China-US tensions: Adapting to malaise

The so-called phase-one trade deal brokered between China and the US last week is intended to break a longstanding impasse. China has agreed to strengthen intellectual property protection, end forced technology transfers by US companies, further open its agricultural and financial services sectors, and buy more US goods and services. But macro themes of this kind seldom pivot on the details. Their movements reflect countless inputs and unfold in ways better suited to measuring the march of time than keeping score in a tit-for-tat standoff. They’re glaciers.

The US-China trade war, now going into its third year, will continue to jostle the most liquid markets with its phased negotiations, flashpoints, and sundry updates. Meanwhile, long-term investors will continue to interpret these reverberations for what they are: symptoms of an increasingly well-understood backdrop where hardening suspicions fuel a lose-lose, prisoner’s dilemma-style paradox for the two key spheres of influence.

If that’s not depressing enough, a recent report from research firm Rhodium Group has more. “US strategic doctrine is shifting from a presumption of eventual Chinese convergence with liberal market principles to an expectation of long-term systemic rivalry,” it says. “Initially manifested through greater US regulatory attention to foreign direct investment, US policy changes have also led to greater scrutiny of other types of capital flows including venture capital financing of early-stage technology companies.”

The report looks specifically at cross-border venture capital, highlighting how broadening oversight by the Committee on Foreign Investment in the US (CFIUS) to include minority deals in sensitive areas has stymied Chinese activity. Investment in US-based start-ups fell to $1.1 billion in the first half of last year, down from $2.5 billion in the same period in 2018. (Capital deployed by US venture capital firms in China has also fallen, but primarily due to a general slowdown, not regulatory intervention.)

These numbers might be a harbinger of the decoupling feared by so many. A Cold War-style unwinding of international cooperation primarily focused on deep-tech categories expected to define the global economy of the future. Artificial intelligence and blockchain investors forced to maneuver through countercyclical plays that reverse-engineer crisis into opportunity and by generally keeping their noses clean in terms of national security issues.

Slow-onset challenges deserve equally deliberate responses, however, and Rhodium sees this as the domain of leaders outside of the investment and technology industries. It makes three recommendations for US policymakers. First, given some degree of decoupling is inevitable, agree an overarching framework so that actions are rational and not unnecessarily disruptive. Second, create transparent and well-defined oversight systems that address China-specific concerns, easing the current regulatory uncertainty. Third, consider the implications of an excessively heavy-handed approach, which could leave the US isolated, unattractive to innovators and shorn of its competitive edge.

The recommendations are framed as protecting the US interests, but the US-China VC relationship is far from symbiotic. Chinese venture investors are marginal players in the US VC ecosystem, so their absence would not be keenly felt. At least in the near term, it is China’s technology sector – and the US and Chinese investors that feed it and feed off it – that would be hardest hit by a “hard” decoupling. US policymakers inevitably pursue national interests, but it is to be hoped that some see the bigger picture. In the long term, the line between winners and losers might not be so clearly drawn.

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• Topics
• Greater China
• North America
• Technology
• China
• USA
• Economy