The Asia-based managing partner of one of the world’s largest law firms laid out what he believed to be the dominant foreign affairs story in China last week in the last quarter of 2021. Corporate clients are frightened by a range of factors, he said, adding that the global supply chains established over the past two decades are experiencing an unprecedented flow and the key word on boards is “decoupling”.
Nonsense, I was told a day later by a hot Asian supremo from one of the world’s largest investment banks. Regardless of the geopolitical embitterments or significant regulatory uncertainties that may plague the tech and real estate sectors, Beijing remains fundamentally pro-private. The opportunities in such a dynamic demand-driven market remain far too huge to be avoided. Client companies, he said, are either increasing their investment in China or, for those that weakened in the opening rounds of the US-China trade war in 2018, are preparing to to “reconcile” before the opportunity is lost.
So which one to believe? Or, if both are correct now, which one will still be correct in a year?
Clearly, we have entered the peak season of China’s divergent or conflicting narrative-building. A recent article from the University of California at San Diego courageously attempts to unravel the paradoxes of what it calls the “difficult coexistence of economic decoupling with the status quo in the current era of the trade war between the United States and the United States. China “. Its findings, say the authors, help explain why the anecdotal evidence on actual decoupling and divestment is so mixed. For hedging observers and investors, many have started to predict an era of “selective decoupling” as the ground clears.
For now, at least, both versions are simultaneously compelling as each is driven by the same torrent of news and gossip. Even isolated voices, like that of US Secretary of Commerce Gina Raimondo, are delivering ammunition to both sides. At the end of September, she told reporters there was “no point in talking about decoupling” because the United States and China both wanted access to each other’s economies. In a separate interview the same day, she lamented China’s theft of US intellectual property and said that if the US is serious about slowing China’s “innovation rate”, it needs to work more closely with it. non-Chinese allies, such as Europe.
The banker believes large foreign companies will continue to invest in China while its markets generate much of their growth, and do so with a long-term view. In 2020, 27% of European companies with a joint venture in China increased their participation; 18 percent took a controlling stake. They encounter much less official corruption than before and for many the economic calculation is easier than before. For manufacturers of consumer or luxury goods, he said, the lesson of the pandemic has been to expand manufacturing in China or risk losing sales. If the overhaul of China’s manufacturing supply chain requires foreign suppliers to adapt and invest, he says, many will, no matter how severe the regulatory or political risk may seem.
Behind the lawyer’s account hides a counterpoint, supported by the increasingly tedious and costly work he does for clients, that little is getting better for foreign companies in China, especially manufacturers. Forced technology transfers are a huge headache. A recent survey of European companies found that a third party expects China’s evolving cybersecurity law, data security law and evolving personal information protection law to have a “negative impact.” important ”on their business over the next five years.
Meanwhile, the wide-angle picture of decoupling, which the FT has separately heard described by executives in the semiconductor, automotive and telecommunications industries, is that the most sensible approach is to plan as if it was happening. If security concerns and the promotion of national semiconductor champions and other supply chain bottlenecks persist, many manufacturers must adapt to a decoupled reality, Japanese industry CEO said. semiconductors.
For now, at least, say bankers, lawyers, academics and investors, the “selective decoupling” narrative may have something to do with it. But we can, at least, have a way of our own to monitor this narrative as it unfolds. Japan’s appointment last week of its prime minister for economic security may have sounded a bit broad, but political analysts say it is a tacit admission that the engagement of foreign companies with the China is now a big enough business to require its own branch of government to oversee.