Biden Xi meeting could slow but won’t stop fraying economic and trade ties for U.S., China

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JIMBARAN, Indonesia – This week’s face-to-face meeting between President Biden and Chinese President Xi Jinping could represent a welcome relief of tensions, but it is unlikely to Capture the slow pace of economic and trade relations between the United States and China.

The past five years of US-China acrimony over trade, technology and Taiwan have set off 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 sanctioned Russia for it the invasion of Ukraine, according to the Institute of International Finance (IIF). At the same time, companies trying to promote weak products have turned to Vietnam or India instead of China.

“There’s been a lot of change,” said Andrew Collier, an economist with GlobalSource Partners in Hong Kong.

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Business groups have praised Biden and Xi for backing away from open talks and said later planned talks between top US and Chinese leaders could herald progress. more. But, at least for now, the relationship between the world’s two largest economies seems to be stuck between breaking and connecting.

The three-hour meeting on the Indonesian resort island of Bali differs from Trump-era summits, which are dominated by trade and tariffs. At this time, the US read the statement about Taiwan and human rights in Xinjiang, Tibet and Hong Kong before saying “the constant concern about China’s economic crisis, which makes the people America’s work and family.”

For its part, the Chinese government dismissed the notion of an inevitable collision. Biden, who last month banned China from receiving advanced US equipment and related equipment, assured Xi that the United States was not seeking to “decouple” from China or limit its economic growth, according to the Chinese Ministry of Foreign Affairs.

“Beginning a trade war or a technological war, building walls and barriers, and pushing for isolation and division of the supply chain runs away from the principles of trade and cause global economic disruption. These attempts are of no benefit to anyone,” the Chinese account of the meeting said.

The discussion, however, did little to clear the cloud surrounding the financial connections of the giants. Many funds this year, including public pension plans in Florida and Texas, have reduced or eliminated their Chinese holdings.

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On Tuesday, S&P Global Ratings warned investors about the consequences if the United States imposes Ukraine-style sanctions on China. With the Chinese economy several times larger than Russia, the economic downturn would be huge.

Blocking Chinese financial institutions from using US dollars – possibly in response to future attacks on Taiwan – may prevent them from paying interest on their bonds, S&P said. . Of the 170 contracts issued by China’s banks, investment firms and insurance companies over the past three years, none allowed repayment in currencies other than the dollar. , the rating agency said.

Mounting the national security alert has cast a colder than what was once a normal investment.

BlackRock, which manages more than $10 trillion in assets, scrapped plans to launch a new fund that would invest in Chinese government bonds, fearing it could lead to a recession. of bipartisan opposition to China to Washington, according to the Financial Times.

It’s easy to see why the company isn’t interested: This week, the House Judiciary Committee held a hearing on the potential national security implications of the release. rules for US funding of “foreign enemies and enemies.”

If some investors fear Washington’s reaction, others are equally concerned about the political development in China. Tiger Global Management, a US-based investment firm, reduced its stake in China after Xi last month broke with recent trends and began a third term as China’s president. respect – leaving some analysts to believe that he plans to rule forever.

The company has benefited from Chinese investment because of regional tensions and economic slowdowns caused by Xi’s strict zero-covid policies, according to a person familiar with the decision. pressure who spoke on the condition of anonymity to discuss company discussions.

According to China’s recent 20th Communist Party meeting, investors fear that the economy-oriented economy is no longer the government’s priority. Instead, Xi has increased the state’s role in the economy and improved the rule of one man.

“The biggest open question is whether China is a safe place for foreign investors,” Carl Weinberg, chief economist for Advanced Business, wrote in customer list on Tuesday.

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Beginning in 2019, foreign investors poured into China’s financial markets to take advantage of higher returns than they could earn in the United States. But in recent months, the tide has reversed.

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

Both Russia’s February 24 attack on Ukraine and the Federal Reserve’s initiation of interest rate hikes in March caused investors to rethink their positions, said David Loevinger, the head of the emerging markets group for TCW, a Los Angeles-based asset management firm.

“Depend on [Winter] Olympics [in Beijing]Xi gave Putin a big bear hug and two weeks later, the tanks were rolling,” said Loevinger, a former US Treasury Department official. “People were asking if China would be punished. Indeed, that is a concern.”

The additional capital outflow will have an impact on the Chinese financial market. But the bigger issue is how companies are reorganizing their supply chains.

For decades, American and other companies have been drawn to China by its low energy costs. But production disruptions during the global pandemic have encouraged them to build more supply lines, despite the added cost.

Companies are looking for other places outside of China for many reasons. Overall US-China relations have been strained. Repeated covid lockdowns have made Chinese manufacturers nervous. And a bipartisan Washington stance on China has made leaders wary of betting too heavily on a country that disagrees.

Among the companies beefing up production another is Apple, which will rely on India for the growth of smartphone products.

President Biden also supports efforts to reduce US dependence on China for essential food, medicine and electric vehicles.

U.S. imports from China today are lower than their pre-recession levels, according to a recent analysis by economist Chad Bown of the Peterson Institute for International Economics. The United States now buys goods such as clothing and shoes from Vietnam that it once bought from Chinese suppliers.

While published data shows a lack of wholesale trade, direct investment across the Pacific is evaporating. Chinese investment in construction or U.S. business peaked in 2016 at nearly $49 billion, before falling to less than $6 billion last year, according to Rhodium Group, a New York-based consulting firm. . US direct investment in China has fallen from its peak in 2008 of nearly $21 billion to $8 billion in 2021.

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For now, the shift away from China seems to be about changing future developments rather than a general departure from the existing footprint.

A third of US companies in China said they managed to make new investments in other countries in the past year, almost double the percentage that did in 2021, according to the recently researched by the US in Shanghai. Only 1 in 6 companies are considering moving their existing China operations elsewhere.

“Xi Jinping’s clear message about the challenge of his economic policies, which will not be good for the private sector, will affect the US investment in China and lead to There are continuing economic and financial implications,” said IMF chief Eswar Prasad, who is. is now a professor of finance at Cornell University.

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To be sure, after four years of growing US-China cooperation, there is little hope of a complete divorce. About $700 billion worth of goods will move between the two countries this year, up more than last year and more than six times in 2000, according to Census Bureau statistics.

The rise in Chinese profits is critical to the profit prospects of American companies including General Motors and Microsoft.

Companies also cannot easily relocate their production plans in China. Ports, roads and railways in China are the best in the world, making it difficult for all plans to abandon the country.

“Unless there’s a real crisis, I don’t see it,” said Michael Pettis, an economics professor at Tsinghua University’s Guanghua School of Management in Beijing. “Once covid is behind us, all that matters is that if you move to production outside China, you immediately become less competitive.”

However, national security considerations are overshadowing pure business in both countries. In Washington, the Biden administration is working on new rules to limit foreign investment in China. Xi wants China to develop more technologies needed for military and economic excellence.

Expanding US-China trade relations under these conditions will not be easy.

“It’s difficult to maintain competitive advantage,” said Eric Robertsen, head of global research and chief executive officer for Standard Chartered Bank in Dubai. we can cooperate. He was not interested in things that would leave the testimony. “

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