Despite the Biden administration’s efforts to stabilize the U.S.-China relationship with visits with their counterparts, pitfalls remain ahead for both investors and U.S. companies operating in China.
The risks continue as both countries look to bolster their defenses against increasing competition and national security concerns—while avoiding conflict. The Biden administration is trying to reopen channels of dialogue that analysts say is crucial to keep the two countries out of conflict even as it preps more restrictions on China. Similarly, China President Xi Jinping is wooing foreign investors as China’s economic recovery is underwhelming, and he’s making moves that rattle investors.
A hearing on Thursday held by the Select Committee on the Chinese Communist Party illustrates what is on the horizon as analysts testified about a range of concerns: the increasing difficulty in getting reliable information about the Chinese economy and policies; the fine line U.S. companies operating in China need to walk; and the increasing presence of China in private sector companies.
China’s moves “have lowered foreign investors’ and businesses’ visibility into the true economic conditions on the ground and hinders them from accurately judging the soundness of their investments,” Shehzad Qazi, managing director at independent research firm China Beige Book, said in written testimony to the committee.
Complicating the situation is the conflict facing U.S. companies. For example, Qazi notes that Chinese regulators asked several investment banks to not publish comments that could be considered politically sensitive in the lead up to last year’s Party Congress as China’s economy sputtered amid its harsh Covid restrictions.
New data laws are keeping fund managers from reporting critical information back to headquarters and often are restricted from sharing research or attending meetings over Zoom due to Beijing’s data-sharing restrictions, he said in his testimony.
“Investment research and corporate boards are well behind the realities of government actions and policies,” says John O’Conner, head J.H. Whitney Data Services, which helps clients manage geopolitical risks, and former member of
JPMorgan
‘s risk management committee. “We are in one of these historically wildly transformative periods. China is presenting an alternative world order and we are trying to hold on to the post-1947 world order.”
Planning ahead can be daunting. Rhodium Group recently estimated the hit from a worst-case scenario of sanctions on China’s banking system if Beijing made a move on Taiwan—the island democracy it claims as its own—at $3 trillion in trade and financial flows. That’s roughly the scale of the U.K. economy, and it’s before including foreign reserve assets that would be at risk.
Surveys show U.S. companies are rethinking new investments in China and money managers are also reassessing allocations. Risk management for companies with operations in China will mean near-term expense, O’Connor says. One guideline is the approach the European Chamber of Commerce offered a couple of years ago: Minimize the business as much as possible, isolate it so it isn’t connected to other systems and capabilities, and become more resilient if China business is lost, he said.
That said, O’Connor isn’t advocating no investments in China. As the recent parade of top executives from JPMorgan Chase’s Jamie Dimon to
Apple
‘s Tim Cook illustrate, firms will pursue all avenues of growth, and ignoring the world’s second-largest economy isn’t an easy ask.
But O’Connor stresses the need for investments and operations in China to be conducted with adequate disclosure and risk management—and he expects Washington to call for it. “One way or another, not unlike the ESG push, someone is going to force you to talk about it,” O’Connor says of the pressure likely to build on boards and chief executives.
In his written testimony to the committee, Qazi recommended U.S. investment banks testify about their business in China—including about the risks to their operations from China’s economic challenges and recent regulations.
The situation for U.S. companies could get thornier as the U.S. preps more restrictions related to outbound investments and critical technologies—and China begins to pushback.
Updates to last October’s export controls that expand restrictions on advanced graphic processing units and add semiconductor manufacturing tools to the list of controlled technologies could come after next week’s visit to China by climate envoy John Kerry.
The long-awaited executive order on outbound investment reviews could be delayed until November, when President Joe Biden and Xi may meet, says Paul Triolo, senior vice president for China and technology policy at consultancy Albright Stonebridge Group.
The administration could be pushed to move sooner if the recent momentum on bills in Congress, which target a broader swath of technology than the executive order—including large-capacity batteries, satellite communications and hypersonics—continues to build, Triolo says.
China’s response so far has been muted—even with the recent measure to require exporters seek a license for critical minerals like gallium and germanium to the U.S. that stopped short of a ban. Similar measures targeting other critical minerals, including those needed for electric vehicle battery supply chains like nickel, graphite, cobalt, aluminum, and lithium and could follow if tensions rise, Triolo says.
“The actions to extend controls on technologies and critical minerals on both sides has the potential to morph into a tit-for-tat process that works to undermine the recent momentum in the bilateral relationship,” Triolo cautions.
The tensions could also create a cloud over U.S. companies’ tie-ups with Chinese firms, like
Ford Motor
‘s (ticker: F) planned pact with Chinese electric-vehicle battery giant
Contemporary Amperex Technology
(300750.China), or CATL, for a $3.5 billion Michigan plant.
“I look at the deal as incredibly risky to [Ford] shareholders,” O’Connor says. The automaker is at risk from U.S. and Chinese regulators who are taking a closer look at all types of tie-ups between the two, and from issues surrounding data transfers and the resilience of supply chains, he added.
Write to Reshma Kapadia at [email protected]
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