US, China don’t need a cold war over capital

After trade and technology, financial markets are shaping up to be the next front in the cold war between the US and China. Policy makers shouldn’t plunge into this battle too eagerly.
Chinese regulators imposed new curbs on companies seeking to list overseas, potentially closing a loophole that technology firms have used to raise capital in the US. Broader restrictions could be coming. Meanwhile, US regulators have taken aim at the more than 200 Chinese companies already on US exchanges, mandating that they open their books or face expulsion themselves. Within a few years, whether because of actions by Beijing or Washington, Chinese companies might well be barred from going public in the US.
Pressure is also growing in the US to limit outbound flows to China. The most recent report from the congressionally mandated US-China Economic and Security Review Commission paints a dire picture of US investors unwittingly funding China’s surveillance state and rapidly modernising military. It proposes a range of measures to scrutinize and restrict such flows.
Some new rules may indeed be needed. As Chinese companies shift to more opaque mainland markets, US investors that follow them will face new risks. Passive investors may already be putting more money into China than they realise, as index funds raise their weighting of Chinese stocks and bonds. American venture capital firms may inadvertently be funding technologies of use to the Chinese military and security forces.
It’s important to proceed carefully, however. Interventions in financial markets can have far-reaching consequences that are hard to undo. Any new measures should be clear, narrow and targeted to protect US investors and national security, not simply to undermine China’s economy.
Blocking Chinese access to key technologies, for instance, would be more effective than cutting off investment. The Commerce Department can help by moving faster to publish a list of so-called emerging and foundational technologies — which can range from quantum information and sensing technology to advanced semiconductor equipment — that need to be
protected.
At the same time, officials should think carefully about how to manage risks. Creating an entirely new bureaucracy to screen and potentially block further offshoring of critical supply chains, as a bipartisan group of senators has suggested, may not be necessary. The US should exhaust other options first, working more closely with partners to reroute and strengthen those supply chains, while expanding stockpiles of key inputs.
Where possible, it should also prioritise transparency. The Treasury could work with financial firms to seek a clearer picture of where exactly US investments are going in China before assessing any risks involved. Similarly, rather than regulating index fund providers directly, the Securities and Exchange Commission could encourage mutual funds and ETFs that track those indexes to look more closely at how they’re designed.
Finally, policy makers shouldn’t rule out the possibility of compromise. If a deal can be reached that would address US concerns, Chinese companies should be allowed to remain on American exchanges. Legislators should also remember that financial ties between the US and China enrich more than hedge fund barons; such links give the US greater insight into the Chinese economy and create more incentive for both sides to stabilise relations.
Most important, the US benefits far more than it loses from the openness of its financial markets and the predictability of its rules. Those are major advantages over China. They shouldn’t be discarded easily.

—Bloomberg