Market nerves underscore only China’s importance to the global economy


Updates on US-China relations

A curious feature of the consequences of the 2008-9 financial crisis is that there has been no reaction against international finance to compare it with the withdrawal from globalized production. Even more curious is that global capital seems so uncomfortable with the Biden administration after Donald Trump sought to separate himself economically from China.

This makes the bulk of Chinese bonds and shares dumped by global fund managers developed earlier last week – in the face of Beijing’s continued assault on Chinese technology giants and their new attack on the Chinese private education industry – a turning point. Double that, given the pure momentum of record entries in China.

The stock of foreign direct investment in China has increased from $ 587 billion in 2010 to $ 1.9 billion in 2020. While global foreign direct investment fell last year from 35 percent to 1 billion dollars, inflows into China have gone from $ 141 billion to $ 149 billion, no doubt reflecting in part perceptions of a very rapid recovery from Covid-19.

In the first half of this year, foreign investors also bought $ 35 billion worth of Chinese land shares and $ 75 billion in government bonds. The United States, until this month, investors have largely ignored the administration’s threats to cancel those that fail to meet the stricter control compliance requirements. So, too, with bans on investing in Chinese companies with links to the military.

Nicholas Lardy of the Peterson Institute for International Economics points out that the global economic downturn from China has not just happened. Indeed, “in some critical dimensions, China’s integration into the global economy continues to deepen.”

In part, this reflects Beijing’s leadership’s commitment to the gradual liberalization of the financial system. Wall Street beauties, fascinated by the prospect of a Chinese gold rush at the end of the global rainbow, have recently been encouraged by the relaxation of Beijing regulators ’ownership rules to take control stakes in Chinese securities companies and fund management groups.

And by easing restrictions on the inflow of bonds and capital, Chinese authorities have helped alleviate the solvency problems of excessively stretched U.S. and European pension funds. At the bottom of an appreciable return, these investors have found more generous returns in China’s bond market than in the United States or Europe.

Meanwhile, Chinese national and listed stocks in the United States offer access to a vibrant technology sector. Rhodium Group, a research firm, estimates that U.S. investors will hold $ 1.1 billion in shares issued by Chinese companies by the end of 2020.

Last week’s market turmoil suggests that developed global investors have underestimated the importance the Chinese Communist Party attaches to control and social stability. Beijing is keen to cut technological titans to size and gain a tighter grip on data. Their inclination towards the tutorial market is designed to make education less friendly for the elite.

The leadership is also determined to block the efforts of the U.S. Public Accounts Accounting Supervisory Board to access the documents of Chinese companies listed in the United States. Former diplomat Roger Garside suggests in his book Coup di China that American threats to oust disrespectful Chinese companies are not vicious. He sees a risk that tensions over capital market issues may escalate seriously.

The scope of Chinese retaliation is equally real, especially in relation to so-called variable interest entities (VIEs), through which US investors access Chinese shares. Beijing’s sudden ban on the use of VIEs by tutoring companies has highlighted the risks in an agreement that confers only tenured property rights and no rights of control at all over Chinese land companies.

If greater hostility to foreign capital persists, China will pay a price. So far Beijing’s aspiration for the renminbi to be a global reserve currency has been well served by its liberalized financial markets. Yet the next essential step – the liberalization of the capital account – had always been a challenge for the party because it entailed a loss of control. It will be even more difficult if there are reduced foreign inflows to compensate for the flight of capital unleashed by wealthy Chinese who do not trust the regime.

The United States and China have a mutual interest in continuing financial interdependence. But as with wider geopolitical competition, the risk is that friction will get out of control. The global financial alchemy that the relatively poor Chinese are helping to finance the pensions of rich countries is no longer given.

john.plender@ft.com



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