Michael Zezas: U.S. Policy and Investment Restrictions on China

As reports that the White House may be considering more impactful approaches to Chinese investment restrictions reach investors, how much should they be reading into these policy deliberations?

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Welcome to Thoughts on the Market. Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 1st at 10 a.m. in New York.

The influence of U.S. policy deliberations on financial markets was once again on display this week. Fresh reports that the White House continues to consider implementing rules that would restrict some investments in China, shouldn't surprise regular listeners of this podcast. After all, the U.S. government has been quite public about its intention to keep U.S. resources from supporting the development of key technologies in China deemed critical to U.S. economic and national security. But what might be a bit surprising was a report suggesting that one approach to achieving this goal could be quite different than many anticipated. In particular, the White House is reportedly considering blanket bans on investing in certain sectors of concern, rather than a tailored investment by investment review. Following the news, China equity markets have moved lower and many of our clients see a link.

However, we think investors shouldn't read too much into one media report. We emphasize that the media reports on this topic are full of hedged and subjective language. While it could very well be true that the administration is considering this more severe approach, policy deliberations of all kinds typically consider multiple options. So, the consideration of this approach doesn't inherently mean it's the most likely outcome.

But we do think one reliable read through from this report is that the U.S. is likely to enact some form of investment restrictions with regard to China. So investors do need to grapple with what this could mean. It could drive concern among investors around impacts to tech concentrated and R&D heavy sectors of the China equity markets. But also consider that such actions underscore emerging opportunities in geographies our colleagues have become quite positive on, like Mexico and India, markets that could benefit from U.S. multinationals having to shift new tech sensitive production away from China.

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