At a time of great power rivalry, Wall Street’s investment banks present one of the most glaring contradictions facing non-state actors and Washington’s policymakers.
Throughout 2020, even as back-to-back U.S. administrations were mobilizing “China Free” supply chain initiatives and sanctioning Chinese companies and individuals for a host of issues—from the South China Sea to Xinjiang—Wall Street plowed almost $78 billion into China’s economy. This was the most ever for any year on record.
Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, and others have jumped at the chance to take 100% control of their joint ventures with local financial firms, after Beijing removed foreign ownership caps.
BlackRock, the American investment firm, has announced it would set up a $1 billion mutual fund, the first fully run fund in China by a foreign firm. In an op-ed piece in the Wall Street Journal, the financier and philanthropist, George Soros, quickly responded by lambasting BlackRock and other American firms.
Soros wrote: “Pouring billions of dollars into China now is a tragic mistake. It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies.”
Beyond the angst that Soros has prompted for some, more broadly, it’s problematic for Wall Street that its investment push into China coincides with two very foreboding developments.
The first involves Beijing’s moves to impose full state controls on China’s markets and companies. The second involves Wall Street’s near impossible task of achieving compliance with the inevitable next wave of Washington’s export controls, sanctions and other restrictions.
The visible hand of the state
Regarding the first challenge, in 2020, the Chinese government blocked the $37 billion hong Kong IPO of the world’s largest fintech company, Ant Group. This should have served as a warning to Wall Street. Not less than two weeks after BlackRock broke the news about its mutual fund, Chinese officials nationalized key elements of Alipay, the world’s largest and most innovative digital wallet. All the while, Beijing had been pushing other big Chinese tech companies into aligning their priorities with those of the party. Those targeted include the world’s largest e-commerce ecosystems, such as Tencent, Alibaba and Pinduoduo.
Along these same lines, Beijing banned Didi—the popular ride sharing app that pushed Uber out of China—after it “forced its way” to a $4.4 billion IPO in New York. Authorities claimed the IPO listing endangered the data privacy of Chinese citizens, and constituted a “national security” threat to China.
This is hardly the ideal environment for pouring billions of dollars into a local market. It’s clear that the Beijing is likely to intervene, anytime, anywhere, on the grounds that a merger or acquisition doesn’t align with party doctrine. Or maybe a listed company gets branded a pariah for failing to meet some other vague standards of “socialism with Chinese characteristics.”
Most of Wall Street’s money is pouring into China’s nascent pension funds. But American investment firms are going to have to learn quickly how to mitigate the pervasive effects of a U.S.-China hybrid cold war.
The Know-Your-Customer Dilemma
Data sovereignty issues and Beijing’s future weaponization of its central bank backed digital currency (CBDCs), as I wrote about in an earlier Forbes column, will present Wall Street with a new set of headaches. The most troublesome will involve sanctioned Chinese companies, government entities and individuals.
The first challenge involves how to determine which companies, for example, in BlackRock’s China fund, are not, in some way, affiliated with the Chinese state. Given the far-reaching controls of the CCP, particularly as it relates to Beijing’s Military-Civil fusion plan, virtually every major Chinese company could be said to have some sort of ties to the Chinese government or its military. Furthermore, at this juncture of history, the CCP has already forced loyal party members onto the boards of all major Chinese companies.
Given the general lack of transparency in the Chinese system, financial firms will struggle to execute effective “know-your-customer”(KYC) procedures and will run the daily risk of stocking their portfolios with restricted entities- which brings harsh penalties and criminal prosecution from the U.S. government.
In addition to sanctions and export controls, the likely introduction of new auditing standards for Chinese companies listed in the U.S. and Europe could preclude Chinese firms from investment portfolios. Increased calls for the delisting of companies—both from China-hawks in Washington and from Beijing’s central planners—will add to the Wall Street’s challenges.
Even if Wall Street’s China portfolios are managed with the requisite amounts of due diligence, and no violations of sanctions occur, there remains the inconvenient truth that the big American investment banks and other foreign investors are seen by China hawks and human rights advocates as aiding and abetting Beijing’s larger ambitions. In the longer term, this issue will resonate with both the political left and right in America and could backfire badly on Wall Street.
As Soros put it, by funding the growth of China’s financial markets and economic actors, Wall Street is effectively funding the spread of Beijing’s model of techno-authoritarianism, and enabling Beijing’s broader geopolitical agenda.
The allure of China’s market beckons strongly, but this dilemma spells big trouble for Wall Street.