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The House of Representatives Select Committee on the Chinese Communist party recently launched an investigation into BlackRock, the world’s largest asset manager, and MSCI, a company that selects securities for many index funds Americans invest in. These companies are being investigated for investing in Chinese companies that the US government has accused of collaborating with the Chinese military and violating human rights.
This investigation is part of a larger trend that I discussed two years ago, which is the transformation of trade wars into capital wars. It was only a matter of time before we reached this point. Capital flows and trade flows are interconnected, and increased scrutiny of global supply chains and financial flows has revealed problematic connections between the US and China that were previously unknown.
For example, it is not uncommon to find evidence of Chinese companies under US sanctions partnering with US firms, or blacklisted companies controlling multiple non-blacklisted affiliates. This allows them to legally import goods and services for their sanctioned investor or parent. My column today focuses on the use of slave labor and coal-fired power in Chinese clean energy technology, which dominates the global market. While the US government may ban Chinese-made solar modules, the raw materials used, such as polysilicon mined in Xinjiang, are not tracked. This means that the problem is not truly being addressed. As global companies confront these inconvenient truths in their efforts to comply with decoupling regulations, it is clear that both western countries and China face difficult choices.
Inconvenient truths about decoupling are not limited to the US. European companies engaging in digital trade with China, for example, face challenges in enforcing EU privacy rules. These differences in political economies create obstacles that are difficult to resolve, particularly since western finance companies have far greater investment freedom than their Chinese counterparts.
Gideon, do you have any bright ideas for resolving these issues? What inconvenient truths have you noticed during the process of deglobalization, decoupling, or de-risking?
Recommended reading:
A profile of art dealer Larry Gagosian by Patrick Radden Keefe in The New Yorker offers valuable insights into the art industry and the role Gagosian has played in shaping it.
If you find yourself stressed by difficult people, check out this Harvard Business Review article for tips on dealing with “second-hand stress.”
Daniel Blake’s article in the FT argues that a multipolar world can benefit investors, while Mohamed El-Erian suggests that we may be too optimistic about current market conditions, particularly in the US.
Gideon Rachman’s response:
Indeed, there are many “inconvenient truths” surrounding decoupling. One of the biggest concerns the green transition:
1. The first inconvenient truth is that our efforts to achieve net-zero emissions in the West will be in vain if China does not reduce its emissions. China currently accounts for about 30% of global carbon emissions, compared to 14% for the US and less than 9% for the EU.
2. However, before we criticize China, it is worth noting that on a per capita basis, China emits about half as much as the US. Additionally, most of the carbon dioxide in the atmosphere was emitted by western countries.
3. The third inconvenient truth is that China’s progress in the green transition is mixed. On one hand, they dominate the global market for solar panels, and a significant portion of their car purchases are electric or hybrid vehicles. On the other hand, China continues to invest in new coal-fired power stations, with more approvals this year than in all of 2021.
4. Finally, it is difficult to imagine a successful green transition without China. China is the dominant producer of critical minerals necessary for battery production. Although the West is trying to reduce reliance on China, this process will take decades, and we need to accelerate the green transition immediately.
We would love to hear your feedback. Please email us at [email protected]. You can also reach out to Gideon at [email protected] and Rana at [email protected] or follow them on Twitter at @RanaForoohar and @GideonRachman. Your response may be featured in our next newsletter.
For more insights, we recommend subscribing to our newsletters Unhedged by Robert Armstrong and Europe Express, which provide in-depth analysis of market trends and important European news respectively.
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