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 may provide a welcome reduction in tensions, but it is unlikely to arrest the slow erosion of financial and economic ties. between the United States and China.

The past five years of US-China tensions over trade, technology and Taiwan have created an ongoing adjustment in financial markets and corporate boardrooms around the world.

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

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

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Business groups applauded Biden and Xi for distancing themselves from open conflict and said planned follow-up meetings between top US and Chinese officials could herald further progress. But, at least for now, the relationship between the world’s two largest economies appears to be teetering between recession and rapprochement.

The three-hour meeting on the Indonesian resort island of Bali was a contrast to Trump-era meetings, which have been dominated by trade and tariffs. This time, the reading of the US debate touched on Taiwan and human rights in Xinjiang, Tibet and Hong Kong before referring to “continuing concerns about China’s anti-trade economic practices, which harm workers and families in America.”

For its part, the Chinese government has rejected the idea of ​​an inevitable conflict. Biden, who last month blocked China’s access to advanced American chips and related equipment, assured Xi that the United States does not want to “downgrade” China or slow down development. its economy, according to China’s Ministry of Foreign Affairs.

“Starting a trade war or a technological war, building walls and barriers, and forcing the dismantling and cutting of supply systems is against the principles of the market economy and undermines the rules of international trade. Such efforts do not serve one’s interests,” said a Chinese report of the meeting.

However, this meeting did nothing to remove the clouds that covered the financial ties between the giants. Many investment funds this year, including public employee retirement plans in Florida and Texas, have reduced or eliminated their Chinese holdings.

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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 recession would be massive.

Banning Chinese financial institutions from using the US dollar – possibly because of a future attack on Taiwan – could leave them unable to make the necessary interest payments on their bonds, S&P said. Of the 170 bond offerings made by Chinese banks, investment firms and insurance companies in the past three years, none allowed repayment in currencies other than the dollar, the rating agency said. said.

Growing national security concerns have created tensions around investments that were once commonplace.

BlackRock, which manages more than $10 trillion in assets, has dropped plans to launch a new fund that would invest in Chinese government bonds, fearing it could run afoul of anti-China sentiment. Washington, according to the Financial Times.

It’s easy to see why the firm balked: This week, the House Financial Services Committee held a hearing on the potential national security risks associated with allowing US funds to “external opponents and opponents.”

If some investors fear the way Washington will respond, others are equally concerned about political developments in China. Tiger Global Management, an American investment firm, has reduced its Chinese holdings after Xi last month defied recent rules and began a third term as China’s president – leaving some critics they are convinced that he intends to rule forever.

The company lost investment in China due to rising political tensions and an economic slowdown from Xi’s strict zero-covid policy, according to a person familiar with the decision who spoke on condition of anonymity. not be known to discuss internal company decisions.

After the recent 20th Congress of the Communist Party of China, investors are worried that market-oriented economic development is no longer a priority for the government. Instead, Xi is increasing the state’s role in the economy and asserting one-man rule.

“The biggest open question is whether China is a safe haven for foreign investors,” Carl Weinberg, chief economist for High Frequency Economics, wrote in a note to clients on Tuesday.

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Beginning in 2019, foreign investors entered the Chinese bond market to take advantage of higher yields than they could get in the United States. But in recent months, that flow has changed.

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

Both the Jan. 24 attack on Russia and the start of the Federal Reserve’s interest rate hike in March caused investors to rethink their positions, said David Loevinger, managing director of the market group. in development for TCW, a Los Angeles-based asset management firm.

“It’s okay [Winter] The Olympics [in Beijing], Xi gave Putin a big bear hug, and two weeks later, the tanks rolled,” said Loevinger, a former US Treasury official. “People were asking if China would they are under sanctions. Actually, that was a problem. ”

More capital gains could be a drag on China’s stock market. But the big issue is how companies modernize their supply chains.

For decades, US and other manufacturers were drawn to China by its cheap labor. But frequent production disruptions during the pandemic convinced them to create more supply chains, albeit at additional costs.

Companies are looking for locations outside of China for several reasons. The overall US-China relationship is getting progressively worse. Repeated covid shutdowns have made Chinese factories less reliable. And Washington’s strong hostility to China makes executives wary of betting too much on an unpopular country.

Among the companies that are increasing production elsewhere is Apple, which will rely on India for an increasing share of smartphone production.

The Biden administration is also promoting efforts to reduce US reliance on China for precious minerals, pharmaceuticals and batteries for electric vehicles.

U.S. imports from China today are below their pre-trade war levels, according to a recent analysis by economist Chad Bown of the Peterson Center for International Economics. The United States is now buying products such as clothing and shoes from Vietnam that it once bought from Chinese suppliers.

While trade data does not indicate a significant slowdown, direct investment across the Pacific is evaporating. Chinese investment to build or acquire American firms peaked in 2016 at about $49 billion, before sinking to less than $6 billion last year, according to Rhodium Group, a New York consultancy. York. US direct investment in China has fallen from its 2008 peak of about $21 billion to $8 billion by 2021.

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For now, the transition from China seems to be about driving future development rather than retreating from the present.

A third of U.S. companies in China said they conducted new investments abroad in the past year, nearly double the percentage that did so in 2021, according to a recent survey by the U.S. in Shanghai. Only 1 in 6 companies are considering relocating their Chinese operations.

“Xi Jinping’s clear signals about his administration’s economic policy framework, which will not favor private enterprise, may discourage American investment in China and lead to an economic and financial slowdown,” the said former IMF official Eswar Prasad. he is now a professor of economics at Cornell University.

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In fact, after four decades of growing US-China cooperation, there is little prospect of a complete divorce. About $700 billion in goods will move between the two countries this year, an increase from last year and more than six times more than in 2000, according to Census Bureau statistics.

Growing Chinese consumers are critical to the profit hopes of US companies including General Motors and Microsoft.

Companies also cannot easily replicate their Chinese manufacturing arrangements elsewhere. China’s port, road and rail networks are among the best in the world, complicating any plans to abandon the country.

“Unless there’s real political pressure, I don’t see it,” said Michael Pettis, a finance professor at the Guanghua School of Management at Tsinghua University in Beijing. “Once covid is behind us, the most important thing is that if you move outside of China, you immediately have no competition.”

However, national security concerns have overshadowed the clean economy in both countries. In Washington, the Biden administration is working on new regulations to curb foreign investment in China. Xi wants China to develop the advanced technology needed for military and commercial supremacy.

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

“It’s difficult to manage competing interests,” said Eric Robertsen, global head of research and chief strategist at Standard Chartered Bank Dubai. But we have to find places where we can cooperate. It is not in one’s interest for things to go in the proverbial way.”

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