Trump team rows back on tough China sanctions

The Trump administration has scrapped plans to blacklist Chinese tech giants Alibaba, Tencent and Baidu – but Joe Biden’s relationship with China may be determined by human rights.

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  1. Garry White

As Democrat supporters were sweeping up detritus from parties celebrating Joe Biden’s presidential win in November, the Trump team had already sprung into action to secure the administration’s legacy.

They made no secret of what they were doing – publicly declaring they wanted to ‘box-in’ the 46th president, tying Mr Biden’s hands on foreign policy well before his inauguration – should their actions to block him from the presidency fail.

The plan was to light so many fires in the death throes of the Trump presidency that the Biden team would have trouble putting them all out. But have these Machiavellian moves really tied Mr Biden into a foreign-policy straitjacket? Or will these Republican roadblocks be easy to reverse?

Despite Mr Trump giving the impression he would cling onto the Oval Office door by his fingertips, those around the president prepared for the end of their time in power – and turbocharged the priorities from their second-term agenda. Mr Trump has now, thankfully, conceded defeat for the first time. But could his administration’s actions result in major difficulties for his team trying to alter course from the turbulent Trump years?

Some of these moves target the Middle East. They included a further withdrawal of US troops from Afghanistan and Iraq and the Defense Department also rushed through the approval of $23bn in advanced weaponry sales to the United Arab Emirates to alter the regional balance of power against Iran.

Targeting China

However, the main target of these interregnal machinations has been China. The accelerator has hit the floor on Washington’s moves to starve Chinese companies of funding. The US wants to remain the world’s leading superpower – and Republican Party hawks want to limit the rise of China before it can challenge American hegemony. The most important tool in America’s armoury is access to money.

Banning federal pension funds from investing in Chinese companies – and declaring other businesses un-investable by US citizens because of their Chinese military ties – cuts off important sources of capital. Companies starved of funding cannot invest in innovation and growth – putting them at a disadvantage to those with good access to equity and credit lines.

Mr Trump signed the Holding Foreign Companies Accountable Act into law on December 18. The Act allows US authorities to delist foreign companies from US stock exchanges if they fail to comply with the audit rules for three years that the US brought in after the financial crisis. This will completely cut off access to the US stock exchanges’ deep pools of capital, global investor base and extensive niche-market knowledge. Clearly aimed at Chinese state-run companies – which are instructed to not comply.

Should US-listed Chinese companies be ejected from US markets it will result in smaller market valuations. The future of Hong Kong is now uncertain and if they are listed only in Shenzhen or Shanghai there will be a much smaller investor base. Forcing Chinese companies off American stock markets and limiting access to funding will have a long-term detrimental effect on the market value of its businesses – hitting the wealth of China itself over the longer term.

All of this means that executives at American Stock Exchanges are clearly under a lot of stress. Not only may they be responsible for compliance with new US audit rules for foreign companies, but the outgoing administration publicly embarrassed executives at the New York Stock Exchange (NYSE) this week. After becoming engulfed in Washington politics, they were forced to perform two major U-turns in just two days.

One day after reversing its late-December decision to delist three Chinese telecom companies – China Mobile, China Telecom, China Unicom – the NYSE bowed to pressure from the Republican establishment – and announced it would, after all, delist the three businesses.

Doves strike victory

However, it appeared Donald Trump and his allies’ attempts to damage Chinese companies may have gone too far. A ban investment in two of China’s biggest and most successful companies – Alibaba and Tencent – the most high-profile targets yet was pulled just before his last week in office.

The combined market value of these two Chinese conglomerates is about $1.3 trillion – that’s twice the size of Spain’s total stock market value. Together, these shares make up about 11% of the weighting of MSCI’s emerging markets benchmark. Many US domiciled tracker funds will be invested in this index and its constituent companies.

The leaked rumours knocked about 5% off the shares of each company within the minutes the news took to spread across New York’s trading desks. Such a ban will clearly lose American investor money – and some on Wall Street are now becoming concerned about the potential reputational and financial hit to US equity markets from such a decision. The shares gained on relief when news of the U-turn was announced.

The Trump team by acting so aggressively and going too far may allow Mr Biden to earn easy goodwill points if he reverses these steps – and give him greater negotiating power with America’s adversaries because of the concessions he has made. Reversing the delisting of Chinese companies will be easy because of the three-year time limit to comply – but enhancing friendly dialogue with Beijing is another matter altogether.

Joe Biden has pledged on numerous occasions to raise human rights issues with Chinese leaders – so he himself has already ensured that Washington’s relationship with Beijing is unlikely to improve at all. In fact, with the issue being such a sensitive subject for China, it could get much, much worse.

A version of this article first appeared in the Daily Telegraph.

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