Michael D. Shear and David E. Sanger reported from Washington, Steven Erlanger from Brussels, and Andrew E. Kramer from Moscow.

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China’s New Rules Worry Foreign Banks and Companies

SHANGHAI — To defend against accusations by Washington and others that it doesn’t play fair on trade, Beijing could point to the banks. Chinese leaders have been steadily lowering the barriers they had erected around the country’s vast financial system, giving Wall Street and European lenders a greater shot at winning business in the world’s second-largest economy.

Now the walls are going up again.

New Chinese rules have sharply limited the ability of foreign banks to do business there, making them less competitive against local rivals, according to three people with knowledge of the directives. One set of rules enacted in December and January restricts how much money foreign banks can transfer into China from overseas. Another that took effect on Wednesday required many foreign banks to make fewer loans and sell off bonds and other investments, two of the people said.

The new rules have caused a stir among the global bank executives and foreign companies in China that depend on those lenders for money, the people said. Among other concerns, they worry that the rules could make foreign-owned businesses more dependent on China’s state-run banking system for the money they need to grow. That dependence could give Beijing another potential pressure point to use as it squares off against Washington and others over trade, human rights, geopolitics and other sticky issues.

Banks and trade groups have been reluctant to speak publicly for fear of triggering further regulatory measures. But in a January letter to China’s central bank that was reviewed by The New York Times, the European Union Chamber of Commerce in China raised concerns about the money transfer limits.

encouraged boycotts of foreign businesses like H&M, the Swedish retailer, and Nike, the American athletic brand, after they vowed not to use cotton made by forced labor in Xinjiang.

The reasons behind China’s new banking rules aren’t clear, though they appear to have little to do with the tense political environment. They seem to be aimed instead at stemming big, potentially disruptive flows of money into the country.

surpassed the United States last year by taking in $163 billion worth of direct investments in factories, office buildings, companies and other assets.

Big money flows into a country can also make its currency rise in value — and China appears to working hard to counter that.

China’s currency, the renminbi, rose sharply in value against the U.S. dollar in the second half of last year. In May, $1 was worth about 7.15 renminbi. By year’s end, $1 bought about 6.5 renminbi. That rise was bad news for China’s exporters because it made their goods less competitive overseas.

But since the Chinese government enacted its new banking rules, the currency has begun to weaken. It now stands at about 6.6 renminbi to the dollar.

The new rules alone aren’t likely significant enough to account for the sudden halt to the renminbi’s rise. But they join other moves made by the Chinese government in recent months that have made moving money into China slightly harder and moving it out slightly easier. Combined, they could put pressure on the renminbi to weaken.

“This has started since last October, and they are all on the same side,” said Michael Pettis, a finance professor at Peking University.

Outside factors have likely contributed to the renminbi’s shift, including the resurgence of the U.S. economy, which could lead investors to steer their money there instead.

Chinese officials have stressed in recent months that their country is open to foreign investment, particularly banking.

“The inflow of foreign capital is inevitable, but so far, the scale and speed are still within our control,” Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission, which has worked closely with the central bank on the new policies, said during a news conference on March 2. “We continue to encourage foreign financial institutions to enter China for shared development.”

In an unsuccessful attempt to head off a trade war with the Trump administration, China gradually relaxed or removed limits on foreign banks, insurers and money management firms. Big banks responded by expanding their mainland operations, including Citigroup, Credit Suisse, Goldman Sachs, HSBC, J.P. Morgan Chase, Morgan Stanley and UBS.

The global financial environment has encouraged money flows into China. With near zero interest rates elsewhere, international banks borrowed cheaply abroad. Until the new rules kicked in, they could send that money to China and lend or invest it there, reaping higher returns.

The first of the new rules, issued in a memo to banks in December, appeared to be aimed at that trend. That rule limited the ability of global banks to raise money overseas and move it into China. The rule is being phased in through November but was written in a way that has already had a big effect on financial contracts involving bets on the renminbi’s direction, said the people familiar with the notice.

Another measure communicated directly by Chinese regulators to foreign banks three weeks ago concerned the size of bank balance sheets, two of the people said.

Concerned about the rapid growth of credit in the Chinese economy, regulators ordered domestic and foreign banks to limit their balance sheets by Wednesday night to show only slight growth from last year. Because China has recently loosened limits on foreign purchases of bonds, many foreign banks had been buying more bonds for sale to foreign customers, expanding their balance sheets.

The full impact of the new rules will depend on how long they stay in place. Eswar Prasad, a Cornell University economist, predicted that China would eventually resume opening up to foreign financial institutions.

“They don’t want to scare off foreign investors in the medium to long term,” he said.

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Why Biden’s China Policy Faces an Obstacle in Germany

TAICANG, China — German and Chinese flags flutter along tree-lined avenues. Workers are erecting a shopping-and-hotel project with the half-timbered style of architecture more typically found in places like Bavaria or the Black Forest. A nearby restaurant serves Thuringia grilled sausages, fried pork sausages and lots of sauerkraut.

And in Erwin Gerber’s bakery nearby in Taicang, an industrial city a little more than an hour’s drive northwest of Shanghai, hungry customers can buy a loaf of country sourdough bread or a pretzel baked the way they are made in Baden-Württemberg.

“Everything you find in Germany,” Mr. Gerber said, “you will find in my bakery.”

Taicang epitomizes the deep ties between the world’s second- and fourth-largest economies. The Chinese city is so tightly knit with Germany’s industrial machine that some people call it “Little Swabia,” after the German region that the owners of many of its factories call home.

an initial European Union investment protection deal with China, despite objections from the incoming Biden administration. Angela Merkel, the German chancellor, has defended the agreement as necessary to help European companies make further gains in China. She signaled in January that she does not want Germany to take sides in a new Cold War, telling the World Economic Forum, “I’m not in favor of the formation of blocs.”

Her stance could have broad sway throughout Europe, given Germany’s position as its largest economy. “It’s a swing state in terms of influence,” said Theresa Fallon, director of the Center for Russia Europe Asia Studies in Brussels.

Germany will be under growing pressure in the months ahead to pick a side. The deal with China still requires approval from the European Parliament, where many are hostile to it.

crackdown on the democracy movement in Hong Kong and its detention of as many as a million members of predominantly Muslim ethnic minorities in Xinjiang, in China’s far west.

“We are not happy about vague promises made in regard to the brutal suppression of the minorities,” said Reinhard Bütikofer, a member of the European Parliament who is the Green Party’s spokesman on foreign policy issues.

recent study by the Bertelsmann Foundation warned, China will no longer need them.

“It won’t be a win-win situation anymore,” said Ulrich Ackermann, director of foreign markets for the Mechanical Engineering Industry Association, known by its German initials, V.D.M.A., which financed the study by the foundation.

Most of the German companies in Taicang are small and midsize manufacturers that make niche industrial products, or the “Mittelstand” companies that underpin the German economy.

Germany’s first roots in Taicang were planted in 1985, when Hans-Jochem Steim, the managing director of a German manufacturer of wire springs, went looking for a place to build a factory. Taicang, little more than a collection of villages then, was a short drive north from Shanghai’s only commercial airport at the time and had a small-town atmosphere that reminded him of the company’s hometown, Schramberg in Swabia.

Kern-Liebers, Mr. Steim’s manufacturer, was the first of what turned out to be over 350 German companies that set up operations in Taicang, drawn by cheap real estate, a nearby airport and cooperative local officials. Mr. Steim encouraged his longtime suppliers to follow him.

“The first 20 German investors were more or less his friends,” said Richard Zhang, the chief executive of Kern-Liebers’s China operations.

Among those early investors was TOX Pressotechnik, which makes machines that join pieces of metal and are used to construct car roofs, chassis and other components. While big companies tended to set up in major population centers, “as a small company, you went to Taicang,” said Susanne Eberhardt, a member of the family that owns the company, which is based in Weingarten in southern Germany.

Chinese employees hired by TOX meshed well with the Germans. “The Chinese people exuded energy and optimism,” Ms. Eberhardt said. “You could feel that China was on the verge of a breakthrough, and they were unbelievably proud to be part of it.”

The Germans taught local managers so well that, these days, Taicang has everything German except a large number of Germans themselves. The vast majority of the customers at Mr. Gerber’s bakery are Chinese. The few expatriates tend to live in Shanghai, which has a German-language school for their children.

German companies in Taicang were usually not big enough to attract a lot of attention from the central government. Several said they did not feel pressure to share technology and trade secrets, a common complaint by larger foreign investors.

“If you don’t touch politically sensitive issues, it’s a very friendly environment,” said Matthias Müller, the managing director of the German Center for Industry and Trade in Taicang.

German investors helped transform Taicang into a city with almost one million people. Workers who once rode bicycles now drive cars.

In 2004, when Klaus Gerlach was setting up operations for Krones, a German maker of machinery for the food and beverage industry, “we had one car in the parking lot, and it was mine,” he said. “Today, the parking lot is full of cars.”

The downside of that growth is that Taicang, like factory towns all over China, is suffering from a shortage of blue-collar labor. Workers tend to job hop frequently unless they receive pay raises and other benefits.

Kern-Liebers has set 5,000 renminbi, or $775, as the monthly pay for entry-level workers, a more than sixteenfold increase from the 1990s. “At that time,” Mr. Zhang said, “we paid 300 and everyone was very happy. Now we pay 5,000 and they are not so happy.”

German companies say they still see room for growth in China. They say the government is not targeting them, because they produce in China and employ predominantly Chinese people.

Vanessa Hellwing, chief financial officer of Chiron, a maker of machine tools used by automakers and the aerospace industry that has a factory in Taicang, said the Chinese economy’s fast recovery from the pandemic had helped compensate for declining sales elsewhere.

Europe remains Chiron’s biggest market, Ms. Hellwing said, but “the most important growth market is China.”

Keith Bradsher reported from Taicang, and Jack Ewing from Frankfurt.

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Ukraine to Nationalize Defense Firm, Keeping China Out in a Nod to U.S.

Ukraine plans to nationalize a prominent aerospace manufacturer and cancel its acquisition by China, after the U.S. opposed the deal to keep critical defense technology out of Beijing’s hands.

The Ukrainian government’s national security council last week announced the decision on Motor Sich, a maker of advanced engines. The decision angered China, which demanded Ukraine respect the rights of Chinese investors, and the plans still must pass the Ukrainian legislature and could face legal challenges from the spurned Chinese suitors.

If carried out, the state takeover would end more than three years of wrangling that had placed the company and Ukraine in an expanding confrontation between Washington and Beijing.

It could also salve relations between the Biden administration and Ukraine, after the government became embroiled in U.S. domestic politics during Donald Trump’s presidency, weakening support for the country in Washington.

The nationalization of Motor Sich shows that Ukraine “stands with the U.S. even at considerable cost,” said Anders Aslund, a Swedish economist and senior fellow at the Atlantic Council, a think tank in Washington. “This was an excellent step that the U.S. should greatly appreciate.”

The White House and the State Department didn’t respond to requests for comment. U.S. officials in both the Biden and Trump administrations have said that Ukraine must understand China’s ambition to acquire and master vital defense technologies and stop the purchase. The Ukrainian government didn’t respond to requests for comment.

Ukrainian President Volodymyr Zelensky, shown in October 2019, became caught up in U.S. domestic politics during the Trump presidency.

Photo: Efrem Lukatsky/Associated Press

In 2019, President Trump asked Ukraine President Volodymyr Zelensky to launch investigations into the business dealings of Hunter Biden, son of then-presumed presidential rival Joe Biden, while the younger Mr. Biden served on the board of a Ukrainian gas company, Burisma Holdings. The phone call between Messrs. Trump and Zelensky led to Mr. Trump’s first impeachment by the House; he was acquitted by the Senate. President Biden and his son denied wrongdoing.

Nearly two months after Mr. Biden’s inauguration as president, he has yet to speak over the phone with Mr. Zelensky. That, a Ukrainian official said, has caused anxiety in Kyiv, which sees the U.S. as a vital partner in standing up to Russia.

“They are trying to please the Americans and trying to get their attention,” said Oleksandr Lemenov, a founder of nonprofit civil-society group StateWatch, which lobbies for transparent economic practice in Ukraine and has received funding from the U.S. Embassy in Ukraine, among others.

Kyiv is also looking at setting up a body to review foreign investments into strategic enterprises—a U.S. goal.

Motor Sich, once a linchpin in the Soviet Union’s defense industry, supplied engines to Russia’s military-helicopter fleet for decades. That came to a halt in 2014, when Ukraine and Russia went to war over Russia’s incursion into eastern Ukraine and its annexation of the Crimean peninsula.

“They are trying to please the Americans and trying to get their attention”

— Oleksandr Lemenov of civil-society group StateWatch

Ukraine then banned exports of military gear to Russia, crippling Motor Sich’s business and providing an opening to China, a Motor Sich customer since the 1990s. Beijing Skyrizon Aviation, a private firm, led a group of companies that in 2017 completed a $3.6 billion purchase to control Motor Sich from shareholders led by company President Vyacheslav Boguslayev.

The U.S. pressed Kyiv to annul the deal, particularly driven by concerns that Chinese ownership would boost China’s efforts to build a fifth-generation fighter plane and a fleet of heavy-lift helicopters, according to U.S. and Ukrainian officials.

A Ukrainian court froze the Chinese transaction in April 2018, and the government’s antimonopoly committee opened an investigation into possible unfair competitive practices. Both actions effectively suspended the deal, with Washington and Beijing continuing to lobby Kyiv.

Then last week, Oleksiy Danilov, the secretary of the Ukranian government’s National Security and Defense Council, said that Motor Sich would be “returned in the near future to the Ukrainian people, to the ownership of the Ukrainian state in a constitutional way.”

Mr. Danilov said that enterprises regarded as strategically important would be legally returned to the state, and their investors would be compensated. He didn’t provide a timetable or other details or use the word “nationalize” in his comments.

“This is being done for the national security of the country,” Mr. Danilov said.

Chinese Foreign Ministry spokesman Zhao Lijian on Friday demanded the issue be properly resolved and that Ukraine “take into account the legal rights of Chinese enterprises and investors.”

A Skyrizon official said the company is preparing to file lawsuits in Ukraine and in other countries. “We will vigorously defend and protect the legal rights of Chinese investors,” he said.

The U.S. has attempted to find a buyer for Motor Sich, according to U.S. and Ukrainian officials, but the decision to nationalize could carry a big price tag, given the $3.6 billion purchase price.

Concern about the Motor Sich transaction persisted in the transition between the Trump and Biden administrations. In January, Motor Sich, signed an $800 million contract with Aviation Industry Corporation of China, a supplier to the Chinese People’s Liberation Army, to build engines for its JL-10 trainer jet fighter.

Around that time, the Trump administration placed Skyrizon on a sanctions blacklist. Ukraine followed suit, freezing Skyrizon’s assets in Ukraine.

U.S. officials have advised Ukraine to establish an entity similar to the Committee on Foreign Investment in the U.S., which reviews foreign investments in U.S. firms, to have a legal basis to deny transactions such as the Motor Sich deal, said a U.S. official who participated in talks with Ukraine on the matter.

Ukraine’s parliament has taken up debate on legislation to establish such a body. Separately, Alexander Kornienko, the deputy head of Mr. Zelensky’s parliamentary faction, said in a recent briefing that he would introduce a bill in the coming weeks to deal with Motor Sich.

“It’s not just the U.S. telling Ukraine what to do,” a Ukrainian official said. “It’s important for Ukrainian national security to keep such companies locally owned.”

A backlash from China is likely to prove costly for Ukraine, which is financially troubled. In recent years, China has purchased tank engines, turbines for destroyers, aerial refueling tankers and landing craft from Ukraine and has also been a major purchaser of Ukrainian agricultural goods.

Last week, as Mr. Danilov was announcing the nationalization of Motor Sich, a delegation of Chinese businessmen met with officials in the Russian-backed government in Crimea, the Black Sea Ukrainian peninsula annexed by Russia in 2014 and an enduring sore point for Kyiv.

Write to Brett Forrest at and Alan Cullison at

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Mexico Set to Reshape Power Sector to Favor the State

MEXICO CITY — President Andrés Manuel López Obrador has never been short of criticisms about his predecessor’s legacy. But he has reserved a special contempt for the sweeping overhaul that opened Mexico’s tightly held energy industry to the private sector.

He has called the changes a form of legalized “pillaging,” the product of corruption and a resounding failure. He has suggested that some foreign energy investors are “looting” the nation and that Mexican lawyers who work for them are guilty of treason.

He is now formalizing his most aggressive attack yet on the measures.

In the next few days, a bill that would strengthen the dominance of Mexico’s state-owned electricity company is expected to become law. The measure, which was recently approved by Mexico’s Congress with the forceful support of Mr. López Obrador, would also limit the participation of private investors in the energy sector. Both effects are central to his long-held aim of restoring energy self-sufficiency and safeguarding Mexican sovereignty.

Mexico’s dependence on foreign hydrocarbons was highlighted last month when a winter storm in Texas led to the interruption of natural gas deliveries from the United States, the source of most of the natural gas used in Mexico. Mr. López Obrador pointed to the ensuing blackouts as evidence of the need to lower dependence on foreign energy.

international business groups and even Mexico’s antitrust watchdog.

Many critics see the bill as a political gambit to excite the president’s base ahead of midterm elections in June, through which Mr. López Obrador hopes to turn his party’s congressional majority into the supermajority needed to make changes to the Constitution.

Opponents of the legislation say that it would not only fail to resuscitate the energy sector or help achieve energy independence but that it would also violate Mexico’s international commitments to reducing carbon emissions, run afoul of trade agreements and further chill foreign investment in Mexico just as the nation is struggling to regain economic momentum amid the pandemic.

The legislation also threatens to throw another wrench into the relationship between the administrations of Mr. López Obrador and President Biden, which got off to a rocky start when the Mexican president became one of the last world leaders to congratulate Mr. Biden on his election victory.

the cancellation of a $13 billion airport project in 2018 and the blocking of a partly built brewery in northern Mexico last year.

Following the Senate’s approval of the new law this past week, the peso dropped to a four-month low against the dollar. And a Reuters poll suggested that the currency could be in for an erratic few months in part owing to concerns over the energy overhaul.

“Investment levels are dropping, and nobody wants to invest here,” said Israel Tello, a legal analyst at Integralia, a Mexico City-based consultancy group. “Legal uncertainty is the most lethal weapon against investment.”

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