he worked in a porcelain factory for the last two decades. I have no inside information on the Chinese government, but then neither do any of the lawyers, compliance officers, and wealth managers whose self-aggrandising attempts to drum up business are quoted by the Anglophone media as gospel truth. The only thing we can say for certain: Treasury is not at all confident that the combined “best efforts” of the governments of the two largest economies on earth will be sufficient to meet the FATCA deadline. And presumably they’re also worried that the U.S. will not get the better side of the trade & tax retaliation that would inevitably follow from an attempt to impose 30% withholding on payments to Chinese financial institutions.