MUMBAI, Nov 16 (Reuters Breakingviews) – The United States prefers to talk about efforts to reduce its dependence on China in positive language. American officials use terms like “de-risking”, “friendshoring” and safeguarding “national security”. Their Chinese counterparts view all these references as a way of describing a decoupling of the world’s two largest economies – something they see as an unacceptable attempt by Washington to stymie the rise of the People’s Republic.
U.S. President Joe Biden and China’s Xi Jinping, who met in San Francisco on Wednesday, may disagree on the terminology. Yet there is a huge shift underway in the Sino-American relationship. To peer beyond the rhetoric, Reuters Breakingviews examined various flows between the two countries which together account for 40% of global GDP. The signs largely point toward a conscious and structural decoupling.
Start with U.S.-China trade, the bedrock of the bilateral relationship. The flow of goods between the two accelerated sharply after the People’s Republic joined the World Trade Organization in 2001, to the benefit of American consumers and Chinese workers. The headline numbers are still robust: U.S. imports of goods from China rose to $536 billion in 2022. However, the figure masks several trends.
First, growth in American imports from China is faster in goods which are not subject to U.S. tariffs. This shows how the trade war launched by former U.S. President Donald Trump in 2018 is biting.
Second, other exporters are gaining more. Barely half the manufactured goods imported into the United States from low-cost Asian countries now come from China. Four years ago the figure was two-thirds, per Kearney’s annual Reshoring Index.
Yet the true picture is more complicated. For example, some exports from Southeast Asia to the U.S. are goods made with components from China which are circumventing duties. Such wrinkles make it tricky to determine how much the two superpowers are really parting ways.
In finance, the separation is more pronounced. Western investors have slashed their exposure to the planet’s second-largest economy.
The average allocation of global equity funds to Chinese assets peaked at 3.13% in April 2015. As of September 2023, it was 1.75%, data from fund flow tracker EPFR shows. That partly reflects a broader retreat from emerging markets after the U.S. Federal Reserve raised interest rates. But it seems unlikely that allocations will fully recover even if investors rediscover their appetite for risk.
Take the $771 billion U.S. Federal Retirement Thrift Investment Board, which on Tuesday said it will exclude stocks listed in China and Hong Kong from its international fund due to the risks associated with rising geopolitical tensions.
Less flighty capital is also being more cautious. The value of U.S. dollar foreign direct investment in China fell to $8 billion last year, returning to 2004 levels, Rhodium Group data shows. Fund managers fear they will be forced to sell if the United States expands investment restrictions relating to artificial intelligence and advanced chips, or slaps additional sanctions on China.
Meanwhile, companies from the People’s Republic have also largely stopped tapping American capital. Chinese firms have raised just $529 million from initial and secondary stock offerings in the United States in the year to mid-October. That’s far below the $29 billion peak in 2014 when e-commerce giant Alibaba (9988.HK), listed its shares in New York, Dealogic data shows.
Chilling financial ties might be expected to eventually squeeze companies’ overseas operations but for now the data offers a mixed picture.
Chinese companies never had a huge presence in the United States but their assets are plateauing and revenue is shrinking, Rhodium Group data shows. This trend could accelerate as U.S. authorities grow more suspicious of Chinese firms. For example, U.S. Republican presidential candidates are vowing to ban social media app TikTok, which is owned by China’s ByteDance, citing spyware and antisemitic content.
Yet American companies which have much more at stake in China are reluctant to retreat from a giant market. Coffee chain Starbucks (SBUX.O) had more than 6,000 outlets in the People’s Republic as of October 2022, 17% of the global total.
Apple (AAPL.O) generates over 16% of its revenue in Greater China, while the country brings in more than a fifth of electric carmaker Tesla’s (TSLA.O) top line. Yet both companies are getting bruised as China retaliates against U.S. attempts to curb its access to cutting-edge technology. Though they maintain a large presence on the Chinese mainland they are also building up supply chains elsewhere.
The flow of people between two countries is often overlooked but can be a useful indicator of the state of a bilateral relationship. Here, the data suggests the world’s understanding of China is likely to plunge dramatically in coming years.
The number of U.S. students studying in China for academic credit fell to just 211 in 2021/22, the lowest level in over two decades, according to data released this week by Open Doors. Though Covid-era restrictions explain much of the steep decline, the numbers seem unlikely to recover to pre-pandemic levels.
The allure of the United States for Chinese students endures, however. Of all international students in the U.S. in 2022/23, 27% were from China, closely followed by India at 25%. Whether this influx promotes greater understanding between the two countries depends in part on whether those students return home.
Strains over Taiwan set the tone for the entire relationship between the U.S. and China. Here there is rising risk of a potentially sudden and harsh decoupling.
The United States’ “One-China” policy acknowledges Chinese claims of sovereignty over Taiwan, a democratically governed island. Yet Washington may impose large-scale sanctions if China invades Taiwan or prompts a major military crisis.
Goldman Sachs’ Cross-Strait Risk Index counts the number of articles that mention geopolitical tension between Taiwan and the mainland. This has trended up sharply since 2020. A market-based measure the Wall Street bank derives from Taiwanese equities has also trended up, though less dramatically.
NOT THE POINT
Politicians from the world’s two superpowers will doubtless continue to debate whether they are decoupling or de-risking. The discussion overlooks the more important point: Sino-American ties have deteriorated on many fronts. Links built up over many decades will be difficult to untangle. But the conscious decoupling between the U.S. and China looks set to continue.
U.S. President Joe Biden and Chinese President Xi Jinping met on Nov. 15 in San Francisco on the sidelines of the Asia-Pacific Economic Cooperation forum. It was the first in-person meeting between the two leaders in one year.
Column by Una Galani in Mumbai and Afiq Fitri Alias in London. Editing by Peter Thal Larsen, Oliver Taslic and Thomas Shum
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