If President Trump and the Republicans seem uninterested in using human rights issues as a means to punish China, then the likelihood of Elizabeth Warren or Bernie Sanders doing so should be considered a new investment risk if Trump loses the White House in November 2020.
The trade war variable is already known. It has been centred on Hong Kong since the summer, and the political aftermath of its protests: a blot on China’s already poor human rights record. It gives Washington a reason to go after China beyond trade.
In Hong Kong, human rights violations are a bit tricky even if the protesters are battling for a right to self-governance. By and large, millions of people have been allowed to protest there without punishment, something that would never be allowed in mainland China.
Beyond some heavy-handed police action against a few anti-Beijing protesters, and the incarceration of some activists, the Hong Kong crackdown has been a non-event: a few firecrackers here and there, but nothing sustainable or long lasting.
That said, the real easy sell for Washington’s human rights watchers rests in Xinjiang, located in far western China, light years away from all that glitters on the South and East China Seas.
For a little over a year now, China’s Uighur Muslim story of religious persecution has gained headlines, another negative for U.S.- China relations.
China calls it much ado about nothing. The region is a potential powder keg, an important transit route on their Belt & Road Project, and needs to be tamed. China can’t have Western China blow up with anti-government protests if it wants to develop that part of the country as a gateway to the undeveloped Central Asian nations nearby.
The U.S., meanwhile, is saying that China is putting ethnic minorities in internment camps.
Worth noting, official Washington has always been wary of China’s One Belt, One Road (OBOR) initiative. They see it as a new attempt by Beijing to use soft power to forge allegiances and possibly create vassal states in Central and Southeast Asia.
That squarely puts OBOR on the desks of foreign policy planners in the Department of Defence, Pentagon and the Department of State, not just on the desks of the capitalists inside the Commerce Department.
For its part, China calls these Uighur facilities reeducation camps. What goes on inside is relatively unknown. It’s probably not a public school setting, learning Taoism and the history of the Han Dynasty. Then again, no one is seriously comparing them to a World War II-inspired death camp either, including the higher-ups at the State Department.
Whatever it is going on there, the picture is not good. The Guardian reported today on drone footage showing people allegedly heading to the “re-ed” facilities sitting blindfolded and handcuffed on the ground.
Simply put, all of this gives Washington policy makers new ammo to fire against Beijing.
What is clear is that the Washington bureaucracy and legislature are eager to punish China for more than just unfair trade practices.
This opens up an entirely new can of worms for China-bound investors.
China probably knows this already, but Washington is setting the table for sanctions based on human rights violations.
These could be individual sanctions against those deemed responsible for said violations, or against corporations deemed to be supportive of it, whether they are public or private.
Investing in China was supposed to get easier. Nope. It’s getting harder. Political risk is to blame.
“We look at the intrinsic risk of a company when investing in China’s A-shares,” says Pedro Zevallos, co-portfolio manager at Dalton Investments, a 20 year old boutique investment firm with $3.4 billion under management. They are primarily focused on Asia. “You need to know the Chinese management team to make sure there is an alignment of interests there before investing. If things go wrong for the manager or for the company, we want it to hurt him and the business as much as it is going to hurt us as investors,” he says.
“The process of investing in China is not perfect, and we try to avoid crises by avoiding state-owned enterprises,” he says about the potential for sanctions. “It’s easy to make mistakes. Hopefully you make less mistakes.”
There are two bills circulating Congress that target China’s human rights record, both spearheaded by Florida Senator Marco Rubio.
Trump might be forced to sign one of them or risk vetoing a bill that makes him appear soft on China at a time when he is trying to quell a raging trade war he started a little over a year ago. (Don’t be shocked if this comes up to vote before any ink dries on Trump’s “great deal.” Needless to say, deal dead if that happens.)
Should the bill hit the President’s desk, Trump would be in the exact position he was in during Russian sanctions legislation. Had he rejected the increased financial pressure against Russian corporate giants like Gazprom, he would have given his political opposition fresh content for their Russian collusion narrative.
Deputy Secretary of State John J. Sullivan co-hosted an invitation-only panel discussion for United Nations delegates and nongovernmental organisations regarding the human rights situation in Xinjiang on Monday.
Sullivan brought in alleged victims of China’s policy of forced integration among not only Uighurs, but also ethnic Kazakhs, Kyrgyz and other Muslim minorities in Central Asia.
According to the State Department’s office, China’s “repression campaign includes the mass detention of more than one million individuals in internment camps since April 2017.”
The discussion, announced to the press this morning, is meant to pressure Beijing to release the Uighurs, something China could only do if it admitted to holding them against their will in the first place.
Such a move would have to come with guarantees from Washington. What might those guarantees be? How about, leave us alone in Hong Kong and we will let Muslim minorities live separate lives from the rest of us? Or we free the Uighurs and you promise not to sanction our surveillance companies? Otherwise, what is this for the Chinese government? Beijing already knows of Washington’s penchant for using human rights as a means to punish countries for not listening to them.
Meanwhile in the markets, Wall Street is both clamoring for Trump’s amazing best-in-show trade deal and expecting it to get worse at the same time.
A lot is riding on the status quo for big investment firms like BlackRock, whose iShares exchange traded fund products are major China investors.
Over the last two years, China stocks and bonds have become new products for the fund industry.
China bonds are now part of the Bloomberg Barclays Global Aggregate Index. China A-shares are now a part of the MSCI Emerging Markets Index. Both stocks and bonds will soon be part of JPMorgan’s collection of indexes.
The number of securities included in these indexes is increasing. Any fund bench marked to those indexes is putting money into China.
With China becoming an important component of the global portfolio balance of American retirees, it exponentially increases the influence of a new China lobby stemming from the finance industry, and not multinational corporations who manufacture in China.
The financial industry, long a power in Washington not unlike defence contractors, big pharmaceuticals and oil and gas, would be keen to assure that a President never sanctions or penalises Chinese companies as it could have a detrimental impact on retirement funds.
In reality, sanctions are more likely to prove merely a nuisance that gives analysts, portfolio managers and index providers more work to weed out Chinese companies who may be bad actors.
To some in Washington, though, China’s growing position in American investment funds is a potential “checkmate.”
“China’s companies face state-backed decision-making without any accountability or commercial motives. They are strategic in nature,” said on Washington think tank operator working with the government on China and could not be quoted on the record. “In that case, they will win not sometimes, but all of the time. That’d be the new world. China wins and we lose, even though we dominate the economic domain.”
Human rights concerns may be where Washington has the leverage to bring China to heel, at least in spots. Banning investments in certain companies, or making it a riskier endeavour to do business with them, plays right into Trump’s hands.
Human rights is going to be one way Washington gets that done. The other way will be bringing up the national security issue.
The threat of sanctions is real. Whether the U.S. goes through with it is anybody’s guess.