Nikkei Watch: US-China tensions threaten great Financial decoupling

2022-05-10 0 By

Rising tensions between China and the US are deepening the rift between the two rivals’ financial systems, a trend that could cut into the productivity of the global economy, nikkei English reported.In the US, there have been moves to exclude Chinese stocks from large public pension plans.China has tightened rules to prevent its companies from listing easily in the United States and elsewhere.These mark a sharp reversal in the internationalisation of finance over the past decade.”China is not a vehicle we want to engage with,” Southern Florida Governor RON desantis said at a news conference announcing “an investigation of all investments in Florida’s retirement system to determine how much of the state’s assets are in Chinese companies.”The Florida State Retirement System is included in the approximately $250 billion in assets managed by the Florida Board of Governors.Anti-china hardliners have long advocated a retreat from Chinese investments, arguing that pensions will be diverted to companies with military ties.Desantis is a leading figure in the opposition Republican Party.With a Navy background and a law degree from Harvard, he is often mentioned as a possible presidential candidate in 2024.So his move could be seen as a calculated appeal to the party’s conservative base ahead of the crucial 2022 midterm congressional elections.And pension funds in eastern STATES are poised to do the same after receiving similar requests from organisations and individuals to vet Chinese investments.In the US, where Democrats and Republicans are deeply divided on many issues, a tough stance on China is increasingly attracting cross-party support.For example, the RECOMMENDATIONS of the US-China Economic and Security Review Commission (USCC), established by both parties in Congress, formed the basis for a regulatory crackdown on major Chinese telecom equipment suppliers.In its 2021 annual report, released in November, the Committee discussed “tightening U.S. -China financial connectivity.”The commission’s report recommends that Congress require The Treasury Department to provide “annual updates of the precise U.S. portfolio position in China,” including exposures to “U.S. institutional types, such as state pension funds,” and individual Chinese recipients who “receive more than a minimum amount, such as $100 million.”Venture capital and private equity funds disclose too little information to verify whether they invest in Chinese companies that could pose security threats.Florida’s move to review the management of public funds can be seen as a response to the USCC’s recommendations.Even the flow of funds passively invested in the index cannot be ignored.MSCI said in 2017 that it would include mainland-listed stocks, particularly large-cap China A-shares, in its main index.Some in the markets are wary, but the Chinese government is said to have lobbied for it.Inflows into Chinese equities from abroad have been increasing since 2018, according to the Institute of International Finance.Us public pension funds have a high proportion of passively managed investments, leading to swings in returns depending on the composition of equity indices.Calpers, which has a $327bn portfolio, showed the percentage of assets under management by region at an internal investment conference in November.China (including Hong Kong) accounts for 2.2 per cent of market capitalisation, close to 2.6 per cent in Second place Japan and 2.5 per cent in third place Britain, and already holds more than 10 per cent of shares sold by region.Hardliners aim to stop that.Investment in Military-related Chinese companies was banned under President Donald Trump and extended by the Biden administration.The Securities and Exchange Commission has issued new rules that make it difficult for Chinese companies to list in the United States.In its report, the USCC recommended that index providers that include Chinese stocks, such as MSCI, be regulated by the SEC.China is also moving in the opposite direction of capital liberalisation.The authorities’ pressure on Didi Chuxing, and subsequent restrictions on its overseas listing, reflect concerns that foreign capital could threaten the government’s grip.China is pushing to develop an environment that allows companies to raise capital domestically for growth, including by setting up a new stock exchange in Beijing for small and medium-sized enterprises.Cliff Kupchan, chairman of New York-based risk analysis firm Eurasia Group, noted that China is working to internationalize the yuan.He noted that China hopes efforts to attract other forms of capital will help internationalise the renminbi.This dynamic is unlikely to challenge the dollar in the short term, but it could be a challenge for decades.Over the past decade, the financial relationship between China and the United States has continued to strengthen.Rhodium Group, a U.S. research firm, estimates that U.S. investors held nearly $1.2 trillion in Chinese stocks and debt securities at the end of 2020, while Chinese investors held as much as $2.1 trillion in U.S. stocks and debt securities.China has long been hesitant to liberalise its capital markets, lagging behind global financial integration, but has gradually loosened restrictions.The U.S. is an important financial trading partner for China, and Chinese companies have long relied on it for financing.On the other hand, American institutional investors and individuals have turned to China in search of higher returns.””Under normal circumstances, there is room for trillions of dollars in U.S.-China financial investment before balances reach levels typical of advanced economies,” according to a 2021 report by the U.S.-China Investment Project, co-led by Rhodium.Finance, which involves the exchange of risk and return, has been globalised for decades because it is more efficient when as many investors as possible are involved.But if political conflict-induced financial decoupling continues, it will spell trouble for the engines of global growth as the cost of capital increases.In mid-September 2021, a meeting of the U.S. -China Financial Roundtable brought together leading Wall Street figures and Chinese officials.The event began in the Trump era and is being held for the first time since the change of administration.The aim is to find a way to solve the problems brewing behind the scenes.But an adversarial structure has developed between the US and China during Trump’s four years that makes effective communication difficult, lamented one US participant.Obviously, how to bridge the capital gap, still need to be excavated.