Market Views: How will planned US curbs affect China investment flows?

The White House is reportedly planning to issue "unprecedented" rules for American firms on investments in China's tech sector around the G7 summit scheduled for May 19. AsianInvestor takes a pulse check of how this could affect investment flows to the region.
Market Views: How will planned US curbs affect China investment flows?

US President Joe Biden plans to sign an executive order in the next few weeks that will impose restrictions on American companies' investment in key sectors of China's economy 

The Biden administration plans to unveil these new limits around the time of a summit of the Group of Seven (G7) advanced economies due to start on May 19 in Japan, according to media reports.

The US has been informing its G-7 allies about imposing investment restraints on high-tech companies and it appears likely that the executive order will be signed soon after it recieves endorsement from other nations at the summit.

The executive order -- in the works for more than a year -- will focus on curbing investments where US corporations actively participate in management and will span the areas of semiconductors, artificial intelligence (AI), and quantum computing. This covers private equity and venture finance as well as types of technology transfer and joint ventures.

AsianInvestor asked institutional investors how they believe Biden’s executive order could potentially impact foreign investment in the region.  

The following contributions have been edited for clarity and brevity.

Patrick Tsang, chairman
Tsang’s Group

Patrick Tsang,
Tsangs Group

President Biden's executive order to impose new investment curbs on key sectors of China's economy is likely to affect foreign investment in the region negatively.

The uncertainty created by these restrictions may discourage foreign investors from investing in the targeted sectors.

The most heavily affected sectors will be strategic ones like technology, infrastructure, and communication, as the curbs aim to limit China's influence in these critical areas.

The rivalry between the US and China has grown, and this move may escalate tensions further.

A cooperative approach, focusing on collaboration in areas such as climate change, public health, and economic development, would be more beneficial for both countries and the global community.

By prioritising cooperation, the US and China can foster innovation, economic growth, and a more stable international environment.

Zhikai Chen, head of Asian and global emerging market equities
BNP Paribas Asset Management

Zhikai Chen,

The latest proposal for sanctions to be imposed by the US on the most advanced chip technology is quite comprehensive and will require the Chinese chipmakers to develop their own ecosystem which will be quite challenging.

This will prompt further investments by Chinese chipmakers to try to evolve and perhaps leapfrog the technology. 

We think that Chinese chipmakers are benefiting from the sanctions placed on advanced chip sales to Chinese companies. As overseas suppliers are unable to supply, these orders are likely to reroute to local chipmakers.

Ultimately, Chinese companies that design and make chips for AI applications in China will see issues in a few years if they do not have access to leading edge technology nodes to power their AI chips. 

Essentially, China’s AI frenzy has attracted the attention of the state media which sees “signs of a valuation bubble”. 

Most of the AI processes require the most advanced computing chips which the Chinese chipmakers cannot supply.

Nvidia’s chips are the most commonly cited in such AI processes; and the company has indicated that it cannot supply its most advanced chips to Chinese companies under the US sanctioned rules. 

Andrew Zurawski, chief economist, Asia Pacific

Andrew Zurawski,

Geopolitical uncertainty has been a key driver of risk for portfolio returns in recent years and regulatory developments in both the US and China have contributed to this.

WTW has advocated there are opportunities for institutional investors to increase portfolio allocations to China as global investors have been traditionally underweight Chinese assets, given its importance in the global economy.

Proposals from the Biden administration around foreign direct investment create more uncertainty around this allocation decision. Reduced access to technology will likely lower longer-term growth in China and equity returns in certain sectors.

The most affected sectors are likely to be those most export orientated while the more domestic facing companies such as Chinese consumer staples should be fairly insulated. But more broadly, a slowing rate of growth in global trade and foreign investment flows have historically been associated with weaker economic growth and hence equity returns.

Jack Janasiewicz, portfolio manager and lead portfolio strategist
Natixis Investment Managers Solutions

Jack Janasiewicz,
Natixis IM

The immediate impact from US President Joe Biden’s executive order on secondary markets would likely prove to be limited.

The market has been aware of the potential investment ban for some time now and the immediate impact on the secondary market is likely to be limited given that curbs would target potential new investments rather than the existing ones.

The longer-term effects could prove opportunistic for others, however. Because US investments in China's high-tech sectors likely will slow further as a result, companies in Asia, Europe and other areas may see this as an opportunity if they comply with US restrictions.

From a domestic perspective, we would expect the Chinese to continue its focus on technological self-reliance which would likely see national champions receiving incremental government support.

From a sector perspective, the obvious risks are for tech companies and capital allocators like venture capital.

While biotech and clean energy are expected to be left out of the ban, life sciences may be in a gray area that has one foot in sensitive areas, while down-the-value-chain industries like consumer goods, basic manufacturing, consumer services and chemicals may be perceived as low risk.

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