De Risking China Requires a Global Economic Shift

De-risking China requires a fundamental shift in the global economic landscape. This shift involves reevaluating trade relationships and diversifying supply chains to reduce reliance on Chinese imports.

The current economic order has been shaped by decades of globalization, with China emerging as a dominant player. However, the risks associated with this dominance, including intellectual property theft and supply chain disruptions, have become increasingly apparent.

To mitigate these risks, countries must consider alternative trade partners and invest in domestic manufacturing capabilities. This approach would not only reduce dependence on Chinese imports but also create new economic opportunities.

The benefits of a more diversified global economy are numerous, including increased economic resilience and reduced exposure to market fluctuations.

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Managing risk is crucial when investing in China, as it's a complex and ever-changing market. MPER helps global investors efficiently manage investment, legal, and reputational risk related to their China portfolios.

The risk of sanctions exposure is a significant concern, with over 50 sanctions and red-flag programs by the US and other major market economy governments affecting Chinese security issuers. Nearly 700 records of active sanctions or red-flag lists exposure have been identified, with the majority (80%) being indirect exposure.

Issuers with high Sanctions Exposure Scores include Hangzhou Hikvision Digital Technology Co Ltd, Semiconductor Manufacturing International Corporation, and Cambricon Technologies Corporation Ltd. The cumulative Sanctions Exposure Score has quintupled since 2000, highlighting the growing importance of managing this risk.

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The US government has been relying on sanctions programs and blacklists to target problematic Chinese security issuers, issuing over a thousand sanctions or red-flag designations between 2019 and May 2024.

These designations include regimes with severe legal consequences, such as OFAC's Specially Designated National List (SDN List) and Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List).

Almost 1,400 such designations have been issued, covering nearly 1,300 individual Chinese companies, as of May 1, 2024.

The US government has also created lists that largely have signaling impact, such as the DOD's List of PRC Military Companies in accordance with Section 1260H of the NDAA for FY 2021 (1260H List).

Proposals to regulate US securities investment in China, such as a 2024 NDAA provision, were dropped due to opposition from House Financial Services Committee members, leading to the reliance on blacklists.

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Global investors face a complex challenge in managing investment, legal, and reputational risk related to their China portfolios.

MPER helps investors efficiently manage this risk.

The growth of foreign securities investment in China has raised concerns in Washington about problematic companies in China.

US policymakers have struggled to find the right balance between national security interests and free capital markets.

Between 2019 and May 2024, the US government issued over a thousand sanctions or red-flag designations on Chinese companies.

This melting pot of blacklisting poses a challenge for global investors who need to track direct and secondhand exposures of security issuers to these lists.

The Sanctions Exposure Score captures both direct and indirect exposures of Chinese security issuers to over 50 sanctions and red-flag programs.

Almost 700 records of active sanctions or red-flag lists exposure were identified, with the majority being indirect exposure.

Hangzhou Hikvision Digital Technology Co Ltd, Semiconductor Manufacturing International Corporation, and Cambricon Technologies Corporation Ltd are among the issuers with the highest Sanctions Exposure Scores.

De-risking is now firmly established as a central concept of China policy on both sides of the Atlantic.

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The US government has been relying on sanctions programs and blacklists to target problematic Chinese security issuers.

Our Sanctions Exposure data can help evaluate whether US sanctions and red-flag listings affect the China portfolios of global investment funds.

China-domiciled funds have the highest exposure to sanctioned and red-flagged entities, while actively managed US- and EU-domiciled funds have the lowest exposure.

US managers at passive funds generally use the limited discretion they have to filter out blacklisted entities.

US investors have significantly expanded their holdings of Chinese securities in the past decade, but data is incomplete and distorted by China’s legacy of capital controls and investors’ tax optimization strategies.

From less than $400 billion in 2010, US investors' holdings of Chinese securities more than tripled to $1.4 trillion in 2020, before declining due to China’s economic slowdown, higher US interest rates, and a changing risk-reward equation.

US holdings of Chinese securities dropped below $700 billion by the end of 2023, the lowest level in five years. This decline was likely driven by the economic slowdown and changing market conditions.

However, foreign appetite for Chinese securities has rebounded in early 2024, with foreign holdings of CNY bonds increasing for six months in a row, and fund flow data suggesting that foreign purchases of equities also recovered towards the end of Q1.

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Some German companies are doubling down on their investments in China, despite the risks. This means they're pouring more money into their operations there, hoping to weather any future storms.

Mercedes CEO Ola Källenius has affectionately referred to China as the company's "second home." BASF's outgoing CEO Martin Brudermüller has expressed similar views.

German companies are not alone in their hesitation to reduce their dependencies on China. A mid-2023 survey by the Bundesbank found that 80 percent of companies covered stated it's difficult or very difficult to replace critical intermediate goods from China.

Record German investments in China have been reported, with Chinese news agency Xinhua claiming that "German companies are ignoring the preaching of 'de-risking.'" This suggests that many German companies are not taking steps to reduce their dependencies on China.

Berlin's inability to make a final decision on the role of Chinese companies in its 5G critical infrastructure is another example of Germany's half-hearted approach to de-risking.

The Biden administration has identified around 2,400 critical goods and materials that fall under its efforts to move supply chains out of China.

So far, we can see that the data reveal some progress, but it's still early days for "friendshoring".

The administration's efforts aim to reduce dependence on Chinese supply chains, which could help mitigate risks associated with trade disruptions.

However, the success of these efforts is still unclear, and more data is needed to fully assess their impact.

The Biden administration's data-driven approach is a positive step towards managing risk in global supply chains.

China's global initiatives are reshaping the world order, and their economic impact is being felt far and wide.

China's Belt and Road Initiative (BRI) is a massive infrastructure project that aims to connect China with other parts of Asia, Europe, and Africa through a network of roads, railways, and ports.

The BRI is expected to generate trillions of dollars in economic activity, but it also raises concerns about debt traps and unfair trade practices.

Chinese President Xi Jinping is using his country's economic might to remake the world order, and it's having a significant impact on global trade and investment.

The BRI is not just about infrastructure; it's also about creating new trade routes and opportunities for Chinese businesses to expand their reach.

China's growing economic influence is making it a major player in global affairs, and its initiatives are being closely watched by policymakers and business leaders around the world.

The BRI is expected to create new opportunities for economic growth and development, but it also raises concerns about the potential risks and challenges involved.

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China's global initiatives are a key aspect of its efforts to remake the world order. Chinese President Xi Jinping is at the forefront of these initiatives, as seen in the China-Central Asia Summit in Xi'an, Shaanxi province, China in May 2023.

These initiatives are aimed at increasing China's influence and presence globally, and they are being met with rising competition from the US and other nations. Chinese President Xi Jinping's meeting with Turkmenistan President Serdar Berdimuhamedov during the summit highlights the importance of these global initiatives.

China's global initiatives are being closely watched by US policymakers and European and Indo-Pacific partners, who are seeking to better understand their implications and how to respond to them.

China's bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a significant development in its global initiatives. China's CPTPP membership bid is part of its efforts to expand its economic influence and trade ties with other countries.

Artificial Intelligence (AI) is a key area of focus for China's CPTPP membership bid, as it is expected to disrupt businesses and all our lives in the 21st century.

China's CPTPP membership bid is a strategic move to position itself as a leader in the global economy and to promote its economic interests abroad.

Beijing's Global Initiatives are a significant aspect of China's growing influence on the world stage. Chinese President Xi Jinping has been actively promoting these initiatives, as seen in his meeting with Turkmenistan President Serdar Berdimuhamedov on the sidelines of the China-Central Asia Summit in Xi'an, Shaanxi province, China in May 2023.

China's global initiatives are driven by the country's desire to remake the world order. US policymakers and European and Indo-Pacific partners need to understand these initiatives to meet the rising competition.

Chinese President Xi Jinping is at the forefront of these initiatives, as evident from his active engagement with world leaders.

The European Union's presence in the Indo-Pacific region is a crucial aspect of China's global initiatives. To navigate this complex landscape, the EU should devise a comprehensive Indo-Pacific strategy to stay ahead of the challenge posed by the shifting geopolitical context.

The EU's engagement in the Indo-Pacific is driven by its desire to maintain a stable and secure region, which is essential for global trade and economic growth. This includes promoting peace, stability, and prosperity in the region.

The EU has been actively involved in various regional initiatives, such as the Association of Southeast Asian Nations (ASEAN) and the Regional Comprehensive Economic Partnership (RCEP). These partnerships aim to foster economic cooperation and promote regional integration.

However, the EU's presence in the Indo-Pacific is not without challenges. The region is characterized by a complex web of relationships between major powers, including the United States, China, Japan, and India.

Artificial intelligence can play a significant role in enhancing cybersecurity, as seen in a CEPS Task Force report proposing concrete policy measures to ease its adoption.

A new report suggests that AI can help detect and prevent cyber threats more efficiently than traditional methods.

By leveraging AI-powered systems, organizations can improve their cybersecurity posture and reduce the risk of data breaches.

Europe can produce its own tech giants, just like the US has Google, Amazon, and Facebook. The EU has the talent and resources to create its own tech leaders.

The EU has a strong foundation in technical savvy, with many universities and research institutions producing highly skilled engineers and programmers. This talent pool is a key ingredient for tech success.

War and rising geopolitical tensions can actually fuel innovation, as seen in the EU's response to the Covid-19 pandemic. The crisis has accelerated digital transformation and innovation in the EU.

The pandemic has also highlighted the importance of digital infrastructure and cybersecurity, areas where the EU can focus on building its own tech giants.

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The Chinese Military is a force to be reckoned with, with a history dating back to the Qing dynasty.

China's military has undergone significant modernization in recent years, with a focus on advanced technologies such as artificial intelligence, cyber warfare, and hypersonic missiles.

One notable example is the Dongfeng 17, a Chinese missile capable of reaching speeds of up to Mach 5, making it nearly impossible to intercept.

China has also been investing heavily in its cyber warfare capabilities, with the goal of gaining a strategic advantage over its adversaries.

The People's Liberation Army (PLA) has been actively developing its cyber warfare capabilities, with a focus on hacking, surveillance, and disruption.

China's military modernization efforts have been driven in part by its desire to project power beyond its borders, with a focus on the Asia-Pacific region.

The PLA has been expanding its presence in the South China Sea, with the deployment of advanced military assets such as surface-to-air missiles and radar systems.

China's military has also been investing in advanced surveillance technologies, including satellite imagery and unmanned aerial vehicles (UAVs).

The PLA's use of UAVs has been particularly notable, with the development of advanced drones capable of long-range reconnaissance and strike missions.

China's military has been actively developing its space-based capabilities, including the deployment of its first space station.

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The PLA's space program has been driven in part by a desire to gain a strategic advantage over its adversaries, with a focus on satellite surveillance and communication.

China has also been investing in its nuclear deterrent capabilities, with a focus on developing more advanced and reliable nuclear missiles.

The PLA has been actively developing its nuclear capabilities, with a focus on the deployment of more advanced and reliable nuclear missiles.

Artificial Intelligence and Cybersecurity is a pressing concern in today's digital landscape. A new CEPS Task Force report proposes concrete policy measures and recommendations to help ease the adoption of AI in this field.

The report suggests that AI can be a valuable tool in detecting and preventing cyber threats. This is because AI systems can analyze vast amounts of data and identify patterns that may indicate a potential security risk.

However, the report also warns that the adoption of AI in cybersecurity requires careful consideration of privacy and data protection concerns. This is because AI systems often rely on large amounts of sensitive data to function effectively.

The CEPS Task Force report recommends that policymakers develop clear guidelines for the use of AI in cybersecurity, including standards for data protection and transparency. This will help to build trust in AI-powered cybersecurity solutions and ensure that they are used responsibly.