HONG KONG (Feb 3): Exit bombastic Chinese foreign ministry spokesperson Zhao Lijian, relentless critic of US policy, who was transferred to a quieter job in January. Enter a literal ball of hot air in the form of a Chinese spy balloon that the US military is tracking in its home skies.
The balloon’s brazen appearance augurs ill for Secretary of State Antony Blinken’s expected visit to Beijing next week. It also may sabotage investors’ hopes that warming signals from Beijing, including conciliatory language in state media, are the beginning of a deeper change in tack by a government that has cultivated anti-Americanism at the expense of a roughly US$600 billion bilateral trade relationship.
Overall US imports from China remain well below the pre-trade war trend, per an analysis by the Peterson Institute for International Economics. Rhodium Group data shows American direct investment has been cooling for years, hitting a low of US$8.7 billion in 2020, down from a peak of US$21 billion in 2008. Tit-for-tat sanctions and protectionist measures are complicating decision-making for technology companies and their bankers, spilling over into Europe and the rest of Asia.
However, it is important to put the balloon in the context of Beijing’s habitual good cop, bad cop negotiating routine. In intelligence terms, both countries spy on each other using satellites and aircraft. Proximity is the biggest risk, as with the collision between a US EP-3 airplane and a Chinese fighter jet in 2001. That resulted in the death of the Chinese pilot and a major diplomatic incident. This balloon may mark an escalation, but then so was then-House Speaker Nancy Pelosi’s visit last year to Taiwan, which China claims as its own.
In financial terms, Beijing still largely has its good-cop hat on. It continues to incrementally lower barriers to Wall Street; in January it approved JPMorgan’s asset management arm to take full ownership of its mainland joint venture. Officials capitulated to the US audit watchdog in order to prevent its firms from being delisted from New York bourses. Although President Xi Jinping’s approach remains protectionist, it has yet to set loose fire-breathing nationalists on American consumer brands like Starbucks.
The push to sanction, to decouple, to drag foreign funds out of Chinese shares is predominantly led by American politicians. The Biden administration continues to escalate efforts to deny Chinese tech companies like Huawei access to key components. US investors may fret about Chinese eyes in the sky, but in financial terms they have more to fear from the flaming gas jets in their own legislature.