There’s some fuss over last-second Trump administration executive orders disrupting US-China relations in ways the Biden administration can’t unwind. For better or worse, this is generally overstated. With no time to implement the orders, they’ll have few effects for President-elect Biden to wrestle with. However, one exception may have popped up last week, because it has already had a small impact on financial markets.
Before the election, the Trump administration repeatedly failed to implement its own loudly stated actions on China trade. Possibly the “best” example is the executive order (EO) supposedly securing the communications supply chain, an important issue President Trump was right to address. But there are no implementing regulations, and no meaningful action has been taken. The EO was issued in May 2019.
The high-profile TikTok EO’s are stalled. More important, the COVID supply chain EO came months late and hasn’t been implemented. The phase 1 trade deal hasn’t been enforced, with regard to either export targets or intellectual property practices. There’s little reason to think EO’s appearing as the administration heads out the door will be any more binding on Biden than previous ones already partly forgotten.
The same might be said about last week’s ostensible prohibition of US investment in enterprises linked to the Chinese military. It’s vague, for instance in warning against evasion. Does evasion include creating a new overseas subsidiary which is not a US person and seemingly not subject to the EO? What are the consequences of evasion? Applications for exemptions are permitted, but will be granted on what basis?
Such questions should be addressed in the same implementing regulations the Trump administration tended not to finish. The EO suggests regulations should be written by the Department of the Treasury, despite initial steps in this case being taken by the Department of Defense. Treasury consistently postpones China action, for example delisting only in 2022 firms that for years have ignored US disclosure requirements.
JPMorgan Chase to the rescue. It yesterday announced the exclusion from its indexes of any new bonds issued by the covered Chinese firms. This may have very little financial impact in itself. The White House doesn’t know how much money the entire EO will affect, because the government amazingly doesn’t know either the amount of American investment in China or what final entities it supports.
In this context, though, the
immediate reaction from a highly visible market participant is a welcome
signal. Market institutions are willing to narrow access to capital for firms
identified as closely tied to the People’s Liberation Army, at least when the
stakes are low. Opposition will of course rise if the amount of money involved
And the EO or a successor must be clarified. Still, as a leading illustration, the four major state banks assist the PLA and are among the top 15 Chinese listings by market capitalization. An expansion of the list of military-linked enterprises should be debated, but it’s a debate well worth having in 2021. In this case, the Trump administration is leaving President-elect Biden with a potentially useful tool, not a burden.