Treasury Secretary Janet Yellen’s recent visit to China aimed to revive dialogue between the two countries, with the goal of reducing misunderstandings and tensions. However, despite these efforts, concerns among investors regarding the deteriorating relationship remain high. With impending developments on the horizon, the situation may escalate further.
Shifting away from previous discussions of decoupling from the world’s second-largest economy, Yellen emphasized the United States’ efforts to diversify its critical supply chains during her visit. She emphasized that both the U.S. and China can coexist and thrive in the global economy, underscoring the importance of finding areas of collaboration.
While there is a growing recognition that complete decoupling between the two largest economies is “virtually impossible,” actions demonstrate a significant reassessment of their relationship. For instance, strict regulations imposed by the U.S., along with its allies, have limited China’s access to crucial technologies like semiconductors.
To combat its struggling economy, Chinese leader Xi Jinping has proposed new measures to attract foreign investors. However, the U.S. is contemplating further restrictions, including limitations on American investments into China. This concern was raised by Chinese officials during Yellen’s visit.
Various possible restrictions loom on the horizon, such as constraints on Chinese companies’ access to U.S. cloud-computing services and tightening of semiconductor export controls. Beacon Policy Advisors analysts predict that these restrictions may be further reinforced once the regulations are finalized.
Furthermore, an executive order addressing outbound investments into China is expected to be released this month. Initially, it is likely to be narrowly targeted. However, discussions are underway within the administration to ensure that limitations on artificial intelligence investments do not excessively impede innovation.
“It is possible that the final executive order targets a very specific set of transactions and that the limits on use of cloud-computing services would be relied on to more broadly restrict China’s development of artificial intelligence,” explain the analysts at Beacon Policy Advisors.
Overall, while Yellen’s trip reopened channels of communication, concerns over the state of U.S.-China relations persist. The ongoing developments and potential restrictions in crucial sectors underscore the need for both countries to navigate their collaboration carefully.
Concerns Over Chinese Export Controls
Investors are expressing concern over potential consequences of the Biden administration’s limits on outbound investments into China. Analysts at asset manager RockCreek warn that even if these limits are initially focused on national security, China is likely to perceive them as economically threatening. The response from Beijing remains uncertain.
China recently banned the export of gallium and germanium, critical materials for the production of semiconductors, missiles, and solar cells. This move can be seen as a response to restrictions imposed by the US, which have limited China’s access to advanced technology and chip exports. It is considered a preliminary step towards a total export ban, demonstrating China’s influence in the global supply chain.
According to Beacon analysts, this export control regime could potentially be expanded to include other widely used minerals if China deems it necessary to further escalate. This development is expected to accelerate the search for alternative sources of rare earth minerals, with Vietnam being positioned as a potential substitute. However, Vietnam’s estimated reserve is only about half of China’s reserve.
Investors are also concerned about the geopolitical risks arising from the evolving US-China relations. The Select Committee on the Chinese Communist Party is scheduled to hold a hearing on Thursday to address the growing peril faced by American companies in China. Additionally, last month, the US warned that companies engaging in regular business activities in China could face penalties due to the country’s new counterespionage laws.
The relationship between the US and China continues to present uncertainty and risks for investors. The full extent of these risks has yet to be determined.
