In what looks like a big setback for UnionPay, the World Trade Organization has ruled that the financial services network operator has an illegal monopoly that unfairly locks rivals like MasterCard (NYSE: MA) and Visa (NYSE: V) out of the market for settling financial transactions denominated in China’s currency, the renminbi. But while this ruling may represent a victory for Visa and MasterCard in the longer term, I have no doubt that the decision will be meaningless for at least the next few years, as Beijing, even if it decides to comply with the ruling, erects bureaucratic obstacles to make sure that UnionPay maintains its monopoly status for now.
That’s important because I expect UnionPay to make a multibillion-dollar IPO as soon as this year, as it seeks to raise its profile and eventually try to become a truly global rival to Visa and MasterCard, which now dominate the worldwide market for settlement of retail financial transactions.
This new ruling marks the end of a case filed several years ago, under which Washington accused China of failing to honor its commitments to open up its financial markets when it entered the WTO a decade ago. (English article; Chinese article) China has the right to appeal the decision, and even if it decides not to appeal it still has a grace period of several years to bring itself into compliance with WTO rules. While the ruling does indeed look like a victory for Visa and MasterCard, past experience has shown that such decisions really matter very little unless Beijing decides that it wants to actively open its markets.
In too many cases, central leaders have committed to opening domestic markets to foreign competition, only to throw up numerous bureaucratic obstacles that make it difficult or impossible for outside players to do business. One exemplary case is in the telecoms services sector, which China committed to opening when it joined the WTO, only to make nearly all private investment extremely difficult. As a result, the sector has become dominated by 3 major telcos, all of them state-owned, creating a slow-moving oligopoly that has become a laggard in the global telecoms services market. (previous post)
In the case with UnionPay, China obviously wants to develop a world-class homegrown player. UnionPay is already moving in that direction by signing a series of tie-ups that will connect its network with other major financial institutions around the world. (previous post) Having to share its home market with foreign rivals would obviously hurt UnionPay’s profits over the shorter term, potentially making its IPO less attractive if and when it comes. But if China really wants to create world-class financial institutions that can innovate and competitive with fast-moving global rivals, it needs to stop letting its companies thrive by giving them exclusive access to its protected home market. Instead, it should not only accept this new WTO ruling, but even embrace it and move quickly to implement changes to open its market. That will force companies like UnionPay to become more efficient by having to compete with global rivals in its home market, better preparing it to eventually become a major player on the global stage.
Bottom line: China needs to comply with a WTO ruling calling on it to open its market to competitors of UnionPay if it wants the company to become a major global player.
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