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Written by: Brian Clark | Knowledge Leaders Capital
For decades since the end of the Cold War there have been very limited restrictions on foreign investments by US investors compared to those of other countries. This has allowed US investors to transact in a wide array of international investment options. Indeed, following the ascension of China to the WTO in 2001, US investment in China increased dramatically. Consequently, China quickly unleashed its economic potential, becoming the second largest economy in the world. That environment started changing under the Trump administration, and with the beginning of the war between Ukraine and Russia, it has accelerated further to include sanctions on Russia and more restrictions on China. Over the past week, there have been additional increases in restrictions between the US and China that are worth noting for investors because they appear to be an expansion and continuation of a negative “decoupling” trend that has been previously pondered and debated, but now seems to be increasingly real.
This past week, according to CNBC’s reports of two short memos circulated to Congress, the White House is expected to issue additional rules for US investors in China’s technology sector. The new set of rules includes millions in additional funding for the monitoring of private investments in the Chinese tech sector as well as greater restrictions on companies that invest in Chinese semiconductors, quantum computing, and potentially artificial intelligence, which are key areas for the development of defense and security advancements, according to CNBC.
The new set of restrictions would expand previous rules put in place in August of 2021 by the Biden administration that banned Americans from investing in 59 Chinese firms, including a leading smart phone maker, Huawei. This order expanded one issued by the Trump administration in late 2020 targeting 31 companies. While a trend toward greater restrictions on military-related technology has been developing for three years, now restrictions appear to be spilling over into the broader technology space, which can be seen in the recent announcement by the US and Canadian governments banning the Chinese social media platform TikTok on all government mobile devices and a new US House bill proposed last week to ban the app for all Americans. Yesterday, the stock price of TikTok’s publicly traded competitor Snap, Inc., surged to a high of over 14% above its Friday closing price, possibly in response to this news.
Last week, the Biden administration announced export controls to several Chinese entities, including shipments to Inspur Group Co. and genetics firm BGI, citing US national security and foreign policy concerns, according to Bloomberg. The administration also added companies to its “Entity List” that are aiding China’s modernization of its military and providing support to Russia’s military. According to Bloomberg, Gina Raimondo, Head of the US Commerce Department stated, “There are times in America’s history of intense global competition with another superpower who does not share our values, this is one of those times.”
The White House has reportedly said that the new restrictions reported to Congress this week are specifically meant to be focused on those companies and entities that could benefit China’s military, and by extension, assistance to Russia’s invasion of Ukraine. For an increasing number of analysts, these recent moves are just the most recent sign of increasing restrictions on trade and geopolitical tensions between the US and China. While some foreign policy experts suggest China backing Russia with arms only risks increased sanctions from the US and would damage its reputation, it is evident that 2022 ushered in a geopolitical landscape where there is an increasing need to revisit old assumptions about international relations and their implications for investments.
As of 12/31/22, none of the securities mentioned were held in the Knowledge Leaders Strategy.
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