Putting Out Fires With Gasoline

With growing US regulatory scrutiny of Chinese companies and a broader trend of actions aimed at Chinese trade and financial markets, can we expect further erosion of the US-China economic relationship, or will the Biden administration pivot to a softer China policy to avoid further fueling Xi’s rapprochement with Putin given this week’s activity in Ukraine? What are the implications for companies operating or investing in China?

The Biden administration is likely to maintain a strong policy to counter China despite risks of pushing China toward a stronger alliance with Russia because of: 1) robust political consensus in DC in favor of taking aggressive and decisive actions to counter China; 2) US public decisively views China negatively, including as an economic and national security threat; 3) Unlikely that a softer stance on economic/trade policy would lead China to shift from Russia, and Biden unlikely to think it will; 4) Real concern that China presents a long-term challenge to US economic/tech strength, so perceived importance in countering China strongly. Companies in China should expect increased regulation/scrutiny of their investments/operations, more challenges, and watch out for retaliation from China as US scrutiny grows.

There is unlikely to be any meaningful pull back or easing of restrictions or tensions between the US and China in the near term with the Biden administration. In fact, it appears that the focus will continue to be on managing risks from China – as evidenced by the Biden White House’s release of its Indo-Pacific strategy amidst serious tensions in Europe over Russia’s aggression in Ukraine. This sends a clear message of where Biden’s priority lays. That said, depending on the outcome of the situation in Ukraine, the Biden administration will levy pressure on Beijing to cooperate or at least not willingly circumvent sanctions.

The harder line stance on China remains incredibly popular on both sides of the aisle, and China has given very little reason for a softer economic approach. The public Chinese opposition to the Russian invasion, even if very soft, does create a chance for rapprochement on larger political issues, but very little is likely from an economic standpoint. Recent findings by the Administration that China failed to live up to any of its import targets that it promised President Trump only reinforces this issue, as do ongoing evidence of IP theft. For companies operating in China, little is likely to change in the near term, but they will face increasing competition from Chinese state-owned enterprises as part of Xi’s push for self-sufficiency.