The Biden Xi meeting may slow but will not end economic and trade ties for the US, China

Kiran

JIMBARAN, Indonesia — A face-to-face meeting this week between President Biden and Chinese President Xi Jinping may represent a welcome easing of tensions, but is unlikely to hold a slow erosion of financial and economic relations between the United States and China.

The past five years of US-China acrimony over trade, technology and Taiwan have brought about a realignment that is playing out in financial markets and corporate boardrooms around the world.

Investors in October pulled $8.8 billion from Chinese stocks and bonds, continuing the 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 their vulnerable supply chains are turning to Vietnam or India instead of China.

“There is a big shift,” said Andrew Collier, an economist with GlobalSource Partners in Hong Kong.

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Business groups applauded Biden and Xi for backing away from open confrontation and said a planned follow-up meeting between senior US and Chinese officials could signal further improvement. But, at least for now, the relationship between the world’s two largest economies seems to be stuck in the middle between rupture and rapprochement.

The three-hour meeting on the Indonesian resort island of Bali is different from the summit of the Trump era, which was dominated by trade and tariffs. This time, the US reading of the mentioned lecture Taiwan and human rights in Xinjiang, Tibet and Hong Kong before referring to “ongoing concerns about China’s non-market economic practices, which harm American workers and families.”

For its part, the Chinese government rejects the notion of an inevitable conflict. Biden, who last month Ban China from acquiring advanced US computer chips and related equipment, assured Xi that the United States does not seek to “decouple” from China or limit its economic development, according to China’s Ministry of Foreign Affairs.

“Starting a trade war or a technology war, building walls and barriers, and encouraging decoupling and severing supply chains is contrary to the principles of market economy and undermines the rules of international trade. Such efforts are not in the interests of others,” said the Chinese account of the meeting.

The session, however, did little to clear the cloud that enshrouded financial links between the giants. Many investment funds this year, including public employee pension plans in Florida and Texas, have reduced or eliminated Chinese holdings.

On Tuesday, S&P Global Ratings warned investors of the consequences if the United States imposes Ukraine-style sanctions on China. With China’s economy several times larger than Russia’s, the economic fallout will be great.

Blocking Chinese financial institutions from using US dollars – perhaps in response to future attacks on Taiwan – could leave them unable to make the required interest payments on their bonds, S&P said. Of the 170 bond offerings by Chinese banks, investment firms and insurance companies over the past three years, none allowed for repayment in a currency other than the dollar, the rating agency said.

Installing a national security alarm has taken a toll on what was once a routine investment.

BlackRock, which manages more than $10 trillion in assets, scrapped plans for a new fund market that would invest in Chinese government bonds, fearing it could offend the bipartisan anti-China mood in Washington, according to the Financial Times.

It’s easy to see why the mouth balked: this week, which House Financial Services Committee held an inquiry into the potential national security risks associated with allowing the US to fund “foreign competitors and adversaries.”

If some investors are afraid of Washington’s reaction, others are equally concerned about political developments in China. Tiger Global Management, an American investment firm, reduced its holdings of Chinese stocks after Xi last month broke with the latest norms and began his third term as China’s president – leaving some analysts convinced he plans to rule forever.

Companies are hurting Chinese investment because of rising geopolitical tensions and the economic fallout from Xi’s zero-covid policies, according to a person familiar with the decision who spoke on condition of anonymity to discuss internal company deliberations.

In the wake of China’s latest 20 Communist Party Congress, investors fret that market-oriented economic development is no longer the government’s priority. Instead, Xi increased the state’s role in the economy and strengthened 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 Tuesday.

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Starting in 2019, foreign investors poured into the Chinese bond market to take advantage of higher returns than they could earn in the United States. But in recent months, that flow has been reversed.

Foreign investors dumped about $70 billion in Chinese bonds during the four months starting in March, according to the IIF.

Both Russia’s February 24 invasion of Ukraine and the beginning Our Federal Reserve The rise in interest rates in March caused investors to rethink their positions, said David Loevinger, managing director of the emerging market group for TCW, a Los Angeles-based asset management firm.

“Dina [Winter] Olympic [in Beijing], Xi gave Putin a big bear hug and two weeks later, the tanks rolled,” said Loevinger, a former US Treasury Department official. “People are asking whether China will submit to sanctions. Certainly, that is a concern.”

Additional capital outflows will drag down China’s financial markets. But the bigger issue is how companies are restructuring their supply chains.

For years, US and other manufacturers were drawn to China by its cheap labor. But recurring production disruptions during the pandemic convinced them to establish multiple supply lines, despite the added cost.

The company is looking for alternative sites outside of China for a number of reasons. US-China relations have generally deteriorated. The ongoing covid lockdown has made Chinese factories less reliable. And Washington’s bipartisan hostility toward China has made executives wary of betting too heavily on an unpopular country.

Among the companies moving production elsewhere is Apple, which will rely on India for a share of its smartphone output.

The Biden administration is also promoting efforts to reduce US 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 products such as clothing 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 American factories peaked in 2016 at nearly $49 billion, before sinking to less than $6 billion last year, according to Rhodium Group, a New York-based consultancy. US direct investment in China has fallen from a peak in 2008 of nearly $21 billion to $8 billion in 2021.

For now, the shift away from China seems to be about redirecting future development rather than a broad retreat from existing footprints.

A third of US companies in China said they had made new investments in other countries in the past year, nearly double the percentage they did in 2021, according to a recent survey by America in Shanghai. Only 1 in 6 companies are considering moving their existing Chinese operations elsewhere.

“Xi Jinping’s clear signal about the contours of his government’s economic policy, which will be less favorable to private companies, is likely to discourage US investment in China and lead to a gradual economic and financial decoupling,” said former IMF official Eswar Prasad, who it was. now professor of economics at Cornell University.

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To be sure, after four decades of growing US-China integration, there is little prospect of a complete divorce. Roughly $700 billion in goods will move between the two countries this year, an increase from last year’s level and more than six times as much as in 2000, according to Census Bureau statistics.

China’s increasingly affluent consumers are vital to the profit hopes of US companies including General Motors and Microsoft.

The company also cannot easily duplicate elsewhere their Chinese production arrangements. China’s ports, roads and rail network are among the best in the world, complicating plans to leave 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, the very important thing is that if you move manufacturing outside of China, you immediately become less competitive.”

still, national security considerations which is overshadowing the pure economy in both nations. In Washington, the Biden administration is working on new regulations to limit outward investment into China. Xi wants China to produce more advanced technology needed for military and commercial superiority.

Expanding US-China commercial relations under these circumstances will not be easy.

“It’s difficult to manage competing interests,” said Eric Robertsen, head of global research and chief strategy officer for Standard Chartered Bank in Dubai. “But we need to find areas where we can work together. There is no interest in things going off the proverbial cliff.”

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