The US is whispering about financial war against China. Investors must brace themselves
- The possibility of Washington restricting US investment in China shouldn’t be taken lightly. US-China financial interconnections have increased in the past decade, and a financial decoupling would be even more damaging than the trade war
Whoever wins this technology race could command the power to reset the global order in the coming decades. Looking ahead, we expect more intense competition in this field.
Worryingly, the rumoured financial restrictions on China would cover all of the above. According to a Bloomberg report, the White House was contemplating delisting Chinese companies from US stock exchanges; reducing US pension funds’ exposure to Chinese markets; and limiting the inclusion of yuan assets in investment benchmarks managed by US firms.
Had such action been taken a decade ago, the impact on China would be minimal. Back then, China had very few companies listed in the US, yuan assets were not in global indices due to China’s sealed capital account, and there were few portfolio flows between the two countries.
But things have clearly changed since then. Financial linkages between the two countries have strengthened markedly. Today US-listed Chinese stocks are valued at US$1.1 trillion. The liberalisation of China’s onshore markets has increased foreign capital inflows, including many from the US.
Renminbi assets have started to enter global indices, with MSCI predicting that Chinese equities, both onshore and offshore, may make up over 40 per cent of its Emerging Markets Index when domestic Chinese equities are included at full weight.
Finally, China still holds more than US$1.1 trillion in US Treasury bonds in its official reserves, with a total exposure – including non-Treasury assets – that we estimate is potentially worth more than US$2 trillion.
For now, the risk of a catastrophe seems low. But the long-term trajectory of the US-China relationship is worrying, and the risks of further confrontations, however small, cannot be downplayed.
With the world’s most powerful country considering putting up walls around technology and capital – the things you would usually expect to transcend boundaries – investors must be prepared for a world segmented by protectionism.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers