U.S. Business Enthusiasm About China Market Undimmed By Ukraine War – At Least So Far

Russia’s invasion of Ukraine has been widely condemned in the United States, yet that hasn’t thus far dampened American business enthusiasm about China, whose government remains friendly with Moscow.

So believes Craig Allen, president of the U.S.-China Business Council, a non-profit organization representing 260 companies doing business in China including GM, Honeywell, McDonald’s, Microsoft and the Carlyle Group. China’s support for Russia hasn’t extended into arms or lethal aid, and Beijing recognizes that it would be subject to U.S. penalties if it were to violate U.S. sanctions, Allen said in an interview from Washington, D.C. on Monday.

As a result, “most of our companies remain bullish,” he noted. “There’s a huge divide between perceptions on the ground in China and perceptions in the United States. On the ground in China, most country managers are: ‘Go, go, go!’ Within the U.S., there’s a much more sensitivity of the geopolitical complexity.”

Allen can track those U.S. trade sensitives well after a long career in the U.S. foreign service with postings in China, Japan and Taiwan, before he joined the U.S.-China Business Council in 2018. Council members include Pfizer, Microsoft, GM, Honeywell and the Carlyle Group. Businesses are upbeat about China, the world’s No. 2 economy after the U.S., owing to its economic growth prospects and large consumer market.

In the same way that U.S. companies are upbeat about business in China, Chinese counterparts would be happy to invest more in the U.S. if there was an overall improvement in ties between the two sides. “I suspect a lot of Chinese companies would love to invest in the United States if they could figure out a safe way to do so,” he said.

Interview excerpts follow.

Flannery: What’s the impact of the of the Russia’s invasion of Ukraine on American companies doing business in China?

Allen: After the sanctions were announced, there were a number of briefings by the U.S. government to our group about of how we are expected to comply with U.S. law, no matter where we are located. We’re pleased that the Chinese government recognizes that is a requirement and that they have said that they don’t intend to violate sanctions. And so I don’t think that, at least until to date that, there is pressure on American companies by the Chinese government at all to violate those sanctions. Now, as time goes on that might become more difficult. But what we have seen is that the Chinese are compliant with the sanctions, because they recognize that they also would be subject to the penalties if they’re not.

That said, the Chinese ambassador in Russia was quoted as saying that it was a good time for Chinese companies to fill a void in Russia. So I think that there are some countercurrents here that American companies need to watch out for. But at least thus far, there are no American companies that I know that have been disadvantaged in China. What I’m reading from the U.S. government’s position is that the red line is the sale by the Chinese of arms or lethal aid to the Russians. I don’t think that the Chinese have crossed that line to my knowledge. I’m hopeful that they don’t and that they recognize that this invasion is a gross violation of UN principles, their own principles, and that they’re not complicit with the deaths of innocent Ukranians. I think that’s where we stand right now.

Flannery: Setting aside that conflict, then what do you think are some of the big trends in U.S.-China business shaping up to be this year?

Allen: The numbers in 2021 were actually very good. U.S. exports up some 22% year on year, on top of a healthy increase last year. So despite the tariffs, companies have been doing very well. That’s not true across the board, but agriculture, energy, consumer goods and financial services have all been extremely successful over the last 24 months. Industrials are mixed. Some — for example — the chemical industry or petrochemical industry are very strong. Others are reasonably strong, including automotive and others are not strong, including aerospace. And then you get to the high-tech area, and that’s very mixed. The government’s expansion of export controls has certainly made that much more complicated. I’d say life sciences are also very complicated as a result of pricing pressure and government management of public health in China, trying to squeeze costs out of the system.

So it’s a mixed picture, but most of our companies remain bullish. There’s a huge divide between perceptions on the ground in China and perceptions in the United States. On the ground in China, most country managers are: ‘Go, go, go!’ Within the U.S., there’s a much more sensitivity of the geopolitical complexity. Both governments are interested reducing dependence on the other, leading to what could be a broader — rather than a more narrow – decoupling. . Those who have watched the Huawei situation, for example, recognize that a certain amount of de coupling is inevitable, but the issue of how broad that becomes remains on undecided. Companies don’t want to see it in their area where they’ve been successfully trading for 10, 20, 30, 40 years.

Flannery: How’s the geopolitical sensitivity that you just mentioned affecting Chinese investment in the U.S.?

Allen: Chinese investment in the U.S. is down to about 15% of the peak – based on Rhodium Group numbers. But money is still coming in, and approvals are being given in many areas; less in high tech and in the sensitive industries, more in general manufacturing, real estate, retail, media, entertainment and education. The nature of the investment has shifted, but it’s still coming in. I tend to think that if both governments gave a positive signal, (investments) could increase 10 times overnight. It’s being – really — artificially constrained by the lack of visas, the lack of ability to travel and the general kind of attitude of both governments. The market is potentially much bigger than what it is. Last year, the best estimates are about $7.5 billion dollars (a year) of Chinese investment came into the United States. I suspect that could grow 10 times – to say, $70 billion — were it a more favorable geopolitical environment. There’s a lot of Chinese money that wants to come.

Moreover, recently, Chinese current account surpluses have been good, and they need to recycle that money. Where is it going to go? It’s going to go into something. They don’t want to, put it into Treasury bonds. There’s a lot of investment going into Europe. I suspect a lot of Chinese companies would love to invest in the United States if they could figure out a safe way to do so, and probably obtain a visa to be able to monitor their investments. But right now all of those things seem difficult.

Flannery: $70 billion seems like a lot right now.

Allen: That was about where we peaked in 2017. We have an enormous trade deficit with China. The Chinese manufacturers would like to invest in the United States to make those products here. That’s been the pattern, not only with Korea, Taiwan, Japan, Hong Kong and Singapore, but going way back to Germany, the UK, France, and Holland. Investment follows trade. That’s not happening here due to the government restrictions but it could happen.

Flannery: Is there still a greater enthusiasm at the state government level for attracting Chinese investment to the U.S. compared to D.C.?

Allen: I think state, county and municipal levels would welcome job-creating Chinese investment in their jurisdiction. But that channel, if you will, has become really restricted and there’s much less Chinese money coming in that all of us would have anticipated 10 years ago. There should be a much broader and deeper and wider flow of capital than it really is.

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@rflannerychina

Source: Forbes