Biden is preparing to launch "unprecedented action" at China's economy. -- China Boss Update 4.21.23
Weekend update
What happened.
The Biden Administration is sharpening the edges of a new weapon it will use against China's technological and military rise: An executive order that will mandate government notification and tracking of new American investment into Chinese tech companies.
The order will set forth which of China's tech firms are legally off-limits to investors, and which types of deals will be subject to additional scrutiny, although many transactions will likely receive the green light after the notice requirement is met, according to Reuters. The “notice and go” feature of the new law is one way US officials plan to keep track of the “billions that American firms have poured into sensitive Chinese sectors,” Reuters staff said.
US officials are now informing industry groups, like the Chamber of Commerce, about the general outlines of their plans in order to smooth the way for compliance and give investors a chance to weigh-in before the order takes effect.
They are also busy briefing G7 partners in “hopes” of “an endorsement” at the summit in May, Bloomberg said. The deals likely to be outright prohibited will be in critical technologies that have military application, like advanced semiconductors, quantum computing and artificial intelligence, Politico staff said.
Why it matters.
The national security arguments
Recommendations for a China investment screening mechanism have been put forward since, at least, 2021 when the United States Economic and Security Commission on China (USCC), a congressional research unit, highlighted national security issues in the “surge of U.S. investor participation in China’s markets.” Two (very simplified) arguments for greater scrutiny are as follows:
American investors fund China’s military tech to the detriment of the US
According to USCC, American investment in China's technologies is exceeding the US military's capabilities for maintaining its leading edge in defense. This handicap is occurring while China is also enhancing its abilities to align private firms and resources with Chinese leader Xi Jinping's domestic and geopolitical goals, several of which are in direct conflict with U.S. interests.
China dreamin’ investors constrain a meaningful US response
The USCC’s findings, put more simply, reveal that the zeal of US investment banks and other firms for Chinese tech stocks hamper the US’ ability to respond to China's rapid development of military tech. By way of example, even after Beijing's heavy crackdown on Chinese e-commerce and fin-tech firms - during which investors lost billions - the global financial services industry's enthusiasm for China tech remains, with many large institutional investors optimistic that “the worst is over as China reopens and exits its zero-Covid policy.” To address this asymmetry, Biden has decided to regulate outbound capital flows to China.
But will Biden’s weaponization of capital work?
The use of private equity and venture capital in geopolitical competition is a novel concept since private equity and venture capital's forays abroad as "institutionalized asset classes" are, historically-speaking, recent developments.
Another difficulty in assessing the usefulness and risks of Biden’s order, which will be unveiled in the upcoming weeks, lies in the opacity of the massive deluge of unregulated cross-border capital flows.
That said, the fact that China’s own capital markets are designed to supercharge the funding of Xi Jinping’s national goals indicates Beijing, at least, considers capital an essential part of the state’s arsenal, rather than a means of private wealth.
Section 4: U.S.- China Financial Connectivity and Risks to U.S. National Security, USCC, Nov. 2021:
This strategic use of financial markets occurs in an ecosystem in which all types of Chinese companies are subject to state control and influence. As a result, U.S. investors and policymakers cannot always know to what extent U.S. capital flowing into China may advance China’s military modernization, facilitate human rights abuses, or subsidize unfair trade practices by Chinese firms. Of particular concern to U.S. national security is the possibility that U.S. investment could be directed to companies tapped by the Chinese government to modernize China’s military as part of its military-civil fusion strategy. This poses unique national security risks to the United States on top of the economic risks to U.S. investors stemming from the flaws in China’s financial system.†
But another way to measure the impact of Biden’s capital curbs on China’s vast military–industrial complex might be to take Beijing’s temperature.
On Friday, China accused the US of politicizing tech issues. Foreign Ministry spokesman Wang Wenbin said Washington’s “real goal is to deprive China of its development rights. It is pure economic coercion.”
The Asian nation would protect its rights and interests, he said at a regular press briefing in Beijing, without going into detail on how that would happen.
Yet, as Reuters’ analyst Pete Sweeney recently noted, even as the White House bombards it with export curbs, China “keeps its sanction powder dry.” This is almost certainly out of economic necessity as the country’s post-Covid recovery has been stalled. Last week, Nikkei Asia reported that migrant workers are struggling to find jobs in tech and electronics hub Shenzhen and, in The Diplomat, Kung Chan said businesses in “storied manufacturing center” Dongguan are going bankrupt.
Even so, Xi’s trigger finger looks super itchy.
Earlier this week, Financial Times' Edward White and Kana Inagaki reported that Beijing had begun "'surgical' retaliation against foreign companies” - Lockheed Martin, Raytheon, Deloitte, chipmaker Micron, and due diligence firm Mintz - “after five years of snowballing trade and technology restrictions spearheaded by the US.”
“The carmaking sector is also braced for the outcome of a 2022 [PRC] commerce ministry review of technology export restrictions, including possible controls on some rare earth materials and lidar technology used in mapping for driverless cars,” they said. (Emphasis added.)
Tu Le, founder of Sino Auto Insights, a Beijing consultancy, said any decision by China to “weaponise their dominance in mining and refining” of materials used by the electric vehicle industry would create “immediate anxiety for the US, European, Japanese and Korean governments”.
With the US and its allies still scrambling to break China’s hold on critical minerals in the global supply chain, Xi may have the upper hand in this battle.
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Have a great weekend.