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Economy

China-U.S. Financial Coupling or Decoupling: That Is the Question

Feb 23, 2021
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

Financial instruments are gradually replacing trade wars as a more advantageous means of putting pressure on China, and the U.S. is frequently using it for gaming against other great powers. The partial shutdown of Chinese stocks listing in the U.S. is seen as the latest move to promote China’s financial decoupling from the U.S. 

In the past two years, the U.S. has frequently used pan-politicalized executive orders to make trouble with China in the financial sector, by putting China's key industries, target companies, or institutions on the Entity List and imposing asset controls. They’ve also issued medium- and long-term financing bans on China’s access to the U.S. capital market for financing or commercial financing or on China’s investment and related business in the U.S. This “menu” of sanctions has largely been the work of the Trump administration over the last two years. 

Last May in particular, the United States Senate passed the Holding Foreign Companies Accountable Act with unanimous consent, which will force the delisting of foreign companies listed in the U.S. if they fail to disclose relevant information as required for three consecutive years. In the same month, the U.S. Federal Retirement Thrift Investment Board's Thrift Savings Plan (TSP) officially announced the suspension of index funds that track Chinese stocks. 

In October, the U.S. Congress initiated the American Financial Markets Integrity and Security Act, which will prohibit U.S. investment companies, pension funds, and insurance companies from investing in Chinese companies that are on the U.S. Department of Commerce's Entity List or on the U.S. Department of Defense's list of companies backed by the Chinese military. 

In December, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) created a separate sanctions program (Chinese Military Companies Sanctions) for so-called "designated Communist Chinese military companies.” 

All this shows that the U.S. Department of Defense and the Treasury Department have formed a joint enforcement mechanism against Chinese companies and have been expanding the scope of their actions against Chinese companies.

According to a Bloomberg economic report, the number of Chinese companies listed in the U.S. has grown rapidly in recent years as China's economy continues to grow and the scale of overseas financing for Chinese companies continues to expand. Data shows that in 2005, there were 36 Chinese companies listed in the U.S., with a total market value of $260 billion, accounting for only about 1% of the total market value of the U.S. market; while by 2020, there are about 600 of them, with a total market value of about $5.9 trillion, accounting for 8.7% of the total market value of the U.S. market. In particular, IPOs of Chinese tech giants account for the bulk of listings in the U.S. 

All the above-mentioned actions were carried out against China under the executive orders of the Trump administration. Arguably, the biggest change during the Trump era is the reset of China-U.S. relations and the transformation of the foundation and atmosphere of relations with China within U.S. society. It made the notion that, "China is the biggest competitor or even adversary of the US," a generally accepted perception in U.S. society. 

Although people are generally more optimistic about Sino-U.S. relations under Biden than under Trump, it is expected that the framework of U.S. policy toward China will not change fundamentally in the next few years. Judging from the new Biden administration's latest stance of hardening its position toward China, the U.S. will continue to "pressure China" in the financial sector and may have just begun its financial game with China. 

The U.S. has used its absolute dominance of capital markets in global financial markets to issue investment and financing bans on Chinese companies listed in the U.S., adding layers and layers of restrictions, and even initiating quasi-financial sanctions. This has had a significant negative impact on Chinese companies, not only raising financing costs, but also reducing the willingness of global investors to invest. Given the central position of the U.S. capital markets in the global financial market, which is difficult to shake in the short term, the future U.S. financial suppression and counterbalance will continue to be strongly unilateral, which puts China in a serious "asymmetric position" in the China-U.S. financial game. 

However, China can respond to this financial blockade or financial decoupling by actively opening up to achieve recoupling. In contrast to the U.S., China's financial opening has accelerated in recent years, bringing increasing benefits to financial institutions in the U.S. and other countries. In 2020, China's central bank working conference made it clear that China would continue to promote the connectivity of bond market infrastructures and open capital projects in a steady and orderly manner. The China Banking and Insurance Regulatory Commission also issued a document proposing to promote the entry of foreign financial institutions in consumer finance, pension insurance, and other areas of the domestic market. 

Against this backdrop, foreign investors, including U.S. financial institutions, have accelerated their entry into China. In 2019, PayPal became the first foreign company to provide online payment services in China after acquiring a 70 percent stake in Chinese company GoPay. 

In June 2020, American Express received approval to become the first foreign credit card company to conduct domestic operations in China through a joint venture with a Chinese fintech company, and was also allowed to conduct network clearing operations. Visa and Mastercard applied to form a network clearing license. 

S&P Global established a wholly foreign-owned company in 2019, the first foreign company licensed to conduct credit rating services in China's domestic bond market. The size of China's financial market is estimated to be $47 trillion. Foreign financial institutions account for less than 2% of banking assets and less than 6% of the insurance market in China. China’s financial liberalization will create huge value-added and profit margins for foreign financial institutions.

Financial liberalization has proven to attract increased cross-border capital inflows into China. By the end of 2019, foreign institutions and individuals held 4.4 trillion yuan in Chinese stocks and bonds, up 52.4% year-on-year. And in 2020, which was impacted by the Covid-19 pandemic, the net increase in the size of Chinese interbank bonds held by foreign institutions exceeded 1 trillion yuan, and the international attractiveness of China's financial market continued to rise.

There is every reason to believe that a large and increasingly open market will be the most "sticky" for global capital, which is seeking to profit from the efficiency of global resource allocation. It will also form a more solid bond between China and the U.S. financial ties.

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