China can’t be “contained” but it is now scary for investors
The second Cold War has already begun. Because China is different, it will look nothing like the last one between the U.S. and the USSR, and surely there will be no “containment” in the sense of Kennan
● George Kennan, an American diplomat, had sent a famous long telegram from Moscow to Washington D.C. on February 22, 1946 and argued that the Soviets must be “contained”. This was the beginning of the Cold War from an American vantage point.
● China isn’t the Soviet Union. The new Cold War methods will be different. Because China is open to foreign capital and trade, what will hurt it is the scarcity of them. From now on, China will have a hard time to attract western capital. It can’t be “contained” because it isn’t a closed economy.
● The first sign is that China recorded its first-ever quarterly deficit in foreign direct investment. There is capital outflow for the first time in 25 years. What will Beijing do? This is called de-risking move by Western governments.
● Foreign firms operating in China have reported investment liabilities of USD 11.8 billion this year. This can be seen as retained earnings. So, maybe Western companies are taking their money out.
● In terms of trade, there is certainly some re-routing. Instead of exporting directly to the U.S. China could export to some neutral third country, and that country could re-export goods that use Chinese parts or directly made in China.
● Yes, but this would still be a trade loss because the entire Chinese produce can’t be re-exported to the West that way. More to the point, in lieu of China other Asian countries attract capital.
● India but also Vietnam catches the eye. Vietnam is performing with flying colours and could be the next South Korea. Ironically, those countries that had been at war with France and the U.S. for their independence –and anticommunism of course- are now queuing for Western FDIs.