Relations between the USA and China
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A peculiar feature of the aftermath of the 2008-9 financial crisis is that there was no setback against international finances to compare with the pullback of globalized production. Even more curious is that the world capital by the Biden administration looks so unpleasant to Donald Trump in an attempt to disconnect economically from China.
It marks the major collapse of Chinese bonds and equities by developed global fund managers earlier last week – in light of Beijing’s ongoing attack on Chinese technology giants and its new attack about the Chinese private education industry – a striking twist. Double that, given the enormous momentum of record flow to China.
The stock of domestic foreign direct investment in China increased from $ 587 billion in 2010 to $ 1.9 tons in 2020. While global foreign direct investment fell by 35 percent to $ 1 ton last year, inflows to China increased from $ 141 billion to $ 149 billion, no doubt partly reflects the perceptions of a very rapid recovery of Covid-19.
Foreign investors also bought $ 35 billion worth of Chinese shares in the country and $ 75 billion in government bonds in the first half of this year, up 50 percent from live pre-Covid levels in 2019. What Chinese companies in the In the US, investors to this month have largely ignored the threats of the administration to remove those that do not meet the more stringent audit requirements. So too with the ban on investing in Chinese companies with ties to the military.
Nicholas Lardy of the Peterson Institute for International Economics points out that global economic decoupling from China is simply not happening. Indeed, “in some critical dimensions, China’s integration into the world economy continues to deepen”.
This partly reflects the Beijing leadership’s commitment to the gradual liberalization of the financial system. Wall Street’s best, enchanted by the prospect of a Chinese goldstone at the end of the global rainbow, was recently encouraged by the loosening of ownership rules in Beijing, to take control in Chinese security companies and fund management groups.
And by easing the restrictions on the inflow of bonds and shares, the Chinese authorities have helped alleviate the solvency problems of vast US and European pension funds. Against the background of a appreciation for renminbi, these investors found more returns on the bond market in China than in the US or Europe.
Domestic and U.S.-listed Chinese stocks, meanwhile, offer access to a vibrant technology sector. Rhodium Group, a research firm, estimates that US investors held $ 1.1 million worth of shares issued by Chinese companies at the end of 2020.
The turmoil of the past week suggests that investors in the developed world are underestimating the importance of the Chinese Communist Party to control and social stability. Beijing is determined to cut technological titans in size and get data stiffer. Its tilt on the education market is aimed at making education less elite-friendly.
The leadership is also determined to block the efforts of the US Public Company Accounting Oversight Board to gain access to the US-listed Chinese companies’ documents. Former diplomat Roger Garside suggests in his book Coup in China that U.S. threats to remove non-compliant Chinese businesses are not empty. He sees the risk that tensions over capital market issues could seriously escalate.
The scope for Chinese retaliation is equally large, especially with regard to so-called variable interest entities (VIEs), through which US investors gain access to Chinese equities. Beijing’s sudden ban on guiding businesses over the use of VIEs highlighted the risks in an agreement that gives only vague ownership rights and no control rights to all Chinese businesses in the country.
If greater hostility towards foreign capital persists, China will pay a price. So far, Beijing’s quest to make the renminbi a global reserve currency has been well served by its liberalized financial markets. Yet the most important step – liberalization of capital accounts – would always be a challenge for the party because it entails a loss of control. It will become even more difficult if there are fewer foreign influences to disrupt capital flights unleashed by wealthy Chinese who have no confidence in the regime.
The US and China have a mutual interest in continuing financial interdependence. But as with greater geopolitical competition, the risk of friction getting out of control. The global financial alchemy by which the relatively poor Chinese help finance the pensions of rich countries is no longer a given.