Behind the Markets: Placing “China Risk” into Perspective

December brings an annual need to review the past year and think about positioning for the next. Liza Tobin, Senior Director for Economy of the Special Competitive Studies Project (SCSP), was a perfect guest on the latest episode of the Behind the Markets podcast to help in placing China risk into better perspective.

Liza served on the National Security Council staff as China Director, where she led the development of multiple U.S. strategies and policies on trade, economics, climate and the environment, as well as on military issues. She has also worked more than a decade as a China specialist in the U.S. government, including time as an economic analyst for the Central Intelligence Agency (CIA). 

Presidents Biden and Xi Met Recently

After more than a year of not being in direct contact, Presidents Biden and Xi did have a widely publicized recent meeting. Liza saw this as mostly tactical, and that the long-term trajectory of the U.S.-China relationship should not be expected to change much. The Biden Administration set the bar low and stepped over it, more or less. Liza focused a lot on “military-to-military” dialogue, meaning that a policy of the U.S. military being able to speak to the Chinese military did reopen, a policy that had been abandoned by the Chinese military in response to Speaker Pelosi’s visit to Taiwan. There is notably more tension in the Taiwan Strait, and this could help avoid accidents. There was also discussion of fentanyl pre-cursor chemicals coming out of China, but Liza noted that there is a history of agreement like this being made but China walking away when irritated on some other issue, often without warning. 

Investors read too much into this meeting—foreign direct investment has been flowing out of China, and the levels of this investment going into China are at the lowest levels we have seen in decades. 

What Is the Special Competitive Studies Project?

The Special Competitive Studies Project is a group, chaired by former Google CEO Eric Schmidt, with a purpose of making recommendations to strengthen America’s long-term competitiveness as artificial intelligence (AI) and other emerging technologies are reshaping our national security, economy and society.

The Problem of “Dual-Use” Technology

Many technologies can be used in both innocuous, civilian ways as well as to enhance the effectiveness of weaponry. If we think about the miniaturization of semiconductors, for example, a core use-case was missile guidance systems. This is a core piece of technology that can be used by civilians as well as the military. 

The genesis behind a lot of what we see, usually in the form of different sanctions or executive orders, is that the U.S. government believes American technology should not be able to be used by China’s military in order to enhance the capabilities of one of America’s biggest rivals. Examples of technologies in the scope of such rules would be AI, quantum computing and semiconductors. This has certainly garnered major attention during both the Trump and Biden Administrations (Liza worked for a time with both), but the final rules are not yet complete. 

Closer to Home: TikTok (Bytedance) and Temu (Pinduoduo)

Technology with direct military applications might be one thing, but China’s capabilities in software have been increasing and it is difficult to see them any longer as far inferior to the U.S. on this front. Many Americans use TikTok, and Temu’s influence on the recent earnings of Pinduoduo showcase strong increases in U.S. consumer activities. 

It is always interesting to consider that when there is an application (Facebook, Google, New York Times to name a few) that the Chinese government does not agree with, it is banned outright. It is becoming clearer and clearer that the U.S. government does not agree with TikTok and has more than awakened to the risks, but getting the concerted action to actually ban it remains quite difficult. Liza believes that it can happen, but that U.S. government action tends to look like trying to turn a very large ship—everything moves very slowly. 

Looking toward 2024

If investors take away one key word for 2024, it would be elections. There is a Taiwan election in January 2024. Tensions are high, and there is a belief at China’s highest levels that Taiwan should be part of China. It’s impossible to say if this will spark a military confrontation, but in December 2023, we must at least be aware of it.

Later in 2024, we have the U.S. election. Liza has worked during both the Trump and Biden Administrations, and the policy description between the U.S. and China is now “strategic competition”—and this is not likely to change regardless of a Trump or a Biden win (should that be the final choice). Liza noted that Biden is more of an internationalist, wanting to work with European allies on how to best approach the China rivalry, whereas Trump is more likely to go it alone and use more aggressive tools like tariffs, but the concept is largely the same. 

It was a great episode, and we believe anyone looking at the U.S.-China situation and getting ready for 2024 should listen, below.