In October, investors withdrew $8.8 billion from Chinese stocks and bonds, continuing an exodus that began after the United States and Europe imposed sanctions on Russia for its invasion of Ukraine, according to the Institute of International Finance (IIF). At the same time, manufacturers trying to strengthen vulnerable supply chains are looking to Vietnam or India rather than China.
“There’s a huge shift going on,” said Andrew Collier, an economist at GlobalSource Partners in Hong Kong.
Business groups applauded Biden and Xi for backing down from open confrontation and said planned follow-up meetings between senior U.S. and Chinese officials could herald further improvement. But, at least for now, the relationship between the world’s two largest economies seems stuck halfway between rupture and rapprochement.
The three-hour meeting on the Indonesian resort island of Bali differed from Trump-era summits, which were dominated by trade and tariffs. This time, the US reading of the talks mentioned Taiwan and human rights in Xinjiang, Tibet and Hong Kong before referring to “continuing concerns about China’s non-market economic practices, which harm workers and to American families.
For its part, the Chinese government has dismissed notions of an inevitable clash. Biden, who last month banned China from acquiring advanced American computer chips and related equipment, assured Xi that the United States was not seeking to ‘dissociate’ itself from China or limit its economic development. , according to the Chinese Ministry of Foreign Affairs.
“Triggering a trade war or a technology war, building walls and barriers, and pushing for the decoupling and disruption of supply chains go against the principles of market economics and undermine the rules of international trade. . Such attempts serve no one’s interests,” said the Chinese minutes of the meeting.
The session, however, did little to dispel the clouds that shrouded the financial ties between the giants. This year, many investment funds, including public employee pension plans in Florida and Texas, have reduced or eliminated their Chinese holdings.
On Tuesday, S&P Global Ratings warned investors of the consequences if the United States were to impose Ukraine-style sanctions on China. With a Chinese economy several times larger than Russia’s, the economic fallout would be enormous.
Preventing Chinese financial institutions from using the U.S. dollar — perhaps in response to a future attack on Taiwan — could prevent them from making required interest payments on their bonds, S&P said. Of 170 bond issues by Chinese banks, investment firms and insurance companies over the past three years, none allow redemption in a currency other than the dollar, the rating agency said. .
Growing national security alarms have already cast a chill over what were once routine investments.
BlackRock, which manages more than $10 trillion in assets, has scrapped plans to market a new fund that would invest in Chinese government bonds over fears it could run into a bipartisan anti-China mood in Washington, according to the Financial Times.
It’s easy to see why the company shied away: This week, the House Financial Services Committee held a hearing on the potential national security risks associated with allowing U.S. funding of “foreign rivals and adversaries.” .
While some investors fear Washington’s reaction, others are just as worried about political developments in China. Tiger Global Management, a US investment firm, reduced its holdings of Chinese stocks after Xi last month broke with recent norms and began a third term as China’s president – leaving some analysts convinced that he plans to rule indefinitely.
The firm has downgraded on Chinese investments due to rising geopolitical tensions and economic fallout from Xi’s rigid zero-covid policy, according to a person familiar with the decision who spoke on condition of anonymity. to discuss internal company deliberations.
Following the recent 20th Congress of the Communist Party of China, investors fear that market-oriented economic development will no longer be the government’s priority. Instead, Xi is increasing the role of the state in the economy and cementing one-man rule.
“The biggest open question is whether China is a safe environment for foreign investors,” Carl Weinberg, chief economist for High Frequency Economics, wrote in a client note on Tuesday.
Beginning in 2019, foreign investors flocked to the Chinese bond market to enjoy higher yields than they could earn in the United States. But in recent months, those flows have reversed.
Foreign investors sold about $70 billion worth of Chinese bonds in a four-month period from March, according to the IIF.
Russia’s February 24 invasion of Ukraine and the start of Federal Reserve interest rate hikes in March caused investors to rethink their positions, said David Loevinger, managing director of the emerging markets group. for TCW, an asset management company based in Los Angeles.
“At [Winter] Olympic Games [in Beijing], Xi gave Putin a big hug and two weeks later the tanks were rolling,” said Loevinger, a former US Treasury Department official. “People were asking if China would be subject to sanctions. Certainly, that was a concern.
Additional capital outflows would be a drag on Chinese financial markets. But the bigger issue is how companies are reorganizing their supply chains.
For decades, American manufacturers and others have been drawn to China because of its cheap labor. But recurring production disruptions during the pandemic convinced them to establish multiple supply lines, despite the added cost.
Companies are looking for alternative sites outside of China for several reasons. The overall relationship between the United States and China has steadily deteriorated. Repeated covid shutdowns have made Chinese factories less reliable. And Washington’s bipartisan hostility to China makes leaders reluctant to bet too heavily on a country that’s not in favor.
Among the companies stepping up production elsewhere is Apple, which will rely on India for a growing share of smartphone production.
The Biden administration is also encouraging efforts to reduce U.S. dependence on China for key minerals, pharmaceuticals and electric vehicle batteries.
US imports from China are now below their pre-trade war trend, according to a recent analysis by economist Chad Bown of the Peterson Institute for International Economics. The United States now buys goods such as clothes and shoes from Vietnam that it once bought from Chinese suppliers.
While trade data shows no wholesale decoupling, direct investment across the Pacific is evaporating. Chinese investment in building or acquiring US factories peaked in 2016 at nearly $49 billion, before dropping to less than $6 billion last year, according to Rhodium Group, a consultancy based in At New York. U.S. direct investment in China has fallen from its peak of nearly $21 billion in 2008 to around $8 billion in 2021.
For now, the move away from China appears to be a redirection of future development rather than a broad retreat from an existing footprint.
A third of US companies in China said they had channeled new investment to other countries in the past year, nearly double the percentage that did so in 2021, according to a recent US survey in Shanghai. Only 1 in 6 companies are planning to move their existing operations in China elsewhere.
“Clear signals from Xi Jinping about the contours of his administration’s economic policies, which will be less favorable to private enterprise, are likely to discourage U.S. investment in China and lead to the pursuit of gradual economic and financial decoupling. “said former IMF official Eswar Prasad, who is now a professor of economics at Cornell University.
Certainly, after four decades of growing integration between the United States and China, there is little chance of a complete divorce. About $700 billion in goods will move between the two countries this year, an increase from last year’s level and more than six times more than in 2000, according to Census Bureau statistics.
China’s increasingly affluent consumers are key to the profit hopes of US companies such as General Motors and Microsoft.
Companies also cannot easily duplicate their Chinese production agreements elsewhere. Ports, roads and rail networks in China are among the best in the world, complicating any plans to abandon the country.
“Unless there’s real political pressure, I don’t see it,” said Michael Pettis, a finance professor at Tsinghua University’s Guanghua School of Management in Beijing. “Once covid is behind us, all that really matters is that if you move manufacturing out of China, you immediately become less competitive.”
Yet national security considerations trump pure economics in both countries. In Washington, the Biden administration is working on new regulations to limit outbound investment to China. Xi wants China to produce more advanced technologies needed for military and commercial supremacy.
Expanding U.S.-China trade relations under these conditions will not be easy.
“It’s difficult to manage competing interests,” said Eric Robertsen, global head of research and chief strategist at Standard Chartered Bank in Dubai. “But we need to find areas where we can cooperate. It is in no one’s interest for things to come off the proverbial cliff.
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