The Era of Financial Balkanization
By Brian Wong
The Russian invasion of Ukraine and the COVID-19 pandemic have fundamentally transformed geopolitics and finance. From supply chain disruptions to financial sanctions, one thing seems clear: that the era of unfettered globalization, where ideological and political disputes can be swept aside, is over.
Some have claimed that decoupling is increasingly ubiquitous between countries, or clusters of countries, that seemingly share divergent strategic interests.[1] Yet what is oft-missed from the discussion is the presence of recoupling: within such clusters, whether it be NATO, the European Union, or the Association of Southeast Asian Nations (ASEAN), we see countries trending toward greater alignment across multiple fronts, including the commercial, the political, and, of course, the financial. This is compounded by the emergence of new factions and blocs, such as the reorganization and entrenchment of the Shanghai Cooperation Organisation (SCO) into a tenuous union (although not alliance) of sorts between Russian, Chinese, and Central Asian states. With the increasing skepticism and wariness towards Russia amongst Central Asian states as well as the inclusion of India, Pakistan, and Iran, further divisions are to be expected within the SCO.[2] The world is hence both decoupling and recoupling at once.
This era is thus best described not as the end of globalization, as some would suggest, but as one of a shift in the kind of globalization. In lieu of the unbridled, markets-and-economics-over-ideology approach to globalizing trade and capital flows that dominated the three decades after the end of the Cold War, we now observe prominent global players cultivate ever-closer ties with counterparts that share similar worldviews.[3] One way to describe this phenomenon is “financial balkanization”—the decoupling and recoupling of international financial ecosystems that culminates in a series of overlapping at the peripheries but separate at their core capital spheres straddling countries and even continents. The former aspect refers to the fact that tendentious and loose ties remain present between these spheres, whilst the latter denotes that the capital pools across these spheres are ultimately largely self-contained and unlikely to flow into rival spheres. Such blocs reflect underlying strategic and political considerations—as opposed to a strictly economic rationale.
With the high mobility of investment flows, relatively easy conversion between currencies, and the continued preeminence of the U.S. dollar, we have tentative grounds to see financial decoupling as relatively improbable as compared with the many other dimensions and forms of potential decoupling between countries. Indeed, at the height of the Sino-American trade war in 2018, Chinese technology giants still looked to America for Initial Public Offerings (IPOs), whilst Foreign Direct Investment (FDI) from both countries continued to pour into one another in 2020 despite the COVID-19 pandemic.[4]
As bilateral relations soured and more attractive, proximate options for Chinese capital and consolidation emerged in Hong Kong and Singapore, the United States became a less enticing destination for investment. Take, for instance, the Chinese company Didi, which has delisted its stock from the New York Stock Exchange and, despite setbacks, is seeking listing in Hong Kong; or state-owned companies such as China Life Insurance, Petrochina, and Sinopec, which have also delisted from U.S. exchanges and opted instead to double down on their listings in Hong Kong and Mainland China.[5] Other recent notable Hong Kong listings of mainland Chinese companies include SenseTime and Weibo. Indeed, increased scrutiny and skepticism toward Chinese-listed corporations for alleged breaches of regulatory standards and risk to national security, paired with the perception of a heightened risk of sanctions and asset freezes in the aftermath of the highly concerted campaign against Russian oligarchs, convinced Chinese firms that alternatives must be sought elsewhere.[6]
The U.S. government has also accelerated this financial decoupling. The Holding Foreign Companies Accountable Act, signed into effect by then-President Donald Trump in December 2020, effectively enabled the United States to unilaterally delist Chinese-listed corporations from American exchanges within the subsequent three years. A list maintained by the U.S. Securities and Exchange Commission, as of June 2022, suggested that 150 mostly China-based companies could face possible delisting from the American stock market over their non-compliance with auditing rules.[7]
In the meanwhile, U.S. investors and firms—deterred in part by the uncertainty and unpredictability of China’s harsh zero-COVID policies, as well as by the sluggish growth rates in the Chinese national economy, and finally by the prospective dangers of being collateral damage in the vitriol between both sides of the Pacific—have taken a distinctly cooler attitude toward China. Many are pivoting, or are toying with the prospects of pivoting, toward emerging markets such as Southeast Asia and the Middle East as alternatives for stable, investment-driven asset growth.
Unlike the reverse case, the pivot of U.S. investors and firms away from Chinese markets stems more from the perception that Chinese stocks are uninvestable or vastly unattractive—with the ongoing property market crisis and yuan weakness, the Chinese economy is shaping up to face a bleak Q4 and start to 2023 as foreign investors continually exercise caution over their investments into the country.[8] The balkanizing force here is hence substantially more market-driven, and concerns the innate strength and depth of the financial market in question.
Of course, it would not be balkanization unless there is, as mentioned previously, some considerable strengthening of regional blocs and ties. This is exactly what is happening between China and ASEAN, where Chinese FDI increased by over 96% between 2020 and 2021.[9] Notably, this is happening with a much higher base denominator as compared with Chinese investment in ASEAN in 2019.[10] Much of this took place against the backdrop of declining Chinese investment into the European Union (EU) and a China that is rapidly catching up to the United States in terms of investment and financial presence in ASEAN.[11] The “Balkans” are indeed forming.
This era of financial balkanization offers investors some room for caution—though not, perhaps, undue alarm or concern. Solace and relative growth opportunities can be found in neutral zones that are less likely to be ensnared by the friction between the United States and China. Examples include Southeast Asia and the Middle East, both regions with rapidly growing emerging markets, which China and the United States alike have sought to extensively court. Both are regions that cannot be easily pigeonholed with respect to these spheres of influence, and possess increasing versatility and bargaining power vis-à-vis other geopolitical blocs.
Balkanization may bring with it heightened geopolitical and military risks—especially over flashpoints such as territorial and sovereignty disputes, e.g. the Taiwan Strait and the future of Ukraine. Yet such fragmentation has additional financial consequences. Safe haven assets whose rates of return correlate positively with geopolitical volatility may be favored due to their lack of risk. They may also benefit from the reshoring or near-shoring of supply chains, or from the securitization and protectionism of strategic sectors. What is required here is a shift in investment strategy—one that no longer takes the assumptions of continued monetary expansion and a capital-intensive growth model with heightened capital-to-worker ratios as given.[12]
The real danger underpinning financial balkanization rests beyond the narrowly financial. Take environment, social, and governance (ESG) investments, for starters. The highly publicized potential movement toward greater environment and sustainability-oriented investment has little chance of becoming reality if the two largest economies refuse to engage in formal conversations on how to tackle climate change in the first place. Whilst these talks look set to resume in early 2023, the underlying skepticism rightfully leaves many investors concerned over the future prospects of Sino-American collaboration over otherwise seemingly innocuous matters like ESG finance. How can we motivate and derive a framework of international cooperation over these shared issues—whilst accepting or accommodating greater distances between countries in commercial, sociocultural, ideological, and financial terms? This remains a question that is hitherto unanswered.
Financial balkanization feeds into the wider perceptual and normative mistrust and antagonism that precludes countries from coming together to tackle their gravest challenges, such as climate change and environmental destruction. There is a vicious cycle developing between increasing financial balkanization, ideologically fuelled and geopolitically motivated distancing, and the deterioration in cooperative relations between disparate actors. Both ideological polarization and the severance of financial ties render such mutually beneficial ventures increasingly difficult to advance across our world.
About the Author
Brian Wong is a geopolitical strategist, Rhodes Scholar (HKSAR, China) and final-year DPhil in Politics candidate at Balliol College, University of Oxford, and the co-founder of the Oxford Political Review. Brian is also a regular contributor to TIME, The Diplomat, Nikkei, and the South China Morning Post on Chinese foreign policy.
Endnotes:
Martin Wolf, “Putin’s war demands a concerted global economic response”, Financial Times, March 22 2022, https://www.ft.com/content/fc9e7fd7-0476-4e37-a135-538aeecbe5b2.
Brian Wong and Iskander Akylbayev, "What Does Xi Jinping’s Visit Tell Us About China’s Relationship with Central Asia?”, The Diplomat, September 15 2022, https://thediplomat.com/2022/09/what-does-xi-jinpings-visit-tell-us-about-chinas-relationship-with-central-asia/.
Brian Y.S. Wong, “In a world driven by geopolitics, keeping the doors of trade open will be a challenge”, South China Morning Post, September 16 2022, https://www.scmp.com/comment/opinion/article/3192424/world-driven-geopolitics-keeping-doors-trade-open-will-be-challenge.
Stephen Grocer, “Chinese Companies Flocked to U.S. Markets in 2018. The Trade War May Have Had a Role.”, New York Times, January 3 2019, https://www.nytimes.com/2019/01/02/business/dealbook/trade-war-china-ipos.html?smid=nytcore-ios-share; Thilo Hanemann, Daniel H. Rosen, Mark Witzke, Steve Bennion, and Emma Smith, "Two-Way Street – US-China Investment Trends – 2021 Update", Rhodium Group, May 19 2021, https://rhg.com/research/twowaystreet-2021/.
Hanemann et al.
Tanner Brown, “U.S.-Listed Chinese Firms Are Facing More Hurdles. How the Hong Kong Exchange Is Stepping Up to Attract Companies.”, Barron’s, December 10 2021, https://www.barrons.com/articles/how-hong-kong-is-stepping-up-to-attract-u-s-listed-chinese-companies-51639131301; Georgina Lee, “Hong Kong can take advantage of any ‘mass delisting’ of Chinese firms in US, Financial Secretary Paul Chan says”, South China Morning Post, March 16 2022, https://www.scmp.com/business/banking-finance/article/3170699/hong-kong-can-take-advantage-mass-delisting-chinese-firms.
Takenori Miyamoto and Noriyuki Doi, "Nearly 150 U.S.-traded Chinese companies at risk of delisting", Nikkei Asia, June 14 2022, https://asia.nikkei.com/Business/Markets/Nearly-150-U.S.-traded-Chinese-companies-at-risk-of-delisting.
Jiaxing Li, “Most investors see Chinese stocks as unattractive, hold bearish views on property market and yuan weakness, BCA survey shows”, South China Morning Post, October 6 2022, https://www.scmp.com/business/markets/article/3194906/most-investors-see-chinese-stocks-unattractive-hold-bearish-views.
ASEAN Secretariat, “ASEAN Investment Report 2022”, https://asean.org/book/asean-investment-report-2022/.
ASEAN Secretariat, “ASEAN-China Economic Relation”, https://asean.org/our-communities/economic-community/integration-with-global-economy/asean-china-economic-relation/
Agatha Kratz, Max Zenglein, Gregor Sebastian, Mark Witzke, "Chinese FDI in Europe: 2021 Update", Mercator Institute for China Studies, April 27 2022, https://rhg.com/research/chinese-fdi-in-europe-2021-update/.
The Conference Board, “Global Economic Outlook”, November 2022, https://www.conference-board.org/topics/global-economic-outlook.