According to Xinhua News Agency, the third meeting of the China-US Financial Working Group was held in Beijing on January 18-19, co-chaired by Xuan Changneng, Deputy Governor of the People’s Bank of China (PBoC), and Brent Neiman, Assistant Secretary of the Treasury for International Finance and Development. The two sides discussed on the two countries’ currencies and financial stability, financial supervision, financial markets, cross-border payments and information, sustainable finance, anti-money laundering and counter-terrorist financing, global financial governance, as well as other issues of key concern to both sides. In the midst of the US-China technology confrontation and the Taiwan Strait issue, it is thus intriguing to know the political and economic implications of the US-China financial dialogue.
The US-China Economic and Financial Working Groups were established under the leadership of the PBoC and the US Treasury Undersecretaries, as agreed upon between China and Janet Yellen, US Secretary of the Treasury, during her visit to China in July 2023, to enhance communication and exchanges on economic and financial issues. The working group will hold regular and ad-hoc meetings to strengthen communication and exchanges on economic and financial issues. The first two meetings of the US-China Economic Working Group were held in October and November last year. In addition, US Treasury Secretary Janet Yellen, who is in charge of financial and economic affairs, met with Vice Premier He Lifeng of the State Council of the Chinese Communist Party prior to the Biden-Xi summit, and held substantive and extensive discussions on issues such as monetary and financial stability of the two countries, financial regulation, sustainable finance, anti-money laundering and counter-terrorism financing, global financial governance, as well as other issues of key concern to the two sides.
In recent years, China’s weak economic recovery, real estate crises, the departure of foreign capital, the declining stock market, coupled with the fear for the intensified US-China technology confrontation, as well as China’s strengthening of the investigation and prosecution of espionage, inhibiting investment, strong financial regulation, complex geopolitical situation and other factors, foreign investment either withdrawn or slowed down the pace of investment. US President Joe Biden signed a high-profile executive order on August 9 last year authorizing the US Secretary of the Treasury to prohibit private equity and venture capital firms from investing in China’s high-tech enterprises in three areas, namely semiconductors and microelectronics, quantum information technology, and certain artificial intelligence systems. The ban has already discouraged many venture capital funds. According to Rhodium Group, US direct investment in China in 2022 is $8.2 billion, a 20-year low, while venture capital investment is $1.3 billion, also a 10-year low. The PRC Ministry of Commerce announced on January 19 that foreign investment in 2023 is 1.1 trillion yuan (RMB), an annual decrease of 8% and in decline for the seventh consecutive month. However, the number of newly established foreign-invested enterprises in that year was 53,700, an annual increase of 39.7%. Therefore, the financial dialog between China and the US will help to encourage the willingness of foreign capital’s entry to China.
The scale of Chinese-owned US debt reached a historical peak of $1.32 trillion in November 2013, and since then, the number increased and decreased every year. In 2019, the annual holdings were reduced by $53.7 billion; in 2020, $2.4 billion was added; in 2021, $3.6 billion was added; and since 2022, over $100 billion of US debt has been reduced. Many commentators believe that the reason for China to reduce its holdings of US bonds is not solely to diversify allocation and divert investment risks, but also based on the strategic “financial decoupling.” But the US Department of the Treasury announced on January 19 that in November last year, the report on international capital flows shows that China and Japan and other two major overseas debtors have increased their holdings of US Treasury bonds, of which China increased its holdings of 12.4 billion US dollars in November, ending the trend of selling for the first time in eight months. In particular, the timing of the increase in holdings coincided with the Biden-Xi summit in November last year, which is an indication of giving favors for good relations, reflecting the subtle changes in China-US relations.
The currency exchange rate has always been a focal point of the US-China negotiations. The US is concerned that China is deliberately devaluing the RMB to favor its producers’ exports and to eliminate the impact of US tariffs. During the Trump administration, the US reached an agreement with China to curb exchange rate manipulation, which could lead to penalties if China manipulates the RMB exchange rate. In recent years, due to the Fed’s cycle of interest rate hikes, the US dollar has continued to go strong while the RMB has depreciated. On November 8 last year, the US Department of the Treasury released its second annual report on the economic and foreign exchange policies of its major trading partners, placing Taiwan and China on the currency manipulator watchlist. With the recent sharp fluctuations in the exchange rates of the US dollar and the RMB, communication between the two sides on exchange rate stabilization has a positive impact on the stability of the two countries and the global financial markets.
As the currency competition between China and the US heats up, it is challenging for the RMB to overcome the US dollar dominance. The Bank of China launched e-MPay, a cross-border payment system, a few years ago to provide more services to small and medium-sized enterprises engaging in cross-border business between China and the US. Chinese enterprises will now be able to receive RMB rather than US dollars directly from the sales of US e-commerce platforms, and RMB has also delivered an eye-catching report card in cross-border payments. According to statistics, RMB’s share of cross-border payments and revenues rose to a record 54% in August last year, surpassing the 41% share of the US dollar. The US side may be thinking that this is China’s way of challenging the “dollar hegemony”, and this issue might have been discussed at this meeting.
In all fairness, the US-China financial dialogue is indeed conducive to economic and trade relations between the two countries as well as to global financial stability, but one should not be overly optimistic. After all, the US-China relationship is bound to be both competitive and cooperative. In particular, the US has taken advantage of its position as a financial powerhouse to pressurize the Chinese side financially, and the “financial decoupling” has yet to be completed.
（Prof. Lee Wo-chiang, Department of Banking and Finance, Tamkang University）
（Translated to English by Chen Cheng-Yi）
