U.S.-China relations have further deteriorated in recent months, and escalating frictions are impacting most channels of economic interaction between the two countries, including trade, direct investment and the flow of people. Financial markets are the latest aspect of the relationship to come into the crosshairs. Politicians and pundits with a hawkish bent are proposing to curtail bilateral investments in stocks, bonds and other financial assets. Such “financial market decoupling” rhetoric is short-sighted and will adversely affect long-term U.S. economic and national security interests.
After the U.S. enacted tougher scrutiny on Chinese inbound investment last year, some politicians and other commentators are now proposing to pull Chinese access to U.S. financial markets into the trade war negotiations. For example, former Presidential candidate and owner of the Dallas Mavericks Mark Cuban has called on President Trump to block Chinese entities from issuing, purchasing or trading stocks, bonds and other financial securities in the U.S.
Others are pushing to restrict U.S. entities to invest in China’s financial markets. Steve Bannon, President Trump’s former chief strategist, claims we need to “unwind all the pension funds and insurance companies in the U.S. that provide capital to the Chinese Communist Party.” In April, a bipartisan group of 24 Congressmen sent a letter to the Treasury and State Departments calling for the penalization of U.S. firms that financially support Chinese firms facilitating human rights violations and urging greater scrutiny of public fund investment in these firms. Recently, word leaked that the White House may restrict portfolio flows into China, potentially affecting hundreds of billions of dollars of investment.
These developments echo the irresponsible rhetoric in other areas and must stop. We must avoid making financial market access a tool for short-term geopolitical objectives.
Open financial markets have for decades been a key source of U.S. prosperity, and open flows in both directions benefit our economy as a whole and every American saving for retirement.
"Open financial markets have for decades been a key source of U.S. prosperity, and open flows in both directions benefit our economy as a whole and every American saving for retirement."
Foreign investment in U.S. stocks and bonds improves access to capital for our companies, and increases the return on Americans’ savings. Most Chinese middle-class households are getting richer quickly, but don’t yet have much savings overseas. Trillions of dollars of Chinese household savings are waiting to be deployed abroad. As a “safe haven” economy with a deep and mature financial market, the U.S. is positioned to be a primary destination for that capital–unless it builds barriers to Chinese participation. China and other foreign investors also hold an estimated $6.6 trillion of U.S. Treasury securities, helping to keep down U.S. costs to fund schools, the military and other public infrastructure.
Restricting U.S. investors from putting their money in Chinese securities would lower opportunities for American savers. China is the world’s second largest economy and has been among the fastest growing emerging markets for decades. It is presently taking steps to allow the greater foreign participation that market nations have long demanded, including new stock and bond connect programs and the recent abolishment of quotas on foreign portfolio investment. This will allow U.S. and other foreign investors to diversify and include China in their global portfolios. If U.S. investors are prevented from making these investments, they will lose out on the chance to capitalize on the fastest growing economy in the world, while investors from other countries move in on the opportunity.
Aside from restricting investment choices for savers, interfering with and politicizing outbound capital flows would also damage the long-term competitiveness of U.S. companies and financial markets. If the U.S. marketplace cannot offer global investors exposure to the second largest economy in the world, they will resort to London, Hong Kong and other options, which will in the long-run severely undermine the position of the U.S. as global financial center.
"If U.S. investors are prevented from making these investments, they will lose out on the chance to capitalize on the fastest growing economy in the world."
Economic arguments aside, China hawks are calling for restrictions on Chinese financial investment in the name of national security. The problem is, those arguments simply do not hold.
Chinese holdings of U.S. securities are passive investments that do not yield any ownership control or give investors access to IP or trade secrets. There are a few exceptions in which small minority stakes could yield influence, but U.S. regulators already have jurisdictions over these cases through a strengthened investment review process under the new Foreign Investment Risk Review Modernization Act.
The argument that we should not financially support companies that threaten U.S. national security interests–for example, firms that work with China’s military–is reasonable. However, those cases can be dealt with under the current U.S. sanctions regime. There is absolutely no good reason for a blanket ban or “comprehensive” financial decoupling between both nations. We should work with a scalpel, not a sledgehammer.
From a national security perspective, it is important to underscore that open markets are the very reason that the U.S. is able to wield financial power globally. The U.S. can enforce sanctions and exercise long-arm jurisdiction on firms outside of the United States precisely because it has created an open and powerful market that no firm operating globally wants to be left out of. Undermining this privilege and power for political gamesmanship or short-term gains is detrimental to our long-term security interests.
The emerging banter about financial market decoupling echoes the irresponsible rhetoric seen in other areas: The mistrust in U.S.-China relations provides fertile ground for populist and simplistic arguments based on a zero-sum mentality. These solutions come with great costs that are underappreciated and oftentimes detrimental to our national interest. The world is complex, and we need targeted and effective policies to reconcile our concerns. We must double down on efforts to figure out what risks are real, and which are imagined.
This editorial first appeared on the South China Morning Post.
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