Yellen speech won’t change minds in Beijing
Treasury Secretary Janet Yellen gave a long and (in our view) well-crafted speech on China this morning (see transcript HERE). It met the expectations we laid out yesterday in terms of themes. Yellen’s three key messages were:
(1) Beijing and Washington need to communicate. This is chiefly a message to Beijing, which has been standoffish about resuming high-level dialogue following the balloon episode and trip by Taiwan president Tsai to the US. But it is also a message to US policymakers and pundits who see little value in engaging directly with Beijing. One of the subtle points that Yellen made here – but one very relevant for investors – is that communication between economic officials is necessary to avoid an economic shock or policy uncertainty in either country rippling through global markets. Think of a sudden debt event in China or repeat of Silicon Valley Bank in the US. When anxiety and uncertainty hit, it is important that Yellen and other US officials know whom to call in China – and vice versa in Beijing. This is especially important now that vice premier Liu He, a well-known and respected interlocutor, has retired.
Yellen noted two global challenges that the US and China should work on: debt relief for developing countries, and climate change. The former remains at something of an impasse even after the spring World Bank/IMF meetings. On climate change, it is noteworthy that while Yellen pressed Beijing on climate commitments (such as phasing out financing of overseas coal-fired power plants) she did not mention anything related to the increasingly pitched contest over clean supply chains and related commodities such as critical minerals. That is, it is simply accepted by both sides now that “new energy” is an area of strategic competition and a central focus on industrial policy.
(2) The US will look to reduce supply chain dependence on China but true “decoupling” is impossible. That’s the right message from Yellen, but the challenge is that a broadening scope of the economic relationship is being defined in national security concerns by both governments. Simply put, there is no consensus on when “supply chain de-risking” stops and “decoupling” starts.
(3) The US won’t pull punches but also isn’t out to contain China. Yellen said, “A growing China that plays by international rules is good for the United States and the world.” This statement would have been uncontroversial prior to 2016 but is noteworthy in a debate framed as “great power competition.” The message to Beijing is: the US will continue to act assertively on national security concerns, human rights and unfair economic practices, but does not seek to contain China’s rise. The message to DC is: “We have no reason to fear healthy economic competition with any country” – avoid unnecessary anxiety over China supplanting the US.
What are the practical takeaways for investors?
First, this speech is not going to change any minds in Beijing. The level of cynicism in Beijing towards US policy and intention is too deep for that. In particular, Yellen’s message that US export controls and other measures seek to address national security concerns but aren’t an effort to “contain” Beijing – while likely meant earnestly from Yellen – is seen as a meaningless distinction in Beijing. Still, her speech will be viewed as at least taking a constructive tone and thus will be helpful if Yellen travels to China. Our understanding is a trip hasn’t been confirmed – Secretary Blinken may need to visit China first – but she noted today that she hopes to visit this year.
Second, this is an incremental step forward by (some members) of the Biden administration to urge a more constructive approach to China. With anti-China sentiment at a fevered pitch, and Congress seeing little cause for restraint on sensitive issues such as Taiwan, more voices in the policy establishment are coming out to urge for a renewal of dialogue. The main proponents in the administration have been Commerce Secretary Gina Raimondo and Treasury Secretary Yellen, both of whom have tried to inject some economic pragmatism in a debate swamped by national security concerns. President Biden has long been inclined to the view that engagement with Beijing is important, but he faces a tricky political calculus. Republicans will seize on any perceived softness towards Beijing to criticize Democrats, and as the 2024 presidential campaign approaches the window for the Biden and Beijing to re-engage may be closing. US officials are likely making that point to Chinese counterparts. It will thus be important to watch for near-term progress in reviving engagement, including a Biden-Xi call and various high-level trips (Blinken, Raimondo, Yellen).
Outbound investment regime draws closer
Bloomberg News has an article out today that the Biden administration will issue its long-awaited draft executive order on outbound investment restrictions before the G-7 summit in Hiroshima, Japan (19-21 May). There has been some expectation that the administration might wait until after the summit to coordinate with counterparts. EU officials, for example, are also considering a mechanism to scrutinize or regulate outbound investment in areas that raise national security concerns.
The US effort has been underway, and under internal debate, for over a year. The purpose of the executive order is to address national security concerns posed by investment by US companies in “countries of concern” – in particular China. There are likely to be outright prohibitions in a few sectors, namely semiconductors and likely AI and quantum technology, and monitoring in others through a notification process (please see here for a good overview by Akin Gump from early March).
While the details and parameters of the executive order are still not fully clear (and likely not yet fully decided), we continue to strongly believe that it will not include typical portfolio investment in China in its scope. It is targeted mainly at investment by corporates but will likely impact private equity and venture capital investment. The executive order will first come out for public comment before moving into implementation. Importantly, it is also intended as something of a pilot program, which means it will evolve and potentially broaden in scope over time.
