Commentary
“Decoupling” from China seems easier said than done.
Despite signals from U.S. political leaders to reduce economic and financial affiliation with the Chinese regime, in practice, U.S. financial institutions seem to be edging ever closer to Beijing.
On the ground, evidence suggests that there’s more work to be done on the “decoupling” front. U.S. companies’ investments in China continue at an elevated level, and financial firms are planning to expand their operational footprint within China.
President Donald Trump suggested in a mid-June tweet that “a complete decoupling from China” was on the table. Since then, administration officials have been careful to strike a more nuanced tone, given the precarious position of the phase one trade deal. Regardless, U.S. foreign policy has been trending toward cooler relations with Beijing on the economic front, with the administration barring federal pension funds from investing in Chinese companies, and ongoing investigations into Chinese companies listing their stock on U.S. markets.
Washington’s recent sanctions of top Chinese Communist Party (CCP) officials over their involvement in persecuting Xinjiang Uyghur Muslims is just the latest policy action in that trend.
Reactions from China to date have been largely dismissive of decoupling, but Chinese commentators are increasingly preparing for the deterioration of economic relations. Zhou Li, a former deputy head of the Chinese Communist Party’s International Liaison Department, recently caused a stir when he wrote an article warning that China must prepare for the consequences of economic decoupling, including shrinking foreign demand for Chinese goods, disruption of supply chains, and limited access to the U.S. dollar in foreign transactions.
Zhou’s article appeared in a journal published by the Chongyang Institute for Financial Studies at Renmin University.
Investment and Trade Realities
Despite the position of U.S. officials, on-the-ground investments and financial exchange are continuing unabated. With few legal or economic ramifications in place, it has been difficult to reverse the momentum of companies expanding into China.Foreign direct investment (FDI) into China has remained relatively stable over the past 10 years. U.S. FDI into China was $14 billion in 2019, slightly above 2018 levels, according to a recent report by the Rhodium Group.
“Much of the stability of U.S. investment into China was due to large multi-year greenfield projects geared towards meeting local demand in areas such as automotive and entertainment,” Rhodium stated.
The year 2020 was shaping up to be a big one for U.S. corporate investments in China until the onset of the CCP virus pandemic. While China’s outbound FDI into the United States halted in the first quarter, U.S. FDI into China continued with $2.3 billion of announced projects, only slightly behind the $2.9 billion quarterly pace from last year.
The data supports an April survey conducted by the U.S. Chamber of Commerce, with a majority (70 percent) of respondents stating that there are currently no plans to move supply chains out of China. Having said that, 52 percent of respondents said it was too early to tell whether they will do so in the future, while 8 percent said they would move out of China.
So as of April 2020, most businesses were either on the fence or weren’t ready to commit.
China’s Market ‘Liberalization’ Tempts US Financial Firms
For financial institutions, the siren call of China’s market is a huge hurdle. Financial institutions, unlike companies in other industries, were mostly locked out of the mainland Chinese market until recently.Last year, Beijing loosened longstanding restrictions on foreign ownership of the Chinese financial sector, including brokerages, securities firms, and insurance companies. This recently has led to a huge increase in the number of U.S. companies flocking into China to take majority ownership of their local joint ventures.
Wall Street investment bank Goldman Sachs received approval in March to take majority ownership of its Chinese joint venture, Goldman Sachs Gao Hua Securities Co. It previously had only a 33 percent stake. JPMorgan Chase received permission from Beijing regulators in June to begin operating a fully foreign-owned Chinese subsidiary.
On the payments front, credit card issuer American Express in June received approval to operate a Chinese credit card clearing operation, becoming the first U.S. credit card issuer to enter the Chinese market. Competitors MasterCard and Visa have also applied and are awaiting permission.
PayPal last year became the first foreign digital payments provider to receive permission to operate in China, a market currently dominated by Chinese technology giants Tencent and Alibaba.
One area that was massively holding back China’s onshore capital markets was the quality of its rating agencies. Earlier this year, Fitch Ratings received a license to start a Chinese subsidiary to rate bonds in China, following the footsteps of S&P Global last year.
The increased willingness to open China’s onshore financial markets to foreign companies may be one reason Beijing isn’t budging on imposing the national security law over Hong Kong. With enough foreign banks, investment firms, and payment providers in its fold, Beijing has less need for Hong Kong to act as a financial pipeline between China and the West.
The reality is, U.S. officials and lawmakers have much work to do to keep U.S. companies home. If the administration is serious about reversing this ongoing trend, legislation and economic incentives—beyond rhetoric or moral obligation—must be established. And quickly.
