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China Decoupling: Why & How



  Sep 20, 2023

China Decoupling and De-risking:What,Why and How



Decoupling involves the reduced connection between China's financial markets and the rest of the world, as well as shifts in global supply chains and investments.
On the otherhand, de-risking refers to the strategic efforts made by businesses and industries to decrease their dependence on China for essential materials and as a market for their finished products.
The primary goal of de-risking in this context is to minimize potential risks associated with trade disruptions and interruptions in global supply chains.
By diversifying sourcing and market strategies, companies aim to enhance their resilience to economic or geopolitical challenges tied to their China-related operations.Here's a more detailed explanation:

Why Decoupling is Happening:

Economic Challenges: China has faced economic challenges, including a slowdown due to COVID-19 restrictions, a property market crisis, and tensions with Western countries.
 
Investor Sentiment: Concerns about China's economy, governance issues, and geopolitical tensions have led foreign investors to reduce their exposure to Chinese assets.
 
Global Supply Chain Shifts: Companies are diversifying their supply chains, reducing reliance on China, and adopting a "China plus one" strategy.
This involves maintaining China as a manufacturing base while establishing an additional base in another country.
 
Taiwan Issue: The Taiwan issue has also played a role, as tensions between China and Taiwan have made investors and companies cautious about overreliance on Chinese supply chains.

Actions Taken:

Capital Exodus: Foreign holdings of Chinese equities and debt have significantly decreased, with a substantial outflow of funds from Chinese markets.
 
Avoidance of Chinese Assets: Investors have increasingly adopted an "avoid China" approach in their portfolios, seeking alternatives in other emerging markets.
 
Supply Chain Diversification: Companies are diversifying their supply chains by relocating some manufacturing operations to other countries to reduce dependence on China.

Consequences:

Market Divergence: China's stock market performance has diverged from global trends, with significant losses in recent years.
 
Reduced Global Influence: China's clout in global portfolios has diminished due to the decrease in foreign holdings of its assets.
 
Economic Implications: Decoupling has raised concerns about China's economic stability, foreign investment attractiveness, and the ability to maintain growth.
 
Supply Chain Shifts: Companies are restructuring their supply chains to reduce dependence on China, increasing self-reliance, and exploring alternatives in countries with lower geopolitical risks.
 
In summary, decoupling in the context of China refers to reduced interdependence between China's financial markets, global investments, and supply chains.
It is driven by economic challenges, investor sentiment, global supply chain shifts, and concerns over geopolitical issues like the Taiwan dispute.
Companies are adopting strategies like "China plus one" to diversify their operations and reduce dependence on China.


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