The severe downturn in China’s financial markets, and Western companies’ belated realization that opportunities there are not as rosy as they had hoped, call for a deep shift in how businesses look at Asia and the prospects for doing business there, and for the reallocation of their enormous investments to more suitable markets.
That’s the view of a former Trump administration official who criticizes the Biden administration for failing to take initiative and respond to the fluid situation in China by advancing or modifying Trump’s China policies where appropriate.
China enjoys sharply lower foreign investment and grapples with an $11.8 billion deficit in such investment for the three months leading up to October 2023, sources report.
Foreign firms are pulling out, and plentiful opportunities await businesses willing to go to the trouble of redomiciling from China to the vibrant and expanding markets of Thailand, Malaysia, Vietnam, and Singapore, the former Trump administration official believes. But the shift will require an effort of will at the political level that has been conspicuously absent of late.
“U.S. companies competing directly with Chinese national champions have a unique opportunity,” Clete Willems, a partner at the law firm Akin Gump who served during the Trump administration as deputy assistant to the president for international economics and deputy director of the National Economic Council, told The Epoch Times.
Ominous Signs
The reported decision of BlackRock, the world’s largest asset manager, to sell the office it bought in Shanghai for a price 30 percent lower than the firm paid for it in 2017, is just one of the latest signs of how eager companies are to pull out of a rapidly deteriorating Chinese market before things get even worse, observers of U.S.-China relations say.
Not so long ago, BlackRock could not get enough China business. BlackRock bought the 27-floor Shanghai Central Park for $199 million in 2017, when the asset manager and other firms were highly bullish about opportunities in China’s enormous markets, and competition to make inroads and woo clients was fierce.
But in recent months, BlackRock’s general outlook on China has cooled, and in September 2023, the asset manager downgraded its rating of China stocks from “neutral” to “overweight.” BlackRock decided that same month to wind up its China Flexible Equity Fund as of Nov. 7, after the fund attracted an underwhelming $22.3 million of assets in nearly six years of operation.
BlackRock’s decisions coincided roughly with a series of dramatic actions on the part of Chinese officials toward the overleveraged real estate conglomerate Evergrande, including the detaining of members of Evergrande staff amid late and skipped payments on the company’s debts.
A Perfect Storm
As noted in The Wall Street Journal and elsewhere, larger geopolitical forces have added fuel to the fire. The situation has grown so dire that it is well past time for a fundamental reset of the market dynamics of western engagement with Asian markets, experts on U.S.-China relations have told The Epoch Times.Mr. Willems sees the pullback on the part of U.S. companies as resulting from a confluence of factors.
“I would characterize it as the ‘drip, drip, drip’ effect. I work with clients in the investment space as well as multinational companies, some of which have had supply-chain exposure to China. Clearly, there is a perception that doing business in China has gotten more challenging, both as a result of macroeconomic trends and the governance over there, the different policies they’ve implemented under Xi Jinping,” Mr. Willems told The Epoch Times.
Beijing’s harsh COVID-19 crackdown on its own people went far to remind the world how little the regime cares for the niceties of due process and personal liberty when push comes to shove, Mr. Willems acknowledged.
But an even more disturbing and destabilizing factor is then-U.S. House of Representatives Speaker Nancy Pelosi’s visit to Taiwan in August 2022, which brought to the fore the ongoing and, some would say, ever-worsening tensions over Beijing’s long-term designs on the sovereign territory.
“I saw the inflection point when then-Speaker Pelosi went to Taiwan. That’s where, all of a sudden, I started getting all these questions about, ‘Do we need a Plan B?’ People started to realize that U.S.-China tension is not going down anytime soon,” Mr. Willems said. Taken together, the financial downturn and the geopolitical tensions have turned bullish companies and asset managers bearish, to say the least.
“I don’t attribute it to any one factor, but U.S. policy, China’s policy, the overall tensions, it’s really created a scenario where the risks have gone up and the rewards have gone down. A lot of companies we work with, they’re thinking about how to reduce their China exposure,” Mr. Willems said.
The trends have eroded whatever trust Chinese firms might have once enjoyed and what appeal they may have held out as investment targets. In some cases, this works to the advantage of their stateside rivals.
“I’m hearing from clients who are looking at the U.S. competitors to Chinese companies that are perceived as bad actors, and looking at whether it’s a good investment,” he added.
Diversified Market Strategy
Given the cooling in U.S. firms’ stance toward China, they are bound to grapple sooner or later with the question of where to find less headache-inducing investment prospects and business partnerships.Other nation-states may offer more stable and secure investment opportunities as the geopolitical high drama plays out, experts argue.
“People are looking. Singapore has been a clear beneficiary of some redomiciling, and people are exploring throughout Southeast Asia. Vietnam is on the list, as are Thailand, Malaysia, and others,” Mr. Willems said.
But while the need to stand up to Beijing’s heavy-handed and abusive practices is not in doubt, Mr. Willems believes, the lack of positive incentives to refocus on other markets is a significant liability for firms reconsidering their China commitments—and an issue that whoever occupies the White House in January 2025 would do well to address directly.
“We’re saying shut down this market, but we’re not giving them anywhere else to go, and I think that’s a major misstep in policy,” Mr. Willems continued.
Nor has the Biden administration adopted a nuanced, tailored approach to the enforcement of the $300 billion worth of tariffs that former President Trump imposed on Chinese goods, Mr. Willems believes. The current administration has largely adopted a passive stance, even as the track record of tariffs in place for years suggests that some are working better than others, he argued.
“Now, almost four years in, tariffs are exactly where they were when we started. Passivity is the hallmark of Biden policy,” Mr. Willems stated.
In Mr. Willems’s view, it is incumbent on Biden, or whoever replaces him in January 2025, to augment those tariffs that have proven effective while letting others expire. By way of example, Mr. Willems contrasted the lack of tariffs on personal computers, with the tariffs that are in effect for components of PCs. This lopsided arrangement fosters a disincentive to manufacture PCs in the United States, he said.
“My perspective is, they should take the evidence that’s out there, increase the good tariffs and get rid of the bad tariffs, and it’s kind of unclear why they’ve been unable to achieve that,” Mr. Willems added.
Holding Beijing Responsible
While the downturn may help induce companies invested in China to look elsewhere and redomicile, it would be a mistake to view the country’s myriad fiscal problems as the natural result of the kind of boom-and-bust cycles that can afflict any economy, anywhere, another expert in trade relations believes.That’s the view of Stephen Ezell, Vice President for Global Innovation Policy at the Washington-based Information Technology and Innovation Foundation.
Mr. Ezell cited a survey that the American Chamber of Commerce in Shanghai released in September 2023, finding that roughly 40 percent of companies taking part in the survey were in the midst of moving investments from China to other jurisdictions. He also cited a UBS Evidence Lab study reporting that 71 percent of U.S. firms with manufacturing facilities in China were moving those operations to other countries or had plans to do so.
In Mr. Ezell’s view, the reasons for these figures are plain. Beijing’s chronic abusive practices have helped breed the current crisis by alienating foreign firms, and the bad actors in official positions who are responsible for such wrongdoing must face sanctions.
IP Theft and Cyber-Spycraft
Garden-variety market turmoil is not the culprit driving foreign firms out, he stressed.“I think it’s being driven much more by companies’ concerns about the business environment in China, which continue to include significant concerns over IP theft, cyber-espionage, and even forced detention of Western business executives, not to mention the aftereffects of COVID-19-disrupted global supply chains and rising U.S.-China geopolitical tensions,” Mr. Ezell said.
As long as Beijing continues to behave abusively and flout the terms of its World Trade Organization (WTO) membership, Mr. Ezell believes, there is a role for tariffs and other policies that send a loud and clear message to Chinese Communist Party officials.
“China conducts its economic statecraft in a manner inconsistent with its WTO commitments to member nations. The United States must continue to push back aggressively against such Chinese practices, and enroll like-minded nations in doing so, wherever possible,” Mr. Ezell said.
However, Mr. Ezell concurs with Mr. Willems about the need to revisit tariffs that have been in place for years and consider carefully which ones have proven efficacious and which have not.
“Tariffs are a blunt instrument, and so the United States needs to begin to craft a far more nuanced, sophisticated set of policies to defend its economic interests in the competition with China, such as comprehensively reforming Section 337 of U.S. trade law,” Mr. Ezell said.
The Epoch Times has reached out to the U.S. Department of Commerce for comment.
