By Bryan Richardson
Will egos or sensibilities prevail?
US-China relations are poised to become extremely challenged over the next few years, and not just because of The Donald. It’s also because the recent business-friendly climate has turned decidedly unfriendly.
Two years ago, cautious optimism around China was abundant. The country was aggressively pushing the RMB to become a reserve currency and marching toward a goal of Shanghai becoming a global financial center on par with New York, London and Hong Kong. To accomplish this China was slowly but steadily easing its regulatory restrictions on capital outflows and inflows. This was evidenced by a variety of offshore pooling structures and inter-company lending practices becoming more aligned with global norms seen among developed nations. Both the People’s Bank of China (PBOC) and state administration of foreign exchange (SAFE), China’s primary financial markets regulators, were becoming more approachable and working collaboratively with global banks and MNCs.
But forces have been working against this seeming goodwill. China’s economy has been slowing steadily for several years, real estate has become overleveraged with a threat of a pricing bubble, factories in certain industries have excess capacity or are maintaining high productivity but with falling demand (and prices) for products.
Earlier in the year, the government responded to equity market volatility with manipulative intervention to maintain values, including threats to investors for selling stocks. As one would imagine, the primary response to these events from Chinese nationals and foreign firms was capital flight. The government has reacted by withdrawing much of the previous deregulation of capital flows. Regulators have also developed a pattern of increasing intrusiveness into foreign businesses. Stories are told by expat executives with foreign companies of regulator demands for login credentials to the company financial systems with the intent to download data to flash drives. China has also imposed a requirement that foreign companies maintain information about Chinese customers on servers domiciled in China, supposedly to better safeguard customer privacy and security.
Uncertainty and erratic regulatory behavior in China is not new. But advancing the country in such a meaningful and inviting way only to begin reversing course a few years later is a business confidence killer. Add to these actions the even more aggressive posturing of China’s military in the South China Sea, threatening and intimidating fishermen from other countries with military vessels, openly constructing islands specifically for offensive military installations, all the while denying it, and launching a steady stream of cyber-attacks and espionage. This presents a long-term play of power and intimidation. These emboldened moves have been enabled by stern and forceful rhetoric from the West combined with inaction. China has rightly concluded it can progress along an increasingly threatening path with little, and more likely no, consequences. The West feels they are dependent on China for their own economic well-being and are willing to turn a blind eye to avoid economic disruption.
Now enters Donald Trump, who seems unfettered by economic risks or past precedent and is willing to do an about-face to the last eight years. Further, he is very vocal and unapologetic in his accusations of China’s currency manipulation, cyber-attacks and corporate cheating with unfair trade practices. As he builds out his administration it is apparent by the people he is appointing and nominating that he intends to take a more aggressive position toward China.
The exiting Obama spent his presidency talking tough but lacking action on global concerns. President Trump was elected in part because of his tough talk. The big questions are whether he’ll follow through and if so, will it be productive or counter-productive. China has a lot of ego in the global game and Trump is practically defined by ego. When these egos go toe-to-toe, will they be willing to harm their economies, or worse, to make their points and save face? Or, will they talk tough in public and then go behind the scenes to diplomatically preserve and build mutual benefit. We know that tough talk and no action is an invitation for a black eye like having your undersea drone taken from under your nose. We also know that tough talk and too much, or the wrong kind of, action could start a war. But tough talk and strong, measured and strategic action will have a constructive outcome.
Companies will certainly be watching the posturing and rhetoric in the coming months and taking whatever precautions possible to preserve themselves, their staff and corporate assets through some likely volatile politics and wrestling of egos. However, I believe in the end, sensible heads on both sides will prevail and the constructive outcome will occur, but not before a period of sizing up your opponent. Opponents are more likely to deal productively with those they know have power and aren’t afraid to use it. That will be President Trump’s mandate, to effectively portray that position to China.
As Chinese authorities start pumping the breaks of regulatory progress, it will continue to be difficult for treasurers in the region to do their day-to-day functions.