US-China financial market tensions: The road to riches or ruin? from freeamfva's blog

US-China financial market tensions: The road to riches or ruin?

US-China financial ties are fraying as conflicting national concerns about technology transfer, corporate transparency, and data security threaten everything from Wall Street trading in Chinese corporate giants to American venture-capital investments in China’s startups. But as Washington navigates the road ahead, it should keep a focus on national-security threats and avoid the temptation to push the two countries onto completely divergent paths that could raise the risk of financial-market instability. To get more China finance news, you can visit shine news official website.

The pressure to separate the two countries’ financial markets came to a head over the past year, mirroring the centrifugal political forces that are straining bilateral trade in technology and other goods. This doesn’t necessarily portend the imminent decoupling of the two superpowers’ financial markets, but with recent calls in Washington for new restrictions on investments in China, the potential for disruption is increasing.

This inevitably raises the question of how far each government is prepared to go. Washington has to calibrate whether it is willing to risk that market instability and whether it wants to face a backlash from powerful US financial interests who are happy to make money in China. And Beijing will have to decide whether it’s truly prepared for its companies to lose access to US stock markets just as its own slowing economy faces the pressure of a deepening property-market downturn.

The links between US and Chinese financial markets never appeared tighter than early last year. China’s companies launched a wave of Wall Street initial public offerings (IPOs) in the first half of 2021, helping Chinese stocks on US exchanges hit record highs in February. Foreign capital surged into China’s markets—especially government bonds—as the country’s economy recovered from its pandemic-induced 2020 slowdown and as US venture capitalists pumped money into Chinese startups at close to the pre-pandemic pace.

But as 2021 progressed, both countries’ governments hit the brakes on Chinese IPOs in New York, as China cracked down on the tech giants that had become the darlings of Wall Street and the United States started the clock on a process that could delist every Chinese company from US markets by 2024 because China refuses to abide by disclosure rules.

Actions like these have already reduced the market capitalization of Chinese companies listed on Wall Street by some six hundred billion dollars, and those losses likely will mount as more Chinese firms shift their listings to China’s stock markets. Already, twelve of the fifteen largest Chinese companies traded in the United States have launched secondary listings in Hong Kong, and many US institutional investors have shifted their holdings away from the New York markets.

Nonetheless, US institutional investors continue to buy substantial amounts of Chinese government bonds and stocks on the other side of the Pacific, and Chinese holdings of US government securities consistently top one trillion dollars. Neither government so far is taking aim at those bedrock investments. But China’s economic problems have unnerved some US investors over the past year, suggesting that investments in China may be more fragile than many analysts have assumed. Witness January’s declines across all Chinese asset classes, which sent China’s stock markets into their first bear market since 2019 and left many US investors with their portfolios exposed. The question is how investors will react if there are more shocks.

Now there are signs that more market restrictions may loom. Influential voices in Washington have begun advocating—and trying to legislate—unprecedented oversight of US venture-capital activities in China. That seed money has played an important role in funding Chinese industries ranging from semiconductors to biotechnology, and one industry estimate shows that around one third of all Chinese venture-capital deals by value in recent years include US investors. A second industry report places total 2021 investment in China by Chinese and foreign venture-capital firms at a record-smashing $130.6 billion.
In a July 2021 speech, US National Security Advisor Jake Sullivan said the Biden administration is “looking at the impact of outbound US investment flows that could… enhance the technological capacity of our competitors in ways that harm our national security.”

The US-China Economic and Security Review Commission’s (USCC’s) annual report, released in November, recommended executive-branch and congressional actions to strengthen regulations focused on flows of venture capital and other forms of investments to China’s military-industrial ecosystem.

Other types of investment in China facing scrutiny are securities based on market indices that include Chinese stocks and bonds, which generate large amounts of passive institutional investment. The USCC has called for index providers and derivatives based on indices to be subject to regulation by the US Securities and Exchange Commission (SEC), expressing concern about damage to US economic and security interests.

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