Globalization means increased movement of people, physical goods and of financial capital across borders. All of it is under increasing stress. The free movement of people is being curtailed by coronavirus and by a wave of anti-immigration sentiment around much of the world. The free movement of goods continues, but is menaced by the US-China trade war and a new recognition of the fragility of world-spanning supply chains. And now the free movement of capital is under threat from the emergence of financial nationalism.
Even before the pandemic, the US was growing wary of Chinese investment in domestic markets. President Donald Trump's administration strengthened the Committee on Foreign Investment in the US and has used it to block a number of cross-border deals.
Coronavirus is causing more countries to contemplate similar measures. The pandemic has put a large number of fundamentally healthy companies in places such as Europe and India in temporary distress. There is widespread worry that companies from China, where the disease is more under control and the economy has been harmed less, could seize the opportunity to snap up corporate assets around the world. India’s government recently put in place a law that requires explicit government approval for any acquisition from a country with which it shares a land border. Margrethe Vestager, the European Union's chief competition regulator, has suggested that EU-member governments buy stakes in domestic companies to block Chinese takeovers. Japan recently moved to limit foreign investment in many of its publicly listed firms.
So far, all of these moves involve blocking inbound capital flows. One question is whether outbound flows of money will be restricted as well. The US now seems to be taking a step in that direction.
In the aftermath of a corporate accounting scandal, Chinese coffee house chain Luckin Coffee has been delisted from the Nasdaq. Luckin’s fraud may be the tip of the iceberg; many Chinese companies have been involved in such scandals, and many use accounting standards that wouldn't fly in the US.
Amid concerns about the risks posed to US investors and steadily rising tensions with China, the Senate unanimously passed a bill that will delist many Chinese companies from US exchanges. To stay listed, a Chinese company must either certify that it’s not under foreign government control (a tall order for Chinese companies, where the line between state and private ownership is fuzzy) or allow periodic reviews by the Public Company Accounting Oversight Board, a US accounting watchdog. Because many Chinese companies are obviously under total or partial state control and are loath to open their books to the Americans, this means even giants such as Alibaba Group Holding Ltd. might ultimately be delisted.
So financial nationalism is on the rise. But there are still many questions as to how far the trend will go. It’s not clear that other countries will follow the US’s lead in delisting Chinese companies. Whether the US will take further steps in restricting outbound investment is also unknown as yet. One further step might be to force US-based emerging-market indexes such as MSCI to stop including Chinese companies, which were only added in 2019. A bigger move would be to restrict Chinese ownership of US corporate debt as well as equity.
China itself, feeling stronger and more confident than other nations, has been pushing in the other direction, encouraging overseas financial companies to do business in China. It remains to be seen whether the US, Europe or other countries will try to counter this move.
If barriers to investment into and from China continue to go up, it will create a new economic division between China and much of the rest of the world. This will have a chilling effect on globalization. Restrictions on Chinese acquisitions will make it harder for Chinese goods to be sold in the US, Europe and other markets, as well as inhibiting the flow of workers and ideas. And if it becomes harder to invest in China, companies from the US, Europe, Japan and India will be less likely to put their factories and stores there. Financial nationalism could thus exacerbate economic nationalism, and become an aspect of a potential new Cold War.
This would have both good and bad effects. Obviously, Chinese companies defrauding overseas investors is not a good thing. And restricting Chinese takeovers could allow other countries to stanch the flow of advanced technologies to China, preserving some of their competitive edge against government-backed Chinese rivals. The downside, of course, is that the deeper integration with China that has driven much of the global growth for the last two decades would come to an end. But that may already be happening for other reasons.
The really dangerous possibility, however, is if financial nationalism becomes more than just the world versus China. Japan’s new legislation, for example, applies to all outside investment, not just from China. If countries start using investment restrictions to settle all of their various geopolitical grudges, and to try to protect their industries against all foreign competition, it will be very damaging to the global economy. And paradoxically, it will increase Chinese economic dominance because China will then be the biggest remaining economic bloc.
Although the restrictions on investment to and from China might be a wise move, the rise of financial nationalism should end there and go no further.
Bloomberg
