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H.E. GAO Xiqing: Paradigm Shifts – International Investment under Global Turmoil

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The last few years have witnessed profound changes of the entire world, which are referred to as the “paradigm shift”, and this is especially the case in the last two year or so. The “paradigm shift” is different from any change we used to see, be it cyclical, temporary, one-off, or accidental. It is a shift of the way we see the world. It is profound and long-lasting. Such changes may find their roots in the following three aspects.

First, the direct conflicts between China and the United States in the recent years in trade, economics, investment have now gradually extended to the political and cultural arenas.

Second, Covid-19 has triggered dramatic lifestyle changes and transformed the way economy works around the world.

The third causing factor of such paradigm changes is the Russia-Ukraine conflict.

Viewed separately, these factors may seem like random and accidental events in the vicissitudes of our world, but when added together, they form a huge “paradigm shift”. These are not one-off changes that could be overlooked. On the contrary, they require our keen attention and in-depth understanding.

"Paradigm Shifts" in International Investment and Trade: Changes,
Challenges and Prospects

The “paradigm shift” has significantly altered the division of international investment and trade, which are reflected in the following five aspects.

 First, changes in the international division of labor. As a result of paradigm shifts, China’s role as the world factory is now under challenge.

For example, new bans on Chinese companies keep emerging on a daily basis, be it the result of Covid-19 restrictions, US embargoes, or other possible factors. Also, due to the impacts of the Russia-Ukraine conflict on the energy demand across Europe, governments are now reconsidering production, transportation, and demand. There is a growing awareness that it is unsustainable to stick to the old way, so alternatives to various products and producers will increasingly emerge.


Second, changes in international trade and transport of goods. The world economy has to some extent returned to the natural economy of the past. Of course, a complete return to the past, an economy featuring small workshops and village-based consumption would be impossible. Many people used to take the highly-globalized market for granted, considering labor division as no longer divided by country or nation. But this is not the reality. Donald Trump’s presidency has frustrated the world with rising tariffs, and now we are again suffering from route closures caused by Russia-Ukraine Conflict. These disappointing events have cast doubt on the once prosperous global economy.

Third, the change in the international people-to-people exchange. Conflicts about the epidemic and political views have caused a marked decrease in people-to-people exchanges between countries, further lessening the mutual understanding of all parties. Although we can connect through the Internet, it is completely different from face-to-face conversations. And this would no doubt bring negative influences on our previous open mindset.

Fourth, changes in the international investment landscape. Recent years have seen increase of differences in the ideological arena. Over the past two decades, the US-based CFIUS has drawn wide attention from Europe, China, Russia and other major countries. With the development of CFIUS and the politicization of the investment sector, more and more countries began to put up barriers against foreign investment. There has already been a considerable slowdown of outbound investment in China. The nation’s inbound investment, though remaining the same in terms of quantity, has also been greatly restricted in many areas, especially in high technology and miliary industry, sections related with both military power and people’s well-being.  Meanwhile, areas involving energy, electronics, and minerals also suffer mounting restrictions in both outbound and inbound investment.

Fifth, the impact of financial operations. The causing factors in this regard are twofold. On the one hand, the aforementioned political factors are luring governments to put up obstacles in investment, trade and the exchange of personnel. Take Russia as an example. The nation has been excluded from SWIFT since the Russia-Ukraine conflict, and the dollar bonds held by Russia have also been frozen, further worsening the situation. Consequently, in China, more and more people are worried about these political factors, in particular what will happen next if economic blockades are to be inflicted on China.

 On the other hand, technological development is also playing a role. Thanks to the cryptocurrency, blockchain is now increasingly being adopted to address problems that are once difficult to solve with traditional fiat currencies. Initially, various countries, especially the leading powers including China, the US, France and Russia, were opposed to its emergence, fearing that it would affect the monopoly of their own fiat currency systems. But today, instead of being suppressed, cryptocurrencies and blockchain technology are making an everlarger impact on people, things and transactions. Personally, I think this trend is unstoppable, and it will serve as a powerful booster for international economic and trade relations in the next few decades, and even hundreds of years to come. However, we have also observed hints of backlash. Recently, settlement of currencies and financial assets is slowly returning to more traditional ways of the past, such as bartering and currency payments in small scale between regions. These approaches, which originally accounted for a small proportion in the international financial field, have recently begun to further develop and expand. For example, the foreign exchange control of various countries, especially that of China, are assuming a larger role.

When such a situation arises, governments and their financial mechanisms will be very likely to enter a racing-to-the-bottom mode and be thrust into the end of no return, casting further doubts on the world economic, trade, investment and financial system in the coming period.

Seen from the cycle of world economy, what we are now experiencing is a downward period, which may last for some ten years and will eventually come to an end. One possible sign of returning to an upward trajectory would be the emergence of new law environment. The current law paradigms, such as the WTO, seem somewhat tied up. The world is now in need of a new paradigm and it calls for the willingness of governments to work together and make progress.

Creating a decisive role for the market in resource allocation

On August 26, 2022, an agreement was signed between the China Securities Regulatory Commission, China’s Ministry of Finance and PCLB, the regulator of the U.S. Public Company Accounting Oversight Board. In the past, we have only signed memorandum form, which is not legally binding in substance. Now, the new agreement is much more binding than before, showing that both sides have the willingness to cooperate, which helps to create a win-win situation. The successful signing of this agreement is beneficial to both Chinese companies going public in the United States and American companies investing in China. In recent years, law enforcement and administrative agencies in various countries have distorted the laws to some extent, using them to deal with foreign investments or matters they do not like, politicizing the law. As a law-based society, we need to adapt according to the change of rules and regulations. With our joint effort to implement the principles of a law-based society, we will eventually manage to get along with the new paradigm and make further progress.

China, the U.S., Europe, and India, have the willingness to show that their competitive platforms are fair. Or, at the very least, this is what they seem. Only by making more and more people aware of the fairness of the platform can the market economy get the role it truly deserves.

A factor specifically emphasized at the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China is to allow the market to play a decisive role in the allocation of resources. This understanding is an important experience summed up by the Communist Party of China after 40 years of development. As long as we stick to the principle and work together to implement it, development of the market economy will surely move in a positive direction. Therefore, joint efforts are needed to make it happen. We need to work together to “race to the top”, rather than “race to the bottom”. In doing so, the best investment environment would be just around the corner.

高西庆 1
GAO Xiqing

Professor, University of International Business and Economics

Former Vice Chairman and President, China Investment Corporation

Former Vice Chairman, China Securities Regulatory Commission

Former Vice Chairman, National Council for Social Security Fund of China

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