US Business Enthusiasm for China Market Unaffected by Ukraine War, At Least So Far

Russia’s invasion of Ukraine has been widely condemned in the United States, but so far that hasn’t dampened American business enthusiasm for China, whose government remains Moscow’s friend.

So believes Craig Allen, president of the US-China Business Council, a nonprofit organization that represents 260 companies doing business in China, including GM, Honeywell, McDonald’s, Microsoft and the Carlyle Group. China’s support for Russia has not extended to weapons or lethal aid, and Beijing recognizes that it would be subject to US sanctions if it violated US sanctions, Allen said in an interview from Washington, DC on Monday.

As a result, “most of our companies remain optimistic,” he noted. “There is a huge divide between perceptions on the ground in China and perceptions in the United States. On the ground in China, most country managers say, ‘Come on, come on, come on!’ Within the US, there is much more sensitivity to geopolitical complexity.”

Allen can track sensitive US trade issues well after a long career in the US foreign service with posts in China, Japan and Taiwan, before joining the US Business Council. -China in 2018. Council members include Pfizer, Microsoft, GM, Honeywell and the Carlyle Group. Businesses are bullish on China, the world’s No. 2 economy after the US, because of its economic growth prospects and large consumer market.

In the same way that American companies are optimistic about doing business in China, Chinese counterparts would be happy to invest more in the US if there were a general improvement in ties between the two sides. “I suspect that many Chinese companies would love to invest in the United States if they could find a safe way to do so,” he said.

Below are excerpts from interviews.

Flannery: What is the impact of the Russian invasion of Ukraine on US companies doing business in China?

Allen: After the sanctions were announced, there were a series of briefings from the US government for our group on how we are expected to comply with US law, no matter where we are located. We are pleased that the Chinese government recognizes that this is a requirement and has said that it does not intend to violate the sanctions. So I don’t think that, at least to date, the Chinese government is putting pressure on US companies to violate those sanctions. Now, as time goes on, that might get more difficult. But what we have seen is that the Chinese comply with the sanctions, because they recognize that they would also be subject to the sanctions if they do not.

That said, the Chinese ambassador to Russia was quoted as saying that it was a good time for Chinese companies to fill a void in Russia. So I think there are some crosscurrents here that corporate America needs to be aware of. But at least so far, there are no US companies that I know of that have been disadvantaged in China. What I am reading from the US government position is that the red line is the sale of weapons or lethal aid by the Chinese to the Russians. I don’t think the Chinese have crossed that line that I know of. I hope that they will not and that they will recognize that this invasion is a serious violation of the UN principles, their own principles, and that they are not complicit in the death of innocent Ukrainians. I think that’s where we are now.

Flannery: Putting that conflict aside, so what do you think are some of the big trends in US-China business shaping up this year?

Allen: The numbers in 2021 were really very good. US exports were up 22% year over year, on top of a healthy increase last year. So despite the fees, companies have done very well. That’s not true across the board, but agriculture, energy, consumer goods, and financial services have all done very well in the last 24 months. The industrialists are mixed. Some, for example, the chemical industry or the petrochemical industry are very strong. Others are reasonably strong, including automotive, and others are not, including aerospace. And then you get to the high-tech area, and that’s very varied. The expansion of export controls by the government has certainly made that much more complicated. I would say that life sciences is also very complicated as a result of price pressure and government management of public health in China trying to reduce costs in the system.

So it’s a mixed picture, but most of our companies are still optimistic. There is a big divide between perceptions on the ground in China and perceptions in the United States. On the ground in China, most country managers say, ‘Come on, come on, come on!’ Within the US, there is much more sensitivity to geopolitical complexity. Both governments are interested in reducing dependency on the other, leading to what could be a broader decoupling, rather than a narrower one. . Those who have watched the Huawei situation, for example, acknowledge that a certain amount of decoupling is inevitable, but the question of how broad it becomes remains undecided. Companies don’t want to see you in your area where they have been operating successfully for 10, 20, 30 or 40 years.

Flannery: How does the geopolitical sensitivity you just mentioned affect Chinese investment in the US?

Allen: Chinese investment in the US is down to about 15% of peak, according to Rhodium Group figures. But the money keeps coming in and approvals are coming in many areas; less in high-tech and sensitive industries, more in general manufacturing, real estate, retail, media, entertainment and education. The nature of investing has changed, but it’s still coming. I tend to think that if both governments gave a positive signal, (investments) could increase 10 times overnight. It is actually being artificially limited by the lack of visas, the lack of ability to travel and the general type of attitude of both governments. The market is potentially much larger than it is. Last year, the best estimates are about $7.5 billion dollars (a year) of Chinese investment in the United States. I suspect that it could grow 10 times, that is, $70 billion, if it were a more favorable geopolitical environment. There is a lot of Chinese money that wants to come.

Also, China’s current account surpluses have been good recently and they need to recycle that money. Where is he going? He’s going to get into something. They don’t want to put it in Treasury bonds. There is a lot of investment in Europe. I suspect that many Chinese companies would love to invest in the US if they could find a safe way to do so, and probably get a visa so they could monitor their investments. But right now all those things seem difficult.

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

Allen: That’s where we peaked in 2017. We have a huge trade deficit with China. Chinese manufacturers would like to invest in the United States to make those products here. That has been the pattern, not only with Korea, Taiwan, Japan, Hong Kong, and Singapore, but also with Germany, the UK, France, and the Netherlands. Investment follows trade. That’s not happening here due to government restrictions, but it could.

Flannery: Is there still more enthusiasm at the state government level to attract Chinese investment to the US compared to DC?

Allen: I think the state, county, and municipal levels would welcome Chinese investment that creates jobs in their jurisdiction. But that channel, so to speak, has become really constricted and there is much less Chinese money coming in than we all would have anticipated 10 years ago. There should be a much broader, deeper and wider flow of capital than there actually is.

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