Markets have not even begun to reflect the risks of China-US trade


The writer is a research associate at the China Center at Oxford University and author of ‘Red Flags: Why Xi’s China is in Jeopardy’

Investors have had a clear warning of the decoupling dichotomy between China and the United States crossing global capital markets.

The strong sell-off in newly listed shares of the Didi group in the United States after China launched a security probe in this illustrated the risks.

Beijing now wants to curb, if not eventually ban, Chinese companies ’access to U.S. capital markets where they will increasingly be subject to regulatory and disclosure requirements. Washington is equally hostile to Chinese lists if they refuse. This is just the latest example of a process of financial decoupling, as it is known in Washington, or of self-reliance, as it is called in Beijing.

Yet, seemingly ignorant of politics, Wall Street companies, non-financial corporations and investors continue to beat a path to China’s red door, welcomed by Beijing.

Domestic direct investment and portfolio capital flow together recorded nearly 3 percent of GDP in the first half of 2021, almost as much as the trade surplus. Many US and some EU financial firms have put money into their joint venture management and investment banking ventures or have obtained approval for majority partnerships. Holdings of Chinese bonds and shares have increased dramatically.

Why the surge? Unique factors include known issues such as the economic recovery, differences in bond yields between the United States and China, and exchange rate movements.

Investors also believe that China can offer what they want: growing markets and a large pool of largely unrelated goods. For foreign banks, China could be a lucrative source of income from the rights. This year, China has been a sweet spot.

However, investors should watch out, as Didi’s experience has pointed out. First, they are directly exposed to government repression against many quasi-financial, technology and data-intensive platforms to which their funds are channeled. This campaign stems from China’s anxiety about financial instability and its willingness to keep ambitious private companies and entrepreneurs in check.


However, with capital tampered with by the regulation and control of parties, this also means that these innovative companies, stripped of their growth potential or treated as banks for regulatory purposes, should not conduct similar assessments to technology.

Second, investors are at the forefront where assets and valuations are the target of random policy initiatives. Many American companies are now limited or prohibited from engaging in business with Chinese entities. Investors are subject to the transfer of stakes in dozens of Chinese companies linked to the crackdown in Xinjiang and Hong Kong and the People’s Liberation Army.

Repression, human rights abuses and alleged use of forced labor have raised concerns, particularly in the trade sector and among shareholder activists, about the “S” part of the criteria. environmental, social and governance investment.

Investors are influenced by new legislation authorizing the Securities and Exchange Commission to request the disclosure of shareholder information, board of directors ’ties with the Chinese Communist Party and the release of audit records at a audit authority authorized by the United States.

Failure to do so, which is likely because Chinese regulators will prohibit their companies from making such disclosures under state secret provisions, will lead to lawsuits after a proposed two-year period, likely involving risks of illiquidity and loss. .

China also has tools to respond. It has passed legislation this year to help its companies repeal the effect of export controls and sanctions that apply outside of China and recently passed the Anti-Foreign Sanctions Act, which provides a legal umbrella for companies in China to appeal against sanctions – or face penalties if they comply.

This incremental accumulation in decoupling rules and regulations by both parties will attract more companies and investors into a bulky space where the contradiction between tighter policy and financial interests will become tighter. There is nothing to say that this stand has not been able to continue for some time.

As investors and companies face more conflicts of interest and decisions about the rules to be obeyed and from whom to exploit, politics will win. Assessments are not even beginning to reflect this either.

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