The Squid and the Whale
Capital will be the next frontier of the US-China conflict
Some Swampians may know that this title was taken from the movie of the same name, in which two brothers endure the divorce of their Brooklyn parents in somewhat comic style (half of the movie involves looking for parking after dropping off the kids; the enormous fighting squid and whale that hang in New York’s Natural History Museum represent the parents).
But I digress. The squid that I’m referring to here is Goldman Sachs, and the whale is China. Am I the only one amazed by the juxtaposition of China testing hypersonic weapons and Nato’s new mission to fend off the Middle Kingdom, with Goldman Sachs joining JPMorgan as the second independent bank to be allowed to operate freely in China without a local partner?
Well, freely may be an exaggeration. I’m quite sure that the Chinese Communist party makes it known what its desires and limits are, and that American financial institutions, like US tech giants, abide by them. But I find it rather incredible that even as decoupling is happening in the industrial and trade space, US financial institutions seem to be embedding more deeply in China.
The first question here is, why? For the US institutions, it’s clear. Desperate for fees, they are looking to do wealth management in what must be the most delicious greenfield market in the world. But for the Chinese, it seems to me more complicated. Sure, they have plenty of wealthy people who would like to be serviced by global blue-chip firms. And the country as a whole is still looking to improve its understanding and experience with the financial services market.
But China is also in the midst of a major debt crisis. I have actually been rather impressed by the country’s handling of Evergrande. Rather than waiting for a bubble to burst and bring the real economy down with it, as the US government did during the great financial crisis, Beijing is trying to deflate things in advance of that. The jury is out on whether it will work, but the effort is impressive.
Which brings me to the role of US financial institutions in China’s debt problems. Is the country hoping that US banks, but also entities like BlackRock (which told clients to triple down on China), are going to provide fresh cash to paper over the debt bubble, which has grown faster than any in history? And what might this mean for these firms’ Western investors, as well as the US government, which now views China as a major strategic adversary?
It’s hard for me to imagine that the US can have an entity list full of Chinese companies that can’t engage in cross-border trade, or have US investors, and yet it’s somehow OK for the country’s largest financial firms to move deeper into the orbit of Beijing (particularly as they claim to be focused on ESG). I’m already hearing rumblings about this in both conservative and progressive policy circles. (As per usual, it’s the neoliberal middle on both sides of the aisle that doesn’t think it’s a problem).
For my money, I think it is a problem. I expect that capital will be the next frontier of the US-China conflict. China has made it very clear that it wants to move away from a dollar system. It wants to encourage the adoption of the renminbi and weaken the ability of the US to use its own currency as the single global reserve, which of course gives America incredibly outsized power — we can run higher debts than usual, sanction countries that need to do business in the dollar-based capital markets (on that note, see the Treasury’s report on how virtual coin could weaken that power), and so on.
I can’t imagine how, in this context, we aren’t going to see more limits on the ability of US financial institutions to engage in China — or at least much more scrutiny of whether they are breaking any existing entity list rules in doing so.
Readers, I’d love to hear how you all think this will play out.