China’s political power is growing with its capital markets

Thanks to a mandate for foreign investment and its strong rebound from the coronavirus pandemic, China’s financial markets are pulling record-high lumps of global capital – especially from US-based investors – and are ready to continue growing.

Why it matters: As more money flows into China’s markets, its political leaders will have a clear mechanism to increase the country’s political power, giving China another potent weapon to challenge the United States’ position as the world’s financial superpower.

What we hear: China’s goal is “renminbi internationalization”, says Nicholas Borst, director of China’s research at Seafarer Capital Partners.

What it means: As more foreigners invest in mainland Chinese companies, government bonds and other securities that trade in yuan – China’s currency – they are forced to buy and hold the currency.

  • The more global investors have these Chinese assets, the more international and important China’s currency becomes.
  • “You can not have a globally important currency unless you give investors a safe place to park it,” Borst tells Axios.

The big picture: China has long armed access to its domestic consumer markets for geopolitical gain, forcing airlines, hotels, Hollywood studios and many other companies to avoid crossing the red lines of the Chinese Communist Party.

  • As China’s capital markets become more lucrative, we can expect China to potentially exploit access to these markets in the same way.

The key principle in games: Several international investors are investing directly in China’s markets could strengthen Beijing’s ability to exercise extraterritorial enforcement of its national laws by freezing investment accounts and initiating arbitrary audits.

  • As a financial superpower, the United States has shown relative restraint in how it regulates and politicizes these markets. It has implemented guidelines aimed primarily at eradicating fraud and protecting investors, while facilitating global capital flows.
  • With some notable exceptions in the Trump era, U.S. sanctions have usually targeted the financing of terrorism, the proliferation of weapons, vicious regimes, and gross human rights violators rather than punishing people for their political views.
  • But in the domestic market and increasingly on the international stage, China sees the political opposition as the equivalent of terrorism or money laundering and aims to punish it accordingly.

One case study: In Hong Kong, China’s national security law requires banks to freeze the assets of pro-democracy activists accused of “terrorism” or “rebellion” for their normal political organizational activities.

By the numbers: As of 2020, the market coverage of Chinese companies listed on mainland, Hong Kong, and overseas indices such as New York, London, and Singapore exchanges was nearly $ 17 trillion, with the vast majority ($ 11.7 trillion) on stock exchanges on the mainland.

  • The total number competes with the combined market value of the London Stock Exchange and Euronext exchanges.

What happens: Even like the Trump administration prohibited US investors from owning shares in certain Chinese companies linked to the military and Congress passed legislation to remove Chinese companies from US stock exchanges, China has become one of the largest exposures in some countries for US investors, according to Seafarers data .

  • “China is now both the second largest economy and the second largest capital market,” Linda Zhang, CEO of Purview Investments, told Axios.
  • “Most U.S. investors are exposed to Chinese companies … either directly or indirectly through their brokerage accounts or 401ks.”

But: China has a long way to go before the RMB becomes an international currency. This is partly because China’s leaders are reluctant to make the currency fully convertible, as this would relinquish some control over capital outflows and domestic fiscal policy.

Between the lines: Banning Chinese companies from US stock exchanges could push Chinese companies to Shanghai and Hong Kong stock exchanges, which in the long run will increase the relative strength of these exchanges over US stock exchanges, said Bob Bartel, global head of corporate finance at New York. -based financial advice Duff & Phelps.

What to see: China is developing a digital RMB, and global payments giant SWIFT has partnered with China’s central bank to help develop it.

  • A digital RMB could accelerate the internationalization of China’s currency and expand Beijing’s geopolitical swing around the world.

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