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Financial decoupling - what’s the big story?

The world’s two major economies, the US and China, are pulling apart. After many decades of moving in tandem on trade, it’s been called ‘financial decoupling’. Some claim that the tariff wars of the Trump presidency were the beginning of the end, but China has long been preparing for the split. We examine when and how the ‘coupling’ came about, the benefits it brought and consider a possible new world order.

Trade with the People’s Republic of China became a priority for the US in the early 1970s. President Nixon spotted that if China could earn money by trading with the outside world, it could in turn become a massive market for US goods. From being granted ‘most favored nation’ (MFN) status by the US in 1980, China gained full membership of the WTO (World Trade Organisation) in 2001. China in turn opened parts of its economy to foreign investment.

China’s economy and companies developed rapidly. They sought access to the deep capital markets of the US, allowing them to raise money for expansion via both the equity and bond markets. The high point was perhaps the $21 billion listing of Alibaba Group in 2014, the largest ever seen in the US. But after recent regulatory moves, the lucrative pipeline of Chinese IPOs in New York appears to have been shut off. Or more precisely diverted to Hong Kong.

The opening up of China to trade with the world was a key driver of the ‘globalisation’ trend. China provided cheap components and finished goods to the West, driving consumer prices down. But with them came a massive trade deficit for the US. China gained access to the technology of its major trading partners, allowing its own technological advances. And prompting US accusations of intellectual property theft.

In 2018 the Trump administration imposed the first tariffs on Chinese imports and later blacklisted investment in China’s tech sector for US citizens. But for years prior to that China’s strategy had been to reduce dependence on foreign technology, culminating in the Made in China 2025 policy. Only time will tell whether President Biden or President Xi will be driving the agenda on financial decoupling from here. The US is explicitly aiming to protect American jobs, but China’s current direction marks a switch from economic growth for its own sake, to economic control.