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Is Wall Street serving its own interests by supporting China’s?

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In late September, leaders of the Quad group of nations met in Washington for an in-person summit and days following the summit, analysts and pundits wrote op-eds and spoke to premier journals, painting the Quad grouping as a silver bullet to all threats posed by a rising and authoritative China.

One wondered if the punditry would remain as bullish this month, as Katherine Tai, the U.S. Trade representative, spoke of re-coupling with China at a think-tank in Washington D.C. Or when BlackRock, the world’s largest asset manager, advised investors to increase their asset allocations in China by two to three times.  

The pundits likely do not take note of those developments, or the ones who take notes do not grasp the gravity of the situation.  Either way, while the administration speaks of decoupling and forming coalitions to create a free and open Indo-Pacific, it is simultaneously doing Wall Street’s bidding by negotiating with China for increased market access for its financial institutions, hedge funds and asset managers such as BlacRrock, Goldman Sachs and Bridgewater Associates. 

Consequently, it confirms the Quad to be the paper tiger that Chinese state media characterizes it as. It also leaves one wondering if all these initiatives targeted toward addressing China’s acts of economic coercion are an eye wash and the so-called “worker-centered trade policy” and “foreign policy for the middle class” are mere rhetoric for political gain.   

By August, U.S. mutual funds and exchange traded funds increased their holdings in China to over $43 billion — a $13 billion increase from a year earlier. While Biden convened meetings and summits and voiced discontent toward China’s trade practices and human rights violations,  and lawmakers such as Rep. Ilhan Omar (D-Minn.) expressed concern that the rhetoric was the start of a new Cold War, trade representatives were busy negotiating with Beijing about increasing access to their financial markets.  

Professor John Mearsheimer of University of Chicago lamented that America “foolishly” fed the rise of China over the past 20 years. And if the actions of trade representatives are any indication, it is safe to opine that it is not over yet. The U.S. continues to assist China’s rise and unfortunately at its own expense. 

Over the course of the last 20 years, steel mills have been shut down, America has lost its competitiveness in electronics and advanced high tech manufacturing and most aisles in Walmart house a Made in China product. We can thank Bill Clinton, who brought China into the World Trade Organization fold, and the presidents that succeeded him in economically embracing the communist nation. 

Twenty years after China’s entry into the WTO, Biden finally wakes up and smells the coffee. He introduces the Build Back Better initiative in an attempt to revive American manufacturing and global competitiveness. While there is relative success to this endeavor, as witnessed with semiconductor chip manufacturing moving to Arizona, the administration’s persistent negotiations with the Chinese for increased market access denotes a one step forward, two steps backward approach. It has taken over 20 years for Capitol Hill to realize that they’ve assisted the rise of U.S. competition. It could take another 20 before reality hits them like a shovel to the face regarding the role played by the capital infused by Wall Street.    

Furthermore, the increased capital flows into China will limit U.S. options to take stringent action in times of a global crisis. As Australia witnessed earlier this year and last, a call for inquiry into the origins of the novel coronavirus was responded to with tariffs and bans on Australian exports — igniting a debate in the island nation on its over reliance on an authoritarian state. Increasing investments into Chinese assets and relying on the Chinese market for American agricultural produce will prolong the interdependence between the U.S. and China, giving little room for the U.S. to take any corrective action toward the communist regime. 

China will be able to weaponize this interdependence using America’s own investment banks and hedge funds. With billions locked as investments in China, American asset managers will be the nation’s most ardent advocates and flag bearers if the U.S. were to take any action against China’s aggression in South China Sea, Xinjiang, or even with Taiwan.  

When critics of America’s botched withdrawal from Afghanistan opined that the result in Afghanistan was a prelude to Taiwan’s future, analysts were quick to dismiss it citing the economic interdependence between Taiwan and the U.S. Interestingly, the major dependence has been semiconductor chips, and with Biden’s chip manufacturing in Arizona taking steam, that could be fading away while interdependence with China increases two fold and three fold through American investments. 

In a scenario where America had to choose between China and Taiwan, it wouldn’t be surprising if Biden repeated the frustrated response from his 60 Minutes 2020 Election Interview, “I bear no responsibility.” 

If Wall Street has its way, it won’t be just the average American losing out, but America’s allies and partners around the globe. 

Ray Dalio, founder of the hedge fund Bridgewater Associates, wrote that people in the West should not interpret Beijing’s crackdowns on Chinese businesses as “the Communist Party leaders showing their true anti-capitalist stripes.” Instead, he wrote, the party believed those moves were “better for the country even if the shareholders don’t like it.” 

As long as American lawmakers entertain the counsel of such Wall Street billionaires, global trade will continue to be a zero-sum endeavor. Every time Shanghai or Chengdu or Shenzhen gets an addition to its skyline, an entire community’s livelihood in the midwest or in upstate New York will be wiped out. 

Akhil Ramesh is a non-resident Vasey fellow at the Pacific Forum. He has worked with risk consulting firms, think tanks and in the blockchain industry in the United States, India and in the Philippines. His analysis has been published in The South China Morning Post, The Diplomat, Asia Times and the Jerusalem Post. Follow him on Twitter: @akhil_oldsoul

Tags Bill Clinton BlackRock China–United States relations Economy of China Finance Hedge fund Ilhan Omar Investment Katherine Tai made in china Money

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