On September 27, 2019, CNBC quoted sources saying that the White House is considering certain constrictions on U.S. investment in China, which includes blocking U.S. financial investments in Chinese companies. This was alleged to protect US investors from excessive risks arising from a lack of regulatory oversight in the Chinese markets. According to these sources, the current consideration is still in its infancy, and no decisions have been made thus far, nor is there a definite schedule for their implementation. Bloomberg reported that Trump government officials are still considering ways to limit U.S. investors' investment in China, including delisting Chinese companies from the U.S. stock exchange, as well as preventing U.S. government pension funds from investing in the Chinese market. Sources also reveal that the exact details of the above plan have not yet been determined and are subject to approval by President Donald Trump himself. So far, the White House has declined to comment on this matter.
Immediately after the news, fluctuations occurred in the capital market. Share prices of Alibaba, Baidu and other Chinese companies collectively plummeted. On Friday morning, the three major U.S. stock indices that were previously stable ended lower. The Dow fell about 70 points, the Nasdaq fell more than 1.13%, and the S&P closed down 0.53%. So far, the three major U.S. stock indices fell for two consecutive weeks, with the Dow falling 0.43%, Nasdaq falling 2.19%, representing its biggest weekly decline since August 2, and finally the S&P 500 index falling by 1.01%. In addition, the exchange rate of the RMB against the US dollar fell sharply to 7.15. If the Trump administration seeks to limit U.S. capital investment in Chinese companies, it is undoubtedly far-reaching bad news for China. But will this really happen? The U.S. and China are still struggling to reach agreements in their trade talks, and the authenticity of the above report still needs to be verified. Despite this, it has already caused great concerns to develop in the market. Does the Trump administration really want to stop U.S. companies from investing in China? How feasible is it for the U.S. government to put this into action? If the U.S. government began to restrict investment in China, what impact will it have on the U.S. market? What impact will it have on China? These problems are uncertainties that may trigger further volatility or even the collapse of the currently fragile capital market.
In this regard, ANBOUND's research team believes that it is necessary to combine multiple sources of information in order to make objective judgments.
First of all, short-term fluctuations in the capital market may be nothing more than an overreaction. Bad news will certainly trigger short-term fluctuations in the capital market, but there is still a lot of uncertainties on whether what is thought by the U.S. government to happen would actually happen. A very obvious challenge if the U.S. government intervenes in the market is that there would be numerous legal issues. Where the U.S. government can exert its influence is through the financial aspect but not the trading system. This is because some of the funds are owned by the U.S. government (i.e. from the U.S. federal government) and may be restricted from investing in Chinese companies. However, if the market trading rules are to be modified, then there will be huge legal issues. Therefore, it is unlikely that the U.S. government will completely curb capital investment initiated by the U.S. in Chinese companies within the short term. "One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies," a Nasdaq spokeswoman told Reuters. "The statutory obligation of all U.S. equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for U.S. investors." This statement also shows that the U.S. market system will not be easily changed.
In addition, U.S.-China trade negotiations will not be affected too much, and trade agreements are still possible. From the reports, the investment constriction is currently an unconfirmed internal government discussion, and its implementation will encounter a large number of legal issues. One should note that it is difficult to make institutional changes to the existing market with administrative power. We estimate that, in terms of its short-term impact, there will be no substantial impact on the ongoing U.S.-China trade talks, which will still proceed according to the established plan, and which is still possible to reach a trade agreement. The sudden fall of RMB due to the impact of this news will gradually pick up after the effects of volatility dissipate.
It should be noted that the long-term pressure China faces will not decrease, and its environment of the strategic competition will not change. It is difficult for the U.S. government to make Chinese companies withdraw from the U.S. stock market, and hard for it to prevent market-oriented funds from investing in Chinese companies. As ANBOUND has previously stated, the transformation of the strategic relationship between China and the United States since the U.S. National Defense Strategy 2018 will continue, and the U.S.'s view of China as a "long-term strategic competitor" will not change. Hence, the trend of long-term "strategic competition" between the two countries will remain. China's Belt and Road strategic initiative will also continue to be a focus of constant "interference" in international politics and is seen as an important starting point for changing geopolitical games. It should be emphasized that this kind of core environment will not change even if another person becomes the next U.S. President, as the trend of decoupling between China and the United States continues on.
Finally, the trade pressures on the Chinese market will increase. It must be acknowledged that between China and the United States, China's demand for a trade agreement is much stronger than that of the United States. Although China has a large domestic market that can be maneuvered, China's current market demand, technology level, industrial structure, and resource endowment all determined that China cannot rely solely on comprehensive self-reliance to support its large industrial system and market demand. Therefore, China needs to achieve many close-cut goals through trade negotiations. It urgently needs commodities such as pork, grain, oil, as well as technology products such as chips, high-end software, and high-end equipment. In addition, China as a "world factory" needs to maintain a certain export volume while avoiding the collapse of the RMB exchange rate. It is based on the structural reality of these economies that Trump said that he is not in a rush to come to hasty decisions on the trade deals and that he wants a comprehensive agreement. In contrast, China's demand for a trade agreement seems to be more urgent.
Final analysis conclusion:
The U.S.-China trade friction and the "strategic co-opetition" pattern once again show that the macro situation determines the minuscule outcomes. This is true for a country, a local region, and for an enterprise.
