It's worth noting that China's capital controls provide some insulation against this problem-- though they obviously cannot work to compel ongoing outside investment.

China's currency controls actually made the problem worse--a lot of non-Chinese companies immediately backed off on Chinese investments (i.e., factories, etc.) as soon as the controls were introduced.

What do you mean? China has had currency controls for a very very long time. It doesn’t affect foreigners or foreign companies so much, they give us an easy out (we can exchange whatever we earn automatically).

I'm referring specifically to the capital-related currency controls.

A few years ago China clamped down on how much cash a person could send/take out of China or exchange for foreign currency.

It impacted a number of Chinese companies with operations in the U.S., especially Chinese real estate developers like Greenland, and basically eviscerated the EB5 visa market. I had a number of clients cancel deals because they couldn't get their money out of China.

Yes, they clamped down on Chinese quotas, but not foreigner quotas. Your comment:

> --a lot of non-Chinese companies immediately backed off on Chinese investments (i.e., factories, etc.)

That meant foreign companies on Chinese investments, not Chinese companies on foreign investments, right?

The rule applies to Chinese companies and to the yuan-denominated financial accounts of foreign companies physically doing business in China (meaning having an office or facility in China), which is why it had a dampening effect on foreign investment.

Annoyingly, if you ask a representative of the Chinese government if such a rule exists (before you have sent money into China), they will tell you no such rule exists, or that the rule doesn't apply to foreign companies. They wait until the money is in China and you try to transfer it out of your bank account to let you know that your company is also subject to these rules.

Several US clients of mine found this out the hard way (a few years ago, before the trade war).

The requirements for doing forex are very different for both entities (and I know this from being a foreign entity with Chinese income and a Chinese bank account). There isn’t one rule, it’s a set of regulations.

Doesn't China require that a lot of ventures be majority owned by Chinese citizens? I could see that money ending up 'contaminated' and hard to pull back out of the country later.

Some JVs have a 51-49 rule, but these are mostly being liberalized. Basically, most foreign companies are underwater on their quotas so they can convert as much as they need to. All they have to show is that they either converted that much to RMB earlier or earned that much and paid taxes on it.

Tech companies like Microsoft fully own their Chinese subsidiary.

c.f.: the Impossible Trinity

https://en.wikipedia.org/wiki/Impossible_trinity

I"m having trouble really understanding what is going on in the linked conversation, I hate to admit it.

The most simplistic interpretation I have is China and the US are playing a game of financial chicken. US raises tariffs and China lowers its currency. At some point, based on China's slowing economy and debt load this could trigger a major global recession since China will no longer be able to prop up economies that have been relying on its cash to purchase imports (e.g. Australian resources). In fact, China probably has to do this anyway at some point in time to offload the accumulating bad debt.

If anyone can ELI5 for me I would appreciate it. My impression is that Trump is betting China may just be desperate enough to seem stable (from an economy and currency standpoint) and may actually be willing to concede to his trade war. The guy in video seems to be saying that China may just accept some currency devaluation (other rich countries have done it and survived) and use the opportunity to fix some bad debt in their economy. If they do so, and they may just do so, then they can choose a policy that minimizes impact to their internal economy. That would likely cause major problems for everyone else.

I'm having a hard time seeing a good conclusion to this mess if I'm understanding correctly.

The short answer is china doesn’t have a lot of options. It’s not clear what leverage they can find, I’m guessing they just don’t want to seem weak and give in. Trade is so unfair the US has practically nothing to lose.

China is actually keeping its currency from devaluating right now(trump is playing the media) If all controls are lifted the currency will plummet. Many friends in china have expressed their desire to get out a portion of their cash, and surely nobody is thinking about investing.

> I’m guessing they just don’t want to seem weak and give in.

China has significantly more discipline than the current US administration and opposite to Trump's short-term shoot-from-the-hip approach, they are likely taking a page from Sun Tsu:

If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.

It seems to me that China has been assuming Trump's been shooting-from-the-hip and short-sighted, and allowed themselves to be outmaneuvered by him. People call Trump incompetent and bumbling and other unflattering terms, but Trump is actually very smart and is playing with a full house from a deck he stacked himself.

I agree more with this type or reasoning. He or his administration knows full well that they are holding all the aces. So the Chinese can pretend to play tsun tzu all they want, US just needs to hold. Currently it’s looking much worse for china, but hey things can change and very very quickly.

China is creating controlled inflation - they are basically printing new yuans. That might seem like a bad idea, but China is using newly created currency to buy US treasury bonds (actually buying US debt). China is basically creating a huge leverage on US and on the same time it gives USA cheap debt to buy it's own products, and weak Yuan also causes their exports to be even cheaper.

On May 2019 china had 1.11 trillion USD bonds. And at any point china may decide to sell it off - which will crash USD.

So they sell treasuries and buy them with dollars. How does this crash the Dollar?