Drew Bernstein
Despite the growing geopolitical tensions between Washington and Beijing, the long-standing economic relationship between the United States and China is unlikely to dissolve completely. Like a couple in a 50-year marriage, the two nations have become deeply intertwined, and while there may be rough patches, both sides recognize that a complete breakup would be far more challenging than finding ways to maintain the partnership. The recent investment restrictions announced by the Biden administration reflect this delicate balance, as both countries continue to navigate their interdependence while addressing security concerns.
The New Investment Restrictions
The Biden administration’s new executive order targets U.S. investments in specific high-tech Chinese companies, focusing on sectors such as semiconductors, microelectronics, quantum information technologies, and artificial intelligence. The restrictions apply to new investments in certain subsets of these categories, reflecting a more targeted approach than some had anticipated. While these measures are designed to protect U.S. national security, they also acknowledge the importance of continued economic engagement between the world’s two largest economies.
The Importance of Continued Engagement
U.S. government officials and investors understand that a complete severance of economic ties with China is not only unfeasible but also detrimental to long-term global growth and stability. The continued interaction between the U.S. and Chinese economies is crucial for the global economy, as both nations play significant roles in international trade, investment, and innovation. By maintaining economic engagement, the two countries can continue to benefit from each other’s strengths, even as they navigate the complexities of their geopolitical relationship.
China’s Response to Economic Challenges
China has already begun implementing reforms that signal a willingness to accommodate continued investment ties with the U.S. In 2022, China reached an agreement with the Public Company Accounting Oversight Board, allowing foreign auditing of domestic Chinese firms. The China Securities Regulatory Commission also made changes to secure its settlement system last year, further enhancing the transparency and reliability of its financial markets.
These reforms come at a critical time for China’s economy, which is facing significant challenges. The country’s housing market has nearly collapsed, with major developers defaulting on their debts. Youth unemployment has reached unprecedented levels, and deflation threatens to undermine long-term economic growth. Additionally, China’s export market has slowed considerably as orders from the U.S. decline and supply chains shift to other countries, such as Vietnam.
Despite these challenges, China’s economy remains a significant force in the global market, with a population of over 1.4 billion people—more than three times that of the United States. While the economy has overheated and is now facing restrictions, it is likely to recover over time. Beijing’s recent reforms to overseas listing requirements for Chinese firms, which went into effect on March 31, provide clarity and support for companies seeking to raise foreign capital in global markets.
Opportunities for Continued Investment
China’s domestic equity markets continue to show strong interest in IPOs, indicating that investment opportunities remain robust. In August, Hua Hong, China’s second-largest chipmaker, raised $3 billion in Shanghai’s exchange—the largest listing of the year. The integration of China’s bourses, including the mainland-Hong Kong stock connect program, further increases investment opportunities for China-based companies.
Meanwhile, some U.S. firms, such as Sequoia, are adapting to the changing investment environment by spinning off their China practices. Companies that can navigate the evolving requirements from both Beijing and Washington are likely to continue thriving as the U.S.-China relationship evolves.
Chinese firms also continue to seek listings on U.S. exchanges, with tens of millions of dollars in shares being offered in sectors such as wood products, financial services, new media, and education. Earlier this year, Chinese companies in industries like steel, food, and medical devices successfully listed on U.S. exchanges. More listings are expected as companies prepare for an eventual market recovery with updated audits. Mid-cap Chinese companies, in particular, may seek listings once valuations and the overall investment environment improve.
The Need for Open Markets and Clear Guidelines
For U.S. markets to remain attractive to global companies, they must stay open to listings from around the world. At the same time, investors need clear guidelines on where and when they can invest their capital effectively. While security concerns will undoubtedly restrict some investment flows, there are still ample opportunities for both U.S. and Chinese companies to prosper. By maintaining open markets and fostering economic cooperation, consumers and investors in both countries will benefit in the long run.
Conclusion
The new investment restrictions introduced by the Biden administration are a reflection of the complex and evolving relationship between the United States and China. While these measures aim to protect national security, they also underscore the importance of continued economic engagement between the two nations. Despite the challenges, both countries recognize that their economic interdependence is too significant to be severed entirely. By adapting to the new regulatory landscape and maintaining open markets, U.S. and Chinese companies can continue to thrive, benefiting both nations and the global economy.
