Will trade decoupling become capital decoupling?  

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If American companies can’t trade goods with China in sensitive sectors like semiconductors, why should American investment houses be able to funnel capital to China in ways that may support the development of those industries, which the Biden administration feels may be used in war efforts? It’s a looming question, as the US government is poised in the coming months to roll out new financial restrictions between the US and China.

As far back as 2018 it seemed clear — as it does now — that trade decoupling and financial decoupling will go hand in hand. According to the research provider Rhodium Group, US investors are carrying out about 3,000 transactions a year in China, everything from foreign direct investment into companies to venture capital deals in Chinese start-ups. While such deals have in the past been opaque, there are a new crop of companies tracking supply chains and investment flows. This is a sector that will undoubtedly grow in the wake of Biden’s executive order that puts more emphasis on national security-related capital screening. Bottom line — it’s going to get a lot harder for companies like Blackstone, KKR, Bain and so on to hide their exposure to China.

One can argue about whether capital decoupling is a good idea, but I think it’s only fair that investment houses should have to live by the same principles that non-financial firms do when it comes to national security. The spy balloon issue has put all this front and centre. While there are definitely major risks if investment decoupling becomes a larger currency and T-bill decoupling between the US and China (something I explore in my column today, which looks at the relationship between the two superpowers through the lens of psychology), there are also upsides. A weaker dollar would make it easier for US exporters to sell abroad, something that would fit the Biden administration plan for the re-industrialisation of the US.

For the last few decades, increased foreign capital flows into the US, particularly from China, have made it all too easy for the American economy to be highly financialised, which allows the US to spend more than it should, and save far less. Restricting investment flows isn’t necessarily a way to a new age of American austerity (though I think we may be heading there in any case. But it’s yet another line in the sand that tells the public, and investors, that the world isn’t going to reset to the 1990s.

The way global businesses must behave in a decoupling world is fundamentally changing. And that will have major ramifications for portfolio flows. While I think it’s a good thing for any investment house that is concerned about ESG issues and national security considerations to look carefully at China exposure, I’m also wondering what it will mean for American pensioners to be cut off from the Chinese market.

Richard, I’m curious your thoughts on that question, as well as how players in Silicon Valley see the coming age of investment decoupling between the US and China?

  • My colleague Martin Wolf is quite right to advocate for a land value tax. All value these days seems to live in real estate/land, intellectual property and brands. We need some way to capture tax value from them fairly.

  • And FT guest columnist Ruchir Sharma is also correct to say that investors are not ready for the “long grind to come,” meaning a long period of slower growth, higher inflation and diminished returns.

  • Gerald Seib, one of my favourite conservative thinkers, penned a thoughtful long form piece about the existential struggle within the Republican party about whether to move away from the Reagan-Thatcher legacy, and towards a new worker-centric economics.

  • And finally, Jamie Metzl (a former National Security Council staffer during the Clinton administration) and Matt Pottinger (a deputy national security adviser during the Trump administration) have penned an important bipartisan op-ed in the WSJ, calling for a full investigation into the origins of Covid. Their feeling is that the Wuhan lab theory cannot be dismissed without access to lab samples, personnel and official records (which the Chinese have yet to give), and they present some powerful evidence about why vested interests in the west may be trying to prevent that.

Richard Waters responds

Yes, I agree, the capital decoupling feels like it’s been coming for a while. There’s been a sickening sense of inevitability over here in Silicon Valley about the deepening schism with China.

I keep talking to business leaders who argue that the US can limit the impact of its tech sanctions and target China’s military without undermining tech trade more broadly. But they don’t say it with much conviction.

Cutting off American investors’ chance to profit from the rise of Chinese tech would be devastating for some of the Valley’s most successful investors. Venture capital is all about the big wins, and there haven’t been many bigger than those in China’s consumer tech sector. Alibaba’s rise made a fortune for Silver Lake and its investors. The bet that Yahoo co-founder Jerry Yang made on Alibaba ended up being worth an awful lot more for his shareholders than Yahoo’s own business.

Likewise, TikTok’s parent, ByteDance, got its first big injection of capital form Sequoia, and private equity firms like General Atlantic and KKR have ploughed in billions. The US hasn’t produced a consumer hit like this for years.

It’s hard to see how investment restrictions won’t end up hitting the tech sector broadly. The dual-use nature of much of today’s technology, and fears that Beijing will co-opt any tech company it needs to extend its surveillance, make it almost impossible to draw a line.

It feels like Silicon Valley has been preparing for this for a while. Sequoia recently created a cleaner division between the management of its Chinese and US arms, which in part looked like laying the ground for a complete split, should it ever come to that.

This issue probably seems remote to most people, who will wonder why they should worry if a handful of billionaire investors lose out. But profits from venture capital and private equity have juiced the overall returns for a lot of endowment, pension and sovereign wealth funds. Inevitably, if one of the world’s great growth opportunities is cut off, we’ll all lose out in the long run.

Rana, I’m sorry to end on a gloomy note! It’s always fun talking to you, but my time’s up: Ed will be back later this week.

Your feedback

And now a word from our Swampians . . .

In response to “The intention of algorithms”:
“Section 230 needs to be revised back to its original intent of protecting bulletin board services, possibly today’s Reddit and non-commercial Facebook groups, from defamation lawsuits as it does with letters to the editor. Product reviews, performance reviews and restaurants reviews on Yelp, Amazon or other retailer sites could also be protected as they would be for letters to the editor. To protect the entire commercial enterprise is silly and stupid. If that means their business models blow up, so be it. Let the litigation start as they have more than enough money to cover a decade’s set of court cases.” — Dennis Gerson, Colleyville, Texas

“I just wonder if the US Supreme Court is the appropriate venue for deciding something like this that affects such a large proportion of the world’s population. I realise it follows from the companies (and indeed the internet) being US-driven but, whatever the decision, it makes me (as non-US) feel a bit uncomfortable.” Reader Unimpressed

“Even if the pending cases were about fostering the emergence of new platforms, I doubt more platform competition is going to improve the quality of speech. It may just result in more shouting. Platform competitors like Twitter will want to compete by minimising content moderation. That will chase away the thoughtful users, attract the trolls and speakers of evil, and trap the innocent. There is a risk that other platforms compete by emulating that, leading to a race to the bottom. I hope I am wrong here.” Reader Old traveller

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