Wealth Strategies

US Unlikely To Squeeze US-China Investment Flows - Fidelity International

Tom Burroughes, Group Editor, 1 October 2019

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The firm talks about speculation that the US administration - or future ones - might try to reduce US investors' flows into China.

A major investment house thinks it is unlikely that President Trump or other US authorities will succeed in reducing US investors’ portfolio flows into China – a move speculated upon as Washington continues its trade fight with the Asian giant.

Reports said that President Trump is thinking about expanding its trade confrontation against China by targeting Beijing’s ties with Wall Street and US investors. 

A report by Politico said that such measures have been in the early stages of consideration for at least a month. The report speculated that even Democrats, such as Senator Elizabeth Warren – a candidate running for the presidential ticket next – could run with such an idea.

“When the trade war first broke out last year, few would have expected tariffs on Chinese goods could have reached their current levels. So the news that the US may make the financial sector its next target will be greeted with understandable nervousness, given the ‘anything can happen’ tone in the current media coverage,” Paras Anand, head of asset management, Asia-Pacific, Fidelity International, said. 

“But in reality, I think this newest threat rings particularly hollow. In my view, such a direct intervention in the functioning of America’s capital markets would struggle to get the necessary level of domestic political support, not to mention implementing the requisite overhauls to financial market regulations,” Anand said. 

“Despite the stated ambition of negotiating some end to the current trade tensions with China, the Trump administration is now reportedly considering whether to intervene in markets to constrain the flow of capital into Chinese securities. According to recent news reports, measures being discussed in the US include forcing a de-listing of Chinese companies from American bourses, or potential restrictions on the allocation of US pension funds to Chinese securities,” Anand continued.

Anand said the measures “are the latest example of the Trump administration seeking to push back against predominant trends in global finance”. 

A possible move in such a direction comes at a time when China has liberalised some of its capital controls and investment rules to encourage more foreign flows into the country. Other recent developments have included the inclusion of the renminbi currency, aka yuan, in the International Monetary Fund’s basket of currencies known as Special Drawing Rights. China has also been moving to denominate more commodities in renminbi, trying to dislodge the dollar as the dominant global reserve currency.

Fighting against trends
Another trend, Anand said, is “China’s internationalisation” and the “rise of sustainable investing”.

“Recently the administration moved to constrain the development of sustainable investing for large pension funds in the US, with the Department of Labor stating that the primary aim for such funds is to deliver returns, and that environmental, social or governance (ESG) considerations should be subordinated in this effort,” Anand said. 

“This implies that there is a conflict between pursuing both financial returns and sustainability. However, the global trend of incorporating sustainability factors into investment strategies is arising precisely because most market participants believe that it will help enhance long-term returns. So the labour department appears to be pushing against the ESG tide, with the obvious potential consequence that trustees feel constrained in their allocation decisions - in a way that may negatively impact the underlying investors,” Anand added.

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