Wall Street and the Chinese military industrial complex

A note to readers: Swamp Notes will be on break until Friday December 3. To our US readers, we wish you a happy Thanksgiving.

Anyone who hasn’t yet read the US-China Economic and Security Review Commission’s 2021 report to Congress released last week, pick it up immediately. It’s hard to describe any 500-plus page report to legislators as punchy, but this one is. As I write in my latest column, it ushers in what very well may be a new era of US-China decoupling, with all sorts of new recommendations for limits on capital flows between the two nations. The commission isn’t a lawmaking body, but it has a very good record for pushing forward recommendations that do become law or administration policy, from limits on US business with Huawei, to rules around the insourcing of crucial pharmaceutical ingredients.

The commissioners are chosen by both Republican and Democratic leaders, and there was unusual consensus around this year’s report, which lays out the ways in which the Chinese Communist party (CCP) is building up global economic, political and military power to push forward a “new model for human advancement”. The party is doing so with plenty of help from Wall Street, as FT readers will know. The question is, how long will this divide last? Is it possible to have American financial institutions indefinitely funnelling capital in and out of a country that supports forced labour; has low environmental, social and governance standards; and is the US’s chief strategic adversary?

I think the answer is no, but I must say I’m gob smacked that the hypocrisy of American banks and asset managers pouring money into companies that might endanger US security isn’t getting more attention. It’s an issue raised by two of the commissioners, Jeffrey Fiedler and Michael R Wessel, in their additional comments towards the end of the report. While it’s not technically illegal for companies like BlackRock, Goldman Sachs, Charles Schwab and many others to invest in a firm such as AVIC Shenyang Aircraft Company, a primary producer of Chinese fighter jets, it’s hard to argue that it’s right, particularly in the current moment. As the commissioners put it: “One might be excused for thinking that a basic responsibility of American citizenship ought to be not to do anything to endanger US troops.”

The current Biden executive order prohibits investment in only 24 publicly traded Chinese companies. But the report also states that about two-thirds of non-state companies in China today have CCP officials involved in their business decisions. That means that most US companies doing business with such firms are being influenced in some way, even if it’s in a small way, by the party as well. The commissioners speculate that the lax regulation of capital flows at the moment may be down to increased Treasury Department sway and waning US Department of Defense impact in such matters. But I wonder if that will last as Americans become more aware of how deep Wall Street is entrenched in China.

As Fiedler and Wessel put it on page 504: “In plain language, US investment banks and institutional investors can still buy, sell and profit off of Chinese military related companies as long as they are not doing so in the United States and only involve non-US citizens. If we are really interested in protecting US national security rather than simply appearing to, this loophole should be closed, as the commission recommends.”

I would agree with that — Ed, how about you? What should Wall Street be allowed to do in China today, if anything?

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Edward Luce responds

It is not just about Wall Street. Silicon Valley’s big venture capital funds, such as Sequoia, have stakes in all kinds of Chinese high tech start-ups from quantum computing to advanced semiconductor production. Whether some of these have specific military applications is almost besides the point. Beijing’s “Made in China 2025” plan is to dominate artificial intelligence and advanced tech by 2030. So the Biden administration is facing a sharp dilemma. Does it take far more sweeping measures to decouple the US from China, as this report recommends, or does it continue with Washington’s ad hoc approach to Chinese inward investment? The latter is by far the easier path.

I confess to feeling highly conflicted on this subject. You mention that almost two-thirds of Chinese private sector firms have Communist party influence. But that’s almost impossible to avoid. The CCP has a membership of 100m, so I am surprised the number of party-influenced companies isn’t 100 per cent. Setting up a system that would disentangle bona fide Chinese companies that have purely civilian applications from ones with a more dual use potential is almost impossible. So the logic is that the US and China should confine trade and investment to commodities and low value added electronic and white goods — the sectors that generate the bulk of the US-China trade deficit.

Make no mistake, an economic divorce between the US and China would make the world a far more dangerous place. Yet continuing down today’s path is also hazardous as the US risks underwriting China’s technological acceleration. As I wrote last week, competition between the US and China is a multi-faceted global challenge. We disagree on whether the US should step up its diplomatic and commercial presence around the world, which I believe it should. Were Washington to follow your preferred path, that would imply America decoupling from other parts of the world too, which I believe is what China wants to see. But this is a complex issue and I have no overarching solutions. Divorce is reckless but so is the status quo.

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And now a word from our Swampians . . .

In response to ‘America will never be free of the Middle East’:

“The US cannot hope to retain its status as a global power and ignore the Middle East; but it does not need to be anything like as engaged there as it has been for much of the time since 1945 . . . [A] great deal has been written about the geopolitical implications of decarbonising the global economy, and Mohammed bin Salman’s grandiose declarations on hydrogen etc notwithstanding, it is hard to see the Gulf region as anything other than a big net loser both geopolitically and geoeconomically on this count. In this respect, the region becomes less important not only to the US, but also to China over the next couple of decades. However, China appears to be firmly wedded to the principles which underpin Mackinder’s Heartland Theory, in which the Middle East is a key component even putting energy resources to one side. But I doubt that there are many geopolitical thinkers inside the Beltway who share this perspective.

The more interesting question than Sino-US rivalry in the Gulf region may, in due course, turn out to be Sino-Indian rivalry bearing in mind not only geographical proximity but also India’s deep and abiding historical ties with Iran in particular.” — Alastair Newton, Livingstone, Zambia

“Edward Luce writes that ‘The essence of good diplomacy is to see the world from the other guy’s point of view.’ Then he adds ‘America, at least temporarily, appears to have lost the appetite to do that.’ The first assertion is correct, the second less so. America, unfortunately, has not lost — temporarily — the capacity to see the world from the other guy’s point of view. It has been missing this capability at least since the last three decades, in other words, since the end of the cold war.

Today we have a repeated reference to a ‘one world, two systems’ because America has lost a lot of credibility; and this is not due only to the forever wars but also because on too many occasions American diplomacy, hubristically, has offered only a ‘it’s my way or the highway’ policy, alienating many, too many, nations.” — Marco Carnelos, Rome, Italy