China-US tensions: Foggy flashpoints

For many investors, trade tensions between the US and China have thus far proved a serious but manageable concern. This has made it relatively easy to be philosophical about the risks of specific sector vulnerabilities and supply chain disruptions, which can be outmaneuvered if not simply outlasted with long-term strategies. 

The most of the prominent pressure points have revolved around bilateral terms-of-trade and intellectual property issues such as the Foreign Investment Risk Review Modernization Act (FIRRMA), a US foreign review hurdle that now extends to minority and indirect interests. But these are regarded as inconveniences that can be planned for – not wide-ranging threats to cross-border business and investment.

That may change as the tone of the dialogue shifts. The usual business-level talking points of competitive fairness and tariffs are increasingly giving way to rhetoric that more directly addresses the dispute’s fundamental nature as a geopolitical response to China’s global ambitions.

This is important because these global ambitions have been best crystalized in two of the biggest investment themes of the era: China’s unveiling of a tech-heavy list of industries strategically prioritized for government support and the long-unfolding Belt & Road initiative.

China’s Digital Silk Road – which essentially combines these two themes – was the subject of a panel discussion last week at the Center for Strategic & International Studies in Washington that focused almost entirely on the security implications of Western companies losing market share to Chinese tech giants. While it is by no means unusual for think tanks to cast investment industry activity in this geostrategic light, the rising prominence of technologies such as artificial intelligence is now causing even innocuous consumers segments to become sensitive. 

For example, questions around Chinese companies providing internet service in new markets were fielded by panel speakers the likes of retired US Army lieutenant general William Mayville as a defense imperative. “It preys on smaller economies and gives [the Chinese] the tools to keep them under check, it creates dependencies and gains access to data,” Mayville said. “And we have to remember that it does that with companies that are subjected to and must comply with domestic Chinese law.”

Industrial competition has always been a security issue. But unlike previous tech standoffs, the current tensions could see confrontational postures translating into blunt and immediate impacts on commercial concerns. One glaring indicator of this possibility is Chinese telecom equipment manufacturer ZTE Corporation, which was effectively crippled last year when the US hit it with a seven-year ban on the purchase of essential American components. The ban was later replaced by a fine and closer monitoring.

There are signs that this kind of activity is escalating, especially the debacle around Huawei, a telecoms leader whose CFO was arrested late last year at the request of the US on accusations of violating sanctions against Iran. Although much of the criticism around Huawei relates to government connections, the company’s measured responses have clearly represented the desire of the private sector to quietly get on with business as usual.

Still, the corporate world has proven unable to avoid the diplomatic fallout. Canada has claimed that 13 of its citizens have been detained in China since the Huawei arrest, and the country’s souring public sentiment for the affair is said to be complicating cross-border agendas for various technology sector players. “I can tell you, after the Huawei events, all the Chinese money into Silicon Valley stops,” Zhu Min, a former deputy governor of the People’s Bank of China and former deputy managing director at the IMF, told CNBC. “And no US money will want to invest into China either.”

Tough talk alone will not result in a dramatic change in private US-China investment, but its use in an increasingly blurry civilian-governmental business environment should be a signal for caution. For now, state-backed money flows are only likely to freeze in temporary tit-for-tat gambits, and private investment in China’s growth story will only be pinched if practical barriers to achieving a return are perceived.

The problem with relying on this status quo is that tough talk influences perceptions, which in turn influence investors’ sense of logic. Too much heat in unfamiliar strategic scenarios could result in exaggerated impulses for hesitation and confidence. And if that happens, it will be difficult to be philosophical about it.

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• Topics
• Greater China
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• China
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