Recent policy headwinds can hinder future growth, says New York-based consultancy

Washington has enacted policies in recent years to restrict US investments in Chinese companies on national security concerns

American and Chinese investment in each other’s corporate securities reached US$3.3 trillion in 2020, despite political headwinds on both sides, according to Rhodium Group.

Given the size of the two countries’ economies, “there would be room for trillions of dollars in additional US-China financial investment” to triple to more than US$9 trillion, said the report released on Tuesday by the New York-based consultancy and the National Committee on US-China Relations.

But policy challenges can hinder future growth.

“Measures have proliferated on both sides which, if current trends persist, could greatly diminish growth prospects,” said the authors, led by Adam Lysenko in the report.

Chinese investors held approximately US$2.1 trillion, with about US$700 billion in equity and US$1.4 trillion in debt issued by US entities, said the report titled “US-China Financial Investment: Taking Stock”.

Meanwhile, US investors held US$1.2 trillion, with US$1.1 trillion in equity and US$100 billion in debt issued by Chinese companies at the end of last year.

Washington, which typically takes a liberal approach to financial globalisation, has enacted policies in recent years to restrict US investments in Chinese companies on national security concerns.

A new US administration “is unlikely to fully reverse this shift but may strike a better balance” between mitigating national security risks and promoting investments in other less risky areas, said the authors.

“In Washington, the concerns are not about financial stability but about national security,” said Lysenko. “US policymakers were comfortable with greater investment flows as long as China was converging with liberal market norms.”

China, which traditionally heavily controls the capital flows in and out of the country, had announced it was committed to further open up its financial markets.

Early winners included JPMorgan, which won Beijing’s approval in June to operate the first futures business in China that is fully owned by the bank.

But reforms in the sector would need to take place before “it can truly open its capital account without guardrails”, the authors said. A “true liberalisation would require Beijing to surrender political control over key parameters of its domestic financial and economic system”.

Rhodium Group said the estimated total from the report, which was the first to track two-way capital flows in securities investments by the firm, was nearly twice as much as the US$1.8 trillion figures.

The report included purchases made with foreign exchange reserves by the Chinese government of US securities, as well as holdings of US securities by Chinese capital outside China, which were not accounted for by data provided by China.

“We’re trying to capture the entire universe. These government securities holdings are relevant because if the United States pursues a policy that forces all Chinese investors in the US securities to divest or all US holders of Chinese securities to divest, those securities will be impacted as well,” said Lysenko.

The under-reporting by the official figures, Rhodium’s analysts said, also reflected “the complex” structures used in cross-border securities investments where determining the nationalities of the issuers and owners proved to be challenging.

The data in Rhodium’s report included purchases of public and private stocks and bonds both directly from the home markets of the companies and from markets around the world where these securities are listed and are available.

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