The first high-level meetings between the Biden Administration and Chinese officials set to begin Thursday are unlikely to rattle markets the way these meetings did during the last administration. But policy watchers and investors still will monitor them for hints of how U.S.-China tensions could escalate and the potential fallout for sectors like technology.
The U.S. on Wednesday imposed sanctions on 24 Chinese officials it says have had a role in Beijing’s crackdown on Hong Kong, sending a signal ahead of the two-day meeting between Secretary of State Antony Blinken and National Security Advisor Jake Sullivan and their Chinese counterparts that are expected to set a framework for future dialogue and the broader relationship.
The new administration’s focus on China so far has been advocating a multilateral approach and repairing alliances that frayed under the last four years. As China tries to have a bigger role in shaping the global world order, policy watchers are stressing the need for the U.S. to bolster its relationships in the Indo-Pacific region. In a hearing about China before the Senate Committee on Foreign Relations on Wednesday, Elizabeth Economy, a senior fellow at the Hoover Institution, cited the Biden Administration’s recent comments that the U.S. wouldn’t improve relationships with China unless Beijing improved its relationship with ally Australia.
While Economy said sanctions for human rights abuses in Xinjiang and Hong Kong were unlikely to change China’s behavior around what it sees as core sovereign issues, swaying a broader group of developing economies that have in the past come to China’s defense at the United Nations to rethink their support could have more impact.
Another area of focus is restricting China’s access to critical U.S. technology through the use of existing regulatory tools like export controls, according to a client note by research firm Beacon Policy Advisors. “While the Biden administration was always expected to be tough on China, the extent to which it has sought to take advantage of tools created by the Trump administration to limit Chinese access to American technology has surprised some observers,” writes Beacon.
The new administration has already tightened some of the licenses that had been granted to companies, for example, to keep selling items used in or with 5G devices, and it has also been slower to award licenses to companies that sell to others subject to export restrictions, like Semiconductor Manufacturing International Corporation, according to Beacon.
Somewhat unexpectedly, the administration has also allowed a rule proposed in the last weeks of the Trump administration that gives the Commerce Department broad oversight to review information and communications technology and services (ICTS) transactions involving “foreign adversaries” despite industry pushback, though Beacon analysts note it is unclear how strictly the rule will be enforced.
For now, China is still dependent on the U.S. and allies’ high-end technology supply chains, but that may not remain the case as China invests aggressively and localizes supply chains, Saif Khan, a research fellow at Georgetown’s Center for Security and Emerging Technology, warned senators at the hearing. “Whatever we can do in our technology strategy to maintain that leverage now will have huge geopolitical and strategic relevance in the years ahead,” Khan said.
Indeed, the next big event to watch for investors may be a bipartisan China legislative package that focuses on bolstering domestic competitiveness. That is expected to come for a Senate vote in the spring.
It likely won’t be the last of China-related measures. During the hearing, Sen. Mitt Romney asked a panel of China experts how China had so much money to invest in its efforts to change the global world order and boost its technology power, raising the question of whether it was being funded by U.S. pensions and other investors that have been flocking to China because of the opportunities.
Most policy watchers see little threat of broad restrictions on U.S. investors in the near-term, but questions like those from politicians suggest the risks to investors shouldn’t be dismissed entirely—a reason some fund managers continue to allocate less than they typically would to China or look for a larger cushion before buying a stock.