China’s emergence as a global economic power has remade the geopolitical landscape. Beijing appears to be in a hurry to decouple its economy from the U.S. and at the same time replace Washington as the top player in the regional and global hierarchy.

Overview

With more than 99% of the 33 million businesses2 in the U.S. being privately held, institutional investors have long used private equity (PE) as a means to tap into this vast ecosystem of private companies. The reason is clear: returns from private equity have consistently ranked among the highest of any asset class on a 5-, 10-, 15- and 20-year basis.

However, that attractive performance historically has been difficult to access by investors other than large institutions. For example, in a traditional PE vehicle, investors must commit to funding high dollar amounts, often exceeding $5 million, which are paid in over time as and when fund managers find companies to acquire. These are known as draw-down funds and are best suited for large investors given the significant amounts and unpredictable timing of the capital required. The payback of capital is also unpredictable. A PE fund can go many years before selling its holdings and returning principal and gains to its investors.  Until then, investor capital is locked up with few means of realizing value.

China-Russia Pact: Tread with Caution

Over the past decade, China has forged closer links with Russia, another centralized autocracy, to challenge U.S. hegemony.  But it’s an unequal relationship. Three decades ago, Beijing and Moscow were economic equals. Today, China’s economy is ten times larger than Russia’s. In this relationship, China is the economic powerhouse, while Russia provides the military expertise to modernize China’s armed forces.

Although Russia’s invasion of Ukraine has turned Vladimir Putin into a pariah, Xi has remained steadfast in his backing for the Russian president. China has made its strategic alignment with Russia a key cornerstone of its foreign policy. Xi’s support puts at risk dealings not just with the U.S. but also with the European Union, a trade relationship worth $777 billion.1 Trade with the U.S. accounts for another $657 billion.2 China provides about 18% of U.S. imports and over 22% of the EU’s.3

Sharp Elbows: China’s Assertiveness Riles Up Neighbors

For the European Union (EU), China’s support for Russia was just the latest source of friction. As world’s second and third largest economies, China and the EU have been at an impasse since March 2021 over human rights concerns. Countries that were once part of the Soviet empire, such as the Czech Republic, see Xi’s moral support for Putin as menacing to European security. Last year, the bloc imposed human-rights-related sanctions on China for the first time since the crushing of the Tiananmen Square protests in 1989.  

And it’s not just faraway Europeans who are wary. China's neighbors are nervous about the country’s economic and military dominance in the region. Japan seeks a closer regional partnership with the U.S., and South Korea, under a new president, is now willing to downplay historical grievances against Tokyo to form a tighter front against Beijing. India, smarting from border skirmishes with China, is actively engaged in the Quadrilateral Security Dialogue, a regional grouping, along with Australia, Japan and the U.S.

Trade Wars, Tech Spying and Human Rights Hurt U.S.-China Dealings

The U.S.-China trade war has led to large share shifts in global trade. U.S. imports from Vietnam rose from 9% to 20% of those from China in the last four years.8 And China now accounts for a smaller share of U.S. imports and has seen a noticeable decline in the share of tech-related imports. Beijing’s intellectual property rights infringement has led to a blacklisting of exports to Chinese companies. Chinese telecommunications and surveillance industries face their biggest hurdles importing from the U.S.

The U.S. tech embargo, which began as a narrow effort against a Chinese telecom giant, has expanded to at least 60 firms. Beijing is getting used to being sanctioned. During Xi’s tenure, three different U.S. administrations have penalized China for its human rights and trade practices. The most recent penalties ban imports of products made with forced labor from Xinjiang province, in response to reports of atrocities against Uyghurs and other Muslim ethnic minorities.  There is a long list of "unfair" Chinese practices including not adhering to its purchase commitments within the Phase One trade deal signed in February 2020.

China is also racing to challenge U.S. for tech supremacy in several areas like semiconductors, Artificial Intelligence, 5G technology and green energy.

Preventing Taiwan Independence Preferred to Forced Unification

The war in Ukraine has also put the spotlight on Taiwan’s precarious international position. Beijing asserts that Taiwan, an island of 24 million people, 100 miles off its coast, is a renegade province that must be brought under mainland control. China has sought after the island since 1949 when nationalists fled the mainland after losing the civil war. Chinese leaders became more emboldened to push for unification in part by Western silence over the Communist Party’s crackdown on democracy in Hong Kong. Taiwan leaders rejected China’s offer of “one country, two systems.”

A voluntary reunification seems remote, leaving China with the military option. Washington has maintained a policy of “strategic ambiguity” for more than 70 years, supporting the One China policy but also using its military to deter the Chinese from invading Taiwan. As long as the U.S. had total military superiority, Beijing had to temper its ambitions, but China’s armed forces are catching up. In its most recent report, the Pentagon warned that China was developing technologies to conduct long-range precision strikes as well as space and cyber capabilities to counter U.S. dominance.

¹ OECD, Haver
² OECD, Haver
³ Council for Foreign Relations, Haver
⁴ Bloomberg, Haver
⁵ The Guardian
⁶ CEIC, Haver, CNBC
⁷ World Bank
⁸ US Census Bureau, Empirical Research Partners