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Tag Archives: Wall Street

Im-Politic: Fake News About a Fake Wall Street China Hawk

04 Saturday Dec 2021

Posted by Alan Tonelson in Im-Politic

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2022 election, Bloomberg.com, Bridgewater Associates, China, David McCormick, finance, George W. Bush, human rights, Im-Politic, investment, Katherine Burton, Pennsylvania, Ray Dalio, Republicans, Sridhar Natarajan, U.S. Senate, Wall Street

It’s been a long time since I’ve seen an article contain more sheer garbage per word than today’s Bloomberg.com account of a supposed dispute on dealing with China between two kingpins at the same big American hedge fund.

As the article explains, this ostensible disagreement began this past Tuesday when Ray Dalio, founder and Co-Chairman of Bridgewater Associates told a CNBC interviewer that China’s longtime practice of “disappearing” critics of its thug regime amounted to behaving “like a strict parent….That’s their approach.”

Dalio’s comments unleashed a torrent of outrage that was often as cynical as it’s become predictable these days. For with the exception of making isolated protests about especially egregious Chinese human rights violations (e.g., against the Muslim Uyghur minority), or backing piecemeal controls over cooperation with entities directly tied to the Chinese military, many of those who claim to be appalled by Dalio’s excuse-making for Beijing’s brutality wouldn’t dream of urging Bridgewater – or any American finance firm or other kind of business – to even slow its plans to expand its operations in China. 

In other words, they wouldn’t dream of systematically clamping down on practices that for decades have inevitably helped channel massive amounts of resources and knowhow from around the world into the People’s Republic to use as Beijing’s dictators see fit. And in the case of U.S. investment companies, which look to be just getting started in luring capital to China, these operations will just as inevitably improve the efficiency of China’s own financial system, which will just as surely help enrich it economically and strengthen it militarily.

The Dalio rebuke reported by Bloomberg was genuinely unpredictable, but no doubt even more cynical – for it came from Bridgewater’s own CEO, David McCormick. According to reporters Sridhar Natarajan and Katherine Burton, “on a company call,” McCormick “told staff he’s had lots of arguments about China over the years with Dalio and that he disagrees with the billionaire’s views….”

But of course, the “people with knowledge of the matter” who made certain that this alleged dissent would be made public passed along nothing about what McCormick’s problems with his colleagues’ views entailed. And apparently neither Natarajan nor Burton pressed for elaboration.

The authors did make clear that there was no indication that McCormick favored putting the kibosh on Bridgewater’s recent decision to launch a $1.3 billion investment fund in the People’s Republic, which they wrote would bring the Chinese assets under its management to more than $1.6 billion.

But there was no excuse for Natarajan, Burton, or their editors simply to parrot claims from McCormick’s friends and associates that the Bridgewater CEO is a China “hawk” who views the People’s Republic as “an existential threat to our country” – especially since these same persons are encouraging McCormick’s interest in running in Pennsylvania’s upcoming race to replace retiring Republic U.S. Senator Pat Toomey.

And how on earth could the Bloomberg team allow McCormick buddy Jim Schultz (bizarrely, “a former lawyer in the Trump administration”), to get away with pointing to McCormick’s service in former President George W. Bush’s Treasury Department as evidence that the Bridgewater CEO “has dealt with China in the past…knows how to talk to them, and…will be tough on China as a U.S. senator.”

Even loonier: “’The president of China complained about the decisions he was making about technology at the time,’ Schultz said.”

For anyone who knows anything about U.S.-China relations in the last few decades knows that no administration enabled China’s dangerous rise to dangerous superpower status with lenient trade and technology transfer policies more enthusiatically than W’s.

Natarajan and Burton correctly note that “A hawkish stance on China is all but essential in GOP politics if McCormick makes a run” and that since “Bridgewater has been expanding in China…McCormick would undoubtedly have to navigate China-bashing in the Rust Belt state….”

What they left out is that if the press coverage of this possible campaign is as brain-dead as theirs, McCormick’s challenge won’t be terribly difficult.

Following Up: National Radio China Interview Podcast Now On-Line

18 Thursday Nov 2021

Posted by Alan Tonelson in Following Up

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CBS Eye on the World with John Batchelor, China, decoupling, finance, Following Up, Gordon G. Chang, investment, John Batchelor, logistics, supply chain, tariffs, Trade, tradewar, transport, Wall Street

True to my word, I’m pleased to announce that the podcast is now on-line of my appearance last night on John Batchelor’s nationally syndicated radio show. Click here for a terrific discussion among John, co-host Gordon G. Chang, and me on how successfully Washington has – or hasn’t – been decoupling its economy from that of an increasingly hostile and powerful rival.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Back on National Radio on China Trade, Beijing’s Wall Street Funders…& More!

17 Wednesday Nov 2021

Posted by Alan Tonelson in Making News

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CBS Eye on the World with John Batchelor, China, finance, Gordon G. Chang, investment, logistics, Making News, supply chain, tariffs, Trade, tradewar, transport, Wall Street

I’m pleased to announce that I’m scheduled to return to John Batchelor’s nationally syndicated radio show tonight. In fact, I’m especially pleased to announce this because for a change I have enough notice to give RealityChek readers a heads up!

The conversation – which will include co-host Gordon G. Chang – will cover headline subjects like whether U.S. tariffs on China are still working, why Wall Street has been channeling ever more enormous amounts of capital from abroad in China’s state-controlled economy, and where the global supply chain crisis stands.

As usual, I don’t know when exactly the segment will air, but John’s show is on nightly from 9 AM to I PM, and you can listen live at this link. P.S. John’s other interviews are likely to be must-listening, too. Further, if you can’t tune in, I’ll be posting a link to the podcast as soon as one’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: New Doubts About U.S.-China Decoupling

21 Thursday Oct 2021

Posted by Alan Tonelson in (What's Left of) Our Economy

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American Chamber of Commerce in Shanghai, Biden, China, decoupling, Donald Trump, exchange students, export controls, foreign direct investment, investment, tariffs, Trade, trade war, Wall Street, {What's Left of) Our Economy

As known by RealityChek regulars, the biggest question surrounding U.S.-China economic relations is probably whether the two countries will “decouple” their trade and investment relations with each other.

For several reasons, I’ve been pretty optimistic that the disentangling of the two big economies will continue and even speed up. These include the sizable decoupling progress that’s already been made; the strong and still growing criticisms of China’s behavior pretty much across the issue board by the American public and their leaders; the Biden administration’s surprising decision to continue most of the major Trump anti-China policies; and Beijing’s own determination to bring commercial entities often misleadingly described as “private” businesses even more completely under its thumb and make operating in China ever harder for foreign companies. (See, e.g., here and here.)

But after reading a summary of a recent survey by the American Chamber of Commerce in Shanghai, I’m not so sure.

The organization, comprised of more than 1,300 companies, is one of the leading foreign business groups in the People’s Republic, and last month released its latest annual China Business Report. Among the key findings:

>77.9 percent of the 338 respondents said they were optimistic or slightly optimistic about their next five years in China – the highest such level since former President Trump’s trade war began in 2018.

>77.1 percent reported that their latest profits were higher than expected.

>More than 82 percent expected higher revenues this year than last year – which would represent growth levels “last seen before the worst days of the US-China trade war.”

>The share of respondents reporting annual growth in investment in China (59.5 percent) is also nearly back to 2018 levels (62 percent).

>And only 28 percent of responding manufacturers producing in China had any plans to move production out of the People’s Republic.

Meanwhile, even though its economy is experiencing major problems due largely to mounting energy shortages to an overly aggressive anti-pandemic policy to signs that its mammoth real estate sector will turn into an equally mammoth burst bubble, Wall Street seems more enthusiastic than ever about channeling capital to China.

Signs that decoupling is proceeding are by no means entirely gone. Data on U.S. direct investment (that is, investment in tangible assets like factories as opposed to financial investments like stocks and bonds) for 2021 aren’t available yet, but figures for last year (reported in the above linked RealityChek post) showed that two-way flows continued a decline that dated from before the pandemic slowed both economies dramatically. Moreover, China’s crackdown on its big tech entities has included discouraging them from listing on American stock exchanges.

We do have 2021 goods trade data, and through the first half of this year, U.S. imports from China remained a smaller share of the entire U.S. economy (0.51 percent of annualized gross domestic product) than in the first quarter of 2018 – the last pre-trade war quarter (0.61 percent). Interestingly, the export ratio has returned to those 2018 levels (0.16 percent).

Moreover, since the flow of people back and forth was another major measure of how the United States and China had been drawing closer together, it’s also worth noting evidence that even though overall foreign student applications to American colleges and universities have resumed rising, they’re falling from China.

Since I’m not clairvoyant, I’m not going to pretend to know whether decoupling will slow or stop or accelerate again. But this scenario seems at least plausible: Goods trade between the two countries will keep stagnating at best (especially if the bulk of the Trump tariffs stays in place, and if President Biden keeps expanding controls on defense-related tech exports); but unless the Biden administration puts new clamps on, flows of capital – especially from the United States to China – will keep picking up.

Moreover, as explained by a Financial Times columnist, not only will these investments greatly increase the resources available to China’s dictators. They will also inevitably help China “put its savings to good use.” Which means that U.S.-China commercial interactions could well boomerang in numerous dangeorous ways against Americans even more than they do already.

Those Stubborn Facts: How to Keep Inflating a China Bubble

17 Sunday Oct 2021

Posted by Alan Tonelson in Those Stubborn Facts

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bubbles, China, Evergrande, finance, investment, investors, property, real estate, Those Stubborn Facts, Wall Street

Share of global finance industry recommendations on China

investment that were “buys” at the start of this year, before its giant

real estate firms started going broke: 86 percent

 

Share of global finance industry recommendations on China

investment that are “buys” today, when its giant real estate firms

have started going broke: 87 percent

 

(Source: “Down Is Still Up for Foreign Investors Piling Into China,” by Nikos Chrysoloras and Abhishek Vishnoi, Bloomberg.com, October 16, 2021, China Stock Market: Down Is Still Up for Foreign Investors – Bloomberg)

 

(What’s Left of) Our Economy: Lots to Like in Biden’s (Trump-y) China Trade Policy Vision

07 Thursday Oct 2021

Posted by Alan Tonelson in (What's Left of) Our Economy

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allies, Biden, Biden administration, Center for Strategic and International Studies, China, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP, decoupling, Donald Trump, economics, economists, exports, Katherine Tai, managed trade, multilateralism, multinational companies, Phase One, tariffs, U.S. Trade Representative, USTR, Wall Street, World Trade Organization, WTO, {What's Left of) Our Economy

Despite my strong interest in U.S.-China trade issues, I’d originally decided not to post on chief U.S. trade official Katherine Tai’s Monday speech on the Biden administration’s strategy for these challenges for two main reasons. One, her remarks were widely (and reasonably well) covered by major news organizations; and two, the big news they revealed was, as expected (including by me), making clear that the Trump administration’s sweeping and often steep tariffs on Chinese goods would remain in place for the foreseeable future.

Since then, however, the think tank that hosted the event (the Washington, D.C.-based Center for Strategic and International Studies) has posted not only her presentation as delivered, but the transcript of a lengthy Q&A session that followed. And those exchanges, along with passages from her speech that have received little attention, shed lots of new light on a great many other significantly promising points about the Biden China trade approach that Tai only touched on in her speech, and one-and-a-half points that are still worrisome.

The grounds for encouragement?

First, Tai made an especially forceful and pointed argument that the pre-Trump China trade and broader economic policies (which Biden strongly supported as a Senator and as Barack Obama’s Vice President) had been a major failure. In her prepared text’s words, “For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world.”

In addition, China’s predatory policies (my term, not hers)

“have reinforced a zero-sum dynamic in the world economy where China’s growth and prosperity come at the expense of workers and economic opportunity here in the U.S. and other market-based democratic economies. And that is why we need to take a new, holistic, and pragmatic approach in our relationship with China that can actually further our strategic and economic objectives for the near term and the long term.”

In other words, after decades of promises and hopes that commerce between the two countries would become a winning proposition for both (as mainstream economists also insisted), the Biden administration has officially declared such interactions to have been win-lose – with the United States and especially its workers the losers.

Indeed, Tai wasn’t even close to being finished horrifying the economic mainstream or the corporate China Lobby. She pointedly refused to call Trump’s January, 2020 Phase One trade deal a “failure,” and declared that even though it “did not meaningfully address the fundamental concerns that we have with China’s trade practices and their harmful impacts on the U.S. economy,” it ”is useful and has had value in stabilizing the relationship.”

In addition, going forward, Tai told her audience that more trade Trump-ism was likely. She indicated that the administration might approve a new Trump-like initiative to impose new tariffs to enforce Phase One more effectively. She also poured decidedly cool water on the idea that the President would move to join a Pacific Basin trade deal (now called the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” or CPTPP) touted as a means of containing China, but nixed by Trump partly because its rules created wide open backdoors for goods with lots of China content.

More broadly, Tai signalled that the United States was now perfectly fine with dispensing with free trade orthodoxy in practice much of the time in favor of “managed trade” – which a questioner defined correctly as “governments setting targets [for exports and imports] and trying to achieve them” and which was embodied in China’s Phase One commitments (not yet satisfied) to boost buys of U.S. imports. ‘

Tai depicted such arrangements as having “evolved out of a frustration with the previous model. [which she described as “let’s seek market access and then, you know, let the chips fall where they may.”] And so the question that I bring to this issue that you’ve presented is not ideologically how do I feel about it, but what is actually going to present results and what is actually going to be effective.”

And she plainly portrayed them in a much more favorable light than the notion of relying on the World Trade Organization (WTO), which trade policy traditionalists have fetishized as the globe’s best hope for creating an international trade system that promoted free and fair competition through a set of detailed rules and regulations, along with a supposedly impartial legal system for resolving disputes.

In Tai’s words, however, “We brought 27 cases against China, including some I litigated myself, and through collaboration with our allies. We secured victories in every case that was decided. Still, even when China changed the specific practices we challenged, it did not change the underlying policies, and meaningful reforms by China remained elusive.”

As a result, Tai said, “as much as we will continue to invest and commit and try to innovate in terms of being a member at the WTO and seeking to bring reform to the WTO…we also need to be agile and to be open-minded and to think outside of the box with respect to how we can be more effective in addressing the concerns that we really have been struggling to address with China on trade.”

In addition,Tai also surely shocked her audience (and yours truly – pleasantly) by openly questioning the decades-long bipartisan push to increase U.S. exports to China:

“I think that part of the story of the U.S.-China trade relationship over these recent few decades has been about this thirst on the part of our business sector in particular for increased market access to China. In business sector I include our agriculture sector, obviously. You know, I think along the traditional lines of the way we’ve thought about trade and how benefits come from trade, it has been very focused on securing market access. I think that what we’ve seen is our traditional approach to trade has run into a lot of realities that are today causing us to open our eyes and think about, is what we’re looking for more liberalized trade and just more trade or are we looking for smarter and more resilient trade?”

With China facing mounting economic troubles due largely to its Ponzi-like real estate housing system and a stagnating population, that’s a valuable warning for American producers who still expect China to keep growing spectacularly and to offer gigantic, ever-expanding new markets for their goods and services.

Nonetheless, Tai specified that the Biden administration isn’t on board with widespread calls to decouple America’s economy from China’s:

“I think that the concern, maybe the question is whether or not the United States and China need to stop trading with each other. I don’t think that’s a realistic outcome in terms of our global economy. I think that the issue perhaps is, what are the goals we’re looking for in a kind of re-coupling? How can we have a trade relationship with China where we are occupying strong and robust positions within the supply chain and that there is a trade that’s happening as opposed to a dependency?”

I understand Tai’s reluctance to embrace decoupling openly. It runs too great a risk of making life in China for U.S. companies doing entirely ordinary, unobjectionable business there even harder than it’s already become, especially lately. But the reference to “re-coupling” struck me as totally unnecessary – and as unrealistic as the notion that Washington is skilled enough to preserve just as many connections to make sure that bilateral commerce does serve mutual legitimate interests, but not so many as to maintain or worsen dangerous dependencies on China, or increase its economic and technological power.

And Tai’s speech lauded the Biden aim of dealing with the China economic and technology challenges in concert with U.S. allies way too enthusiastically. As I’ve written, my prime worry has always been that priotizing this kind of multilateral approach will force the US to accept lowest-common-denominator measures that will always be sorely inadequate because so many of these allies depend so heavily on trading with and investing in China.

Nevertheless, Tai declared that “vitally, we will work closely with our allies and likeminded partners towards building truly fair international trade that enables healthy competition,” and even called this approach “the core of our strategy” on China and trade generally.

As I’ve written, U.S. Trade Representatives are rarely the last word on trade policy. So whatever Tai’s just said, I’m still not ruling out the possibility that the President will use some pretext (promises of climate change progress?) to bring back the bad old days. Certainly, that’s what Wall Street and multinational businesses want. But these Tai observations have made such a U-turn much more difficult politically. And if you agree with my cynical view that politics (mainly due to growing American public hostility toward China) and not principle is what’s produced Mr. Biden’s unexpectedly Trumpy positions toward the People’s Republic, that ain’t bean bag.

(What’s Left of) Our Economy: U.S.-China Decoupling Help…From China!

08 Thursday Jul 2021

Posted by Alan Tonelson in (What's Left of) Our Economy

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China, decoupling, Didi, Didi Chuxing, finance, investing, IPOs, national security, privacy, stock markets, tech, Wall Street, Xi JInPing, {What's Left of) Our Economy

Here’s an absolutely stunning and potentially crucial development that I sure didn’t anticipate: The Chinese government is emerging as one of the most powerful forces working to decouple the American and Chinese economies.

In fact, Beijing’s recent crackdown on Chinese entities (remember: since China has no free market economic or financial system, these organizations shouldn’t be called “companies” or “businesses”) could rival the tariffs and the technology curbs imposed by the Trump administration and continued by President Biden as a means of (1) reducing America’s dangerous economic reliance on this increasingly hostile rival, and (2) cutting the long-time outflow of valuable U.S. capital and knowhow that inevitable enriches and strengthen the People’s Republic.

This turn of events is so unexpected, because, as I’ve written, finance looms as the one policy front on which decoupling had made the least progress.  Worse, despite the obvious and more subtle threats posed by this trend to individual investors (described insightfully here by investment analyst and friend Steven A. Schoenfeld), not to mention to American security, prosperity, and privacy, the flow of U.S. capital to the People’s Republic kept swelling. So far this year alone, a record $12.5 billion has been raised for Chinese entities on U.S. stock markets in 34 listings – way up from $1.9 billion worth of new listings in 14 deals during the same period last year. And many more seemed on the way.

But don’t think that these numbers come anywhere close to revealing China’s presence in U.S. finance. The kinds of initial public offerings (IPOs) mentioned just above have been appealing to Chinese entities and to the regime because with the U.S. exchanges the world’s biggest by far, passing muster with them is like a Good Housekeeping Seal of Approval. Therefore, it’s inevitably encouraged investors the nation and world over to pile in. As a result, the total market capitalization of these entities stood at no less than $2.1 trillion as of two months ago.

In recent days, however, China has made clear that some national security concerns of its own, along with dictator Xi Jinping’s determination to bring these gigantic, highly advanced organizations closer to heel, were now outweighing the prospect of continuing to attract more oceans of U.S. and other global investment. Just two days after ride-sharing giant Didi Chuxing raised a record $4.4 billion in a June 30 Wall Street debut, Beijing’s internet regulators ordered it to stop signing up users. This past Monday, China ordered that its app be removed from Chinese app stores (as recounted here).  The announced justifications: the need both to protect national security, and users’ personal data. 

But since China’s leaders are not exactly known as champions of personal privacy, the former was surely the real reason, along with the desire to reassert control. Last weekend, in messages presumably endorsed and even placed by Chinese authorities on the Twitter-like platform Weibo, Didi was actually accused of transferring the data it collected overseas.

Since then, moreover, the crackdown has gone beyond Didi. On Monday, China also announced a cyber-security review of two entities also listed in U.S. markets, and The Wall Street Journal reported that Chinese regulators had suggested that Didi postpone its IPO. The following day, Beijing “issued a sweeping warning to its biggest companies, vowing to tighten oversight of data security and overseas listings just days after Didi Global Inc.’s contentious decision to go public in the U.S.”

This news, along with the beatings taken by the share prices of these U.S. listed companies and major counterparts in trading worldwide, have prompted widespread speculation that the Chinese IPO wave in American finance is over, a least for the time being. And almost right on cue, reportedly today a Chinese entity decided to drop its own U.S. IPO plans because of Beijing’s new stance. 

Wall Street of course isn’t happy – huge underwriting and trading fees stand to be lost. But China’s evident change of priorities represents a golden opportunity for U.S. leaders to jump in and lend a helping hand. They should make the regulatory moves needed to keep Chinese entities out of U.S. markets for good going forward, and speed up efforts to kick out those remaining. And as is not the case with other decoupling policies, American officials seemingly can be certain that China’s powerful flunkies in the Washington, D.C. swamp won’t be trying to gum up the works.

Im-Politic: Clearcut China Coddling by The Times

19 Saturday Dec 2020

Posted by Alan Tonelson in Im-Politic

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America First, Andrew Ross Sorkin, Andy Purdy, Dealbook D.C. Policy Project, Dina Powell, Eric Swalwell, globalists, Huawei, Im-Politic, Mainstream Media, MSM, The New York Times, Trump, Wall Street, Winston Ma

If the Mainstream Media really aren’t deeply in the tank when it comes to the challenge China poses to America’s security and prosperity, they often do an awfully good job of imitating panda huggers. Just check out the latest installment of The New York Times‘ “Dealbook D.C. Policy Project” on “How to Reset the Relationship Between the U.S. and China.”

The Dealbook initiative says it seeks to bring together “Leaders from the public and private sectors [to] debate solutions to the world’s biggest policy challenges” which is a perfectly fine objective although its structure is unmistakably weird. It’s a product of “Andrew Ross Sorkin and team,” meaning it’s run by a Times-er whose overwhelming focus has been the financial world.

And it’s that financial world that dominates the roster of supposed leaders that Sorkin has convened to provide suggestions for the apparently incoming Biden administration on a subject that entails so much more than financial considerations.

In fact, Wall Street’s dominance is so thorough that the group features only one member with any recent public sector experience – Dina Powell. And although she served briefly in the Trump administration, she was clearly one of the traditional globalist Republicans who saw their top priority as undermining the President’s America First agenda, including its determination to recognize the full scope of the China threat and take it seriously.

Worse, the result not only is the complete absence of anyone representing a Trump-ian perspective on China – especially when it comes to policy responses. It’s also a roster that includes one current servant of the Chinese regime – Andy Purdy, a senior executive at Huawei, the Chinese (and therefore regime-controlled) telecommunications giant that, not so incidentally, has been labeled by major national security threat by the Trump administration; and one recent servant (who could still be on Beijing’s payroll for all any outsider knows): Winston Ma, who worked for ten years as a Managing Director of China’s (of course state-run) global investment fund.

In recent weeks, as I and others have reported, The Times has completely ignored the news that a member of the House Permanent Select Committee on Intelligence (and prominent peddler of the Trump Russia hoax) had established a significant relationship with a woman he himself acknowledges was a Chinese spy. Now the paper has organized a policy forum heavily weighted toward longtime China coddling interests and containing two longtime representatives of Chinese interests themselves.

The paper does continue to publish material critical of China’s regime – see, for example, today’s piece on its initial response to the CCP Virus. But just as its neglect of the aforementioned Swalwell spy scandal has clashed with its “All the News That’s Fit to Print” motto, this decidedly skewed – and decidedly pro-Beijing-skewed – China policy panel clashes with what should be a corollary: All the Opinions Fit to Print.

(What’s Left of) Our Economy: U.S. and Other Foreign Investors Keep Funding the China Threat

14 Monday Dec 2020

Posted by Alan Tonelson in (What's Left of) Our Economy

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bonds, China, decoupling, delisting, FDI, Financial Times, foreign direct investment, investment, Joe Biden, pension funds, Phase One, portfolio investment, Steven A. Schoenfeld, stock markets, stocks, Trade, trade surplus, Trump, Wall Street, {What's Left of) Our Economy

Here’s one of the most depressing articles I’ve read in a long time, and it deals with a (big) piece of U.S.-China economic relations to which I haven’t paid enough attention so far:  flows of financial investment.

It’s depressing because it shows that, although the Trump administration has (rightly, in my view) begun to decouple America’s economy from China’s, and made impressive progress in trade and foreign direct investment (purchases of “hard assets,” like factories and labs and enterprises and real estate), portfolio investment (purchases of stocks and bonds) into China from around the world is not only continuing – it’s booming. And these capital flows, including resources from Americans, are already much bigger than direct investment flows and are  rapidly approaching even the mammoth scale of trade flows.

According to this Financial Times piece, in total, investors outside China this year have bought about $150 billion worth of Chinese stocks and bonds – including Chinese government bonds. (Not that the debt of Chinese entities practically speaking differs fundamentally from national and local Chinese government debt, since there’s no private sector worthy of the name in China.)

The Financial Times reports that the vast majority of these inflows are bond purchases, meaning that investors outside China are lending to all manner of borrowers inside the People’s Republic. But buys of stocks in the Chinese entities commonly and misleadingly described as “companies” that presumably closely resemble their counterparts in genuine free market systems matter as well, because they, too, make new resources available to the Chinese regime. And after suffering from net outflows earlier this year, when Beijing locked down much of the country’s economy after the CCP Virus broke out, Chinese stocks are enjoying net inflows once again.

Moreover, China is starting to enjoy this foreign capital windfall just as its own ability to generate the savings needed to finance the huge debts that have fueled the latest phase of its ongoing economic expansion has begun weakening. Indeed, the need to replace faltering domestic capital sources with foreign capital is exactly what’s behind Beijing’s recent spate of decisions to reduce the barriers to overseas investing in China’s financial markets.

Foreign purchases of Chinese financial assets are still dwarfed by China’s global trade surplus (i.e., its profits) this year, which stands at just under $500 billion through November. But they’re now twice as great as global direct investment in China (about $115 billion through October, Beijing reports).

Obviously, the Trump administration can’t directly control non-U.S. foreign investment into China. But capital coming from the United States hasn’t exactly been chump change. I haven’t been able to find official data, but Steven A. Schoenfeld of the investment research and advisory firm MV Index Solutions, who has been investigating this issue for several years, has written that, in 2019, “nearly $400 billion of new foreign investment into Chinese equities was driven by changes in allocations within benchmark indexes, with American investors accounting for more than a third of these massive portfolio flows.” In addition, he has estimated that the 30 largest U.S. public workers’ pension plans had invested more than $50 billion in Chinese entities as of the beginning of this year. (Full disclosure: Steven is a long-time close personal friend.)

The Trump administration belatedly has tried to curb American portfolio investment in China, and has both forced a big federal workers’ pension fund to halt a planned great increase its China holdings, and has ordered a ban on all U.S. financial investment in dozens of companies linked to the Chinese military.

But unless more comprehensive curbs are enacted, the decisions by Wall Street research firms to boost China’s presence in the stock indices they construct, and which both government pension and private fund managers generally try to track, will still ensure that these investors’ exposure to China keeps rising. And the lure of expanded opportunities in China’s already huge and potentially huge-er financial services market, and its still healthily growing real economy, will continue fueling American and other foreign investors’ appetite for both Chinese stocks and bonds. Ironically, the President’s Phase One trade deal could help sustain and even increase U.S. investments in China via the commitments China has made to ease barriers to entry for American finance companies.

In fact, Steven Schoenfeld’s research makes clear that overall, despite these Trump administration curbs, total foreign holdings of Chinese stocks and bonds could approach and even exceed the half trillion dollar level in the next two or three years. These sums would equal several percentage points of China’s total economy.

Nor does the foreign financial support for China stop there. Although the Trump administration and Congress have been working to tighten the standards Chinese entities must meet to list on U.S. stock exchanges, their presence in the three biggest such financial markets as of October had allowed them to achieve total market capitalization of $2.2 trillion.

Of course, the Trump years seem to be nearing a close, raising the question of whether apparent President-elect Joe Biden will try to tighten the clamps on U.S. capital flows further and even encourage American allies to do the same, or whether he’ll simply let current trends continue, or open the flood gates further.  Something we do know for sure:  Investors in Chinese markets seem awfully confident that Washington will let them continue with their version of selling Beijing the rope with which it can hang the free world.  Why else would Chinese stock prices be way up since his apparent election? 

Line chart of Net purchases of Chinese equities via stock connect programme YTD ($bn) showing Biden win spurs return to Chinese stocks

Our So-Called Foreign Policy: Biden Choices Signal a “What, Me Worry?” China Policy

13 Sunday Dec 2020

Posted by Alan Tonelson in Our So-Called Foreign Policy, Those Stubborn Facts

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alliances, allies, Antony Blinken, BlackRock, Brian Deese, China, decoupling, Jake Sullivan, Janet Yellen, Joe Biden, Katherine Tai, Lloyd Austin, multilateralism, national security, Our So-Called Foreign Policy, Robert Lighthizer, sanctions, tariffs, tech war, Trade, trade war, transition, Trump, U.S. Trade Representative, USTR, Wall Street

Apparent President-elect Biden so far is sending a message about his China policy that’s unmistakably bad news for any American believing that the People’s Republic is a major threat to the nation’s security and prosperity – which should be every American. The message: “I’d rather not think about it much.”

In some limited senses, and for the very near future, the impact could be positive. Principally, although he blasted President Trump’s steep, sweeping tariffs on imports from China as disastrously counter-productive for the entire U.S. economy – consumers and producers alike – he’s stated that he won’t lift them right away. Presumably, he’ll also hesitate to remove the various Trump sanctions that have so gravely damaged the tech entities whose activities bolster China’s military strength and foreign espionage capabilities, along with new Trump administration restrictions on these Chinese entities’ ability to list on U.S. stock exchanges.

Looking further down the road, however, if personnel, as widely believed, is indeed policy, Biden’s choices for Cabinet officials and other senior aides to date strongly indicate that his views on the subject haven’t changed much from this past May, when he ridiculed the idea that China not only is going to “eat our lunch,” but represented any kind of serious competitor at all. In fact, in two ways, his choices suggest that his take on China remains the same as that which produced a long record of China coddling.

First, none of his top economic or foreign policy picks boasts any significant China-related experience – or even much interest in China. Like Biden himself, Secretary of State-designate Antony Blinken is an indiscriminate worshipper of U.S. security alliances who views China’s rise overwhelmingly as a development that has tragically and even dangerously given Mr. Trump and other America Firsters an excuse to weaken these arrangements by making allies’ China positions an acid test of their value. In addition, he’s pushed the red herring that the Trump policies amount to a foolhardy, unrealistic attempt at complete decoupling of the U.S. and Chinese economies.

As for the apparently incoming White House national security adviser, Jake J. Sullivan – who served as Biden’s chief foreign policy adviser during his Vice Presidential years – he shares the same alliances-uber-alles perspective on China as Biden and Blinken, and is on record as late as 2017 as criticizing the Trump administration for “failing to strike a middle course” on China – “one that encourages China’s rise in a manner consistent with an open, fair, rules-based, regional order.” I’m still waiting for someone to ask Sullivan why he believes that mission evidently remained unacccomplished after the Obama administration had eight years to try carrying it out.

On the defense policy front, Biden has chosen to head the Pentagon former General Lloyd Austin whose main top-level experience was in fighting Jihadist terrorists in the Middle East, not dealing with a near-superpower like China. That’s no doubt why Biden failed even to mention China when introducing Austin and listing the issues on which he’d need to focus – an omission worrisomely noted by the U.S. Asia allies the apparent President-elect is counting on to help America cope more effectively with whatever problems he thinks China does pose.

As for the Biden economic picks, Treasury Secretary and former Fed Chair Janet Yellen has expressed little interest in China or trade policy more broadly during her long career in public service. (See here for a description of some of her relatively few remarks on the subject.) His choice to head the National Economic Council, Brian Deese, has been working for the Wall Street investment giant, BlackRock, Inc. – which like most of its peers has long hoped to win Beijing’s permission to compete for a slice of the potentially huge China financial services market. But his focus seems to have been environmentally sustainable investments, and his own Obama administration experience centered on climate change.

One theoretical exception is Katherine Tai, evidently slated to become Biden’s U.S. Trade Representative (USTR). Both as a former lawyer at the trade agency  and in her current position as a senior staff member at the House Ways and Means Committee, she boasts vast China experience.

But history teaches clearly that the big American trade policy decisions, like handling China, are almost never made at the USTR level. Mr. Trump’s trade envoy, Robert Lighthizer, was a major exception, and his prominence stemmed from the President’s unfamiliarity as an outsider with the specific policy levers that have needed to be pulled to engineer the big China trade and broader economic policy turnaround sought by Mr. Trump. So expect Tai to be a foot soldier, nothing more.

The cumulative effect of this China vacuum at the top of the likely incoming administration creates the second way in which Biden’s seems to reflect a lack of urgency on the subject: It signals that there will be no China point person in his administration. It’s true that reports have appeared that the apparent President-elect will appoint an Asia policy czar. But more than a week after they’ve been posted, nothing further has been heard.

All of which suggests that, by default, China policy will be made by the alliance festishers Blinken and Sullivan. And if their stated multilateralist impulses do indeed dominate, the result will be basically a U.S. China policy outsourced to Brussels (headquarters of the European Union), and the capitals of Asia. As I’ve written previously, many of these allies have profited greatly from the pre-Trump U.S. and global China trade policy status quo, and their leaders are hoping for a return to this type of world as soon as possible. And it’s no coincidence that’s the kind of world Joe Biden was happy to help preside over during his last White House job.  

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