After the Biden administration announced restrictions on US investment in China, Swiss private bank UBS discusses the outlook and impact on markets.

UBS underlined this week that tensions between the two nations should remain elevated after the US imposed new curbs on investments in China, but it does not expect the measures to represent a significant drag on markets.

The statement comes after the White House announced a ban on select investments in China, including quantum computing, advanced chips, and artificial intelligence. The Biden administration said that Chinese advances in these sectors presented “significant national security risks,” claiming that such technologies could be used to develop advanced weapons and crack codes used by intelligence agencies to protect data. 

UBS said the move reinforces its view that US-China tensions should remain elevated. A regime of increasing restrictions on technology transfer and capital flows between the two nations is likely to take hold and become a persistent issue for investors, the bank said. This risk was emphasized by a statement from the Chinese government saying that it was “gravely concerned” by the news and that it reserved the right to take measures in response. 

However, UBS does not expect the US administration's new measures to represent a significant drag on markets. “Curbs were long in the pipeline and were widely anticipated by investors,” the Swiss private bank continued. More broadly, UBS believes that President Biden’s new executive order represents another step in an expected longer-term process by which the administration is likely to add rules to monitor US investments in nations with whom the US has a more contentious relationship.

UBS doesn’t believe that investors will be taken off guard, and said that restrictions appear to be relatively narrow both in terms of industries affected and the type of investment. The administration stated that the program, once implemented, will not impede all investments in countries of concern or impose sector wide restrictions on the activities of US persons. The production of raw materials, intellectual property licensing, and routine banking services are not expected to be restricted by the new rules. Mergers and acquisitions, private equity investments, and venture capital are likely to be covered by the new program. A carve-out for publicly traded securities and certain types of investment vehicles, such as exchange-traded funds, is expected. Finally, the order won't go into effect until next year, won't be retroactive, and will exclude sectors such as biotechnology, UBS said. 

The Swiss private bank believes that frictions between the US and China, though still elevated, appear to be finding a floor as high-level meetings and dialog resume between the two sides. Despite Chinese government statements of concern, the narrow scope also means that China is less likely to pursue a direct and significant tit-for-tat response, in UBS’s view, such as restricting exports of rare earth metals or critical minerals. More broadly, there have recently been signs of a stabilization of relations between the two countries, UBS continued.

“The language of the announcement should ease fears of broader and stricter curbs, which have been a key overhang on Chinese equities in recent months. With geopolitical risks thus likely on the back burner for now, we think Chinese equities will trade more on the relative strength of policy support over the near term,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.