Economic war against China takes off

It is happening at last, and the American game plan of isolating China and checking its hold in global supply chains is working. Analysis of movement of mutual fund investments shows that there is a definitive move away from China, and into other emerging economies like Mexico, India, Indonesia and other south-east Asian nations.

The reason is being attributed to China’s faltering recovery in the post-Covid period and lack of clear governmental response in terms of policy to the slowdown in economic growth. This is combined with United States’ “investment war, trade war, and geopolitic war” against China, supported by the European Union economies.

“China’s export dominance is ebbing, creating opportunities for other emerging market countries to fill the gap, including Mexico, India and Southeast Asian nations,” said Malcolm Dorson, portfolio manager in New York. It is expected that this trend will continue into the next decade. Data shows that there was $674 million outflow from Chinese mutual funds, while $1 billion went into mutual funds of emerging market economies, excluding China.

Goldman Sachs data showed that in mid-July, foreign purchases of equities in emerging markets excluding China, was $39 billion, first time since 2017 when more funds went to other emerging market economies than China. It is also being reported that the size of the top 10 Chinese mutual funds have shrunk 40 per cent due to outflows and lack of interest in China. “In the last six to 12 months, there have also been no queries for a China-focused mandate,” said Benjamin Low, an American investment director.

The United States has also been tightening fund and technology flows into China, which had started during the Donald Trump presidency, and it has increased in President Joe Biden’s tenure in the White House in the last two years. Part of the reason for the resurfacing of hostility towards China is due to Chinese President Xi Jinping’s hardline on Taiwan, apart from China’s economic support for Russia after Russian President Vladimir Putin’s invasion of Ukraine.

President Biden has almost rekindled a new cold war against China based on the clash between democracies in the West and countries like China and Russia. China has been under pressure on the technology front as well because America has imposed restrictions on exporting sensitive technology in the field of chips related to AI and semiconductors. The United States has asked Japan not to share chip technology and restrict chip exports to China. Beijing has expressed its criticism of Japan for the new stance on technology exports.

The United States and Europe want to stymie Chinese economic growth on political grounds. “US., Canadian, and some European investors are exiting China due to political pressure. On the face of it, the US seems to have started an investment war, following a trade war, and a tech war,” said Wong Kok Hoi, of APS Asset Management, an American company.

The question is whether it is good for the global economy if China’s economy is pushed back for political reasons. It seemed for the last quarter-century and more that the global economy can grow despite political differences among countries. After the outbreak of the Covid pandemic it was felt that China had a near-monopoly on global supply chains and that this excessive dependence on a single country created critical disruptions in the global economy. Therefore, the argument that the necessity arose for diversifying the sources of global supply chains.

But now a new factor has been added. It is being made out by the US and Europe that political ideology is also a powerful reason why there is need for the world to move away from China. This is but a thinly-veiled reason for checking China’s economic growth, the real reason being China’s aggressive stance against Taiwan and its assertion in the South China Sea.