DE-RISKING

1. Context

2. What is De-risking?

• De-risking, a finance concept that is a diplomatic buzzword currently, refers to a reduction of reliance on China in the economic sphere while not turning inwards or trying to prevent Chinese growth. Decoupling is used here as an alternative to an economic boycott.
• The US State Department describes de-risking as the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage risk.
• Simply put, de-risking is to move businesses away from areas that are considered risky in terms of the returns they could generate.
• In the context of China, de-risking can be interpreted as a reduction of the reliance on China in the economic sphere- for the supply of materials or as a market for finished goods- so that potential risks to trade and disruption of supply chains are reduced.

3. What is Decoupling?

• The objective is to sever or significantly reduce economic and trade ties with a specific country or region.
• Decoupling Focuses on reducing economic interdependence for political, security, or strategic reasons.
• Emphasizes the creation of alternative supply chains, markets, and partnerships outside the targeted country or region.
• This may have negative economic consequences for both the target country and the decoupling country.

4. How is de-risking different from Decoupling?

• Decoupling refers to the deliberate dismantling- and eventual re-creation elsewhere of some of the sprawling cross-border supply chains that have defined globalization.
• An expert has explained the two terms using an analogy from an investment perspective: Decoupling means cashing out your whole portfolio; de-risking means selling what you consider the riskiest assets, say, deleveraging on your margins.
• Derisking ties with China became a more regular part of the diplomatic conversation after the European Commission president said that it is neither viable nor in Europe's interest to decouple from China.
• India too has endorsed de-risking. India's Foreign Minister said, " In this era of volatality and uncertainity, its important to de-risk the global economy and yet to ensure that there is very responsible growth.

5. China's view on recent shift of US

• China considers the actions of US to actually be of de-coupling nature and not de-risking.
• It has been facing pressure from the US in fields of information technology and manufacturing.
• US ban on export of certain advanced chips- which have military or AI applications to China.
• Histroy of de-risking in context of financial sector, but same sense applies to China also.
• Banks de-risk by  denying services to aid agencies that work in places like syria that are under sanction.
• With regard to finance as per experts De-risking can create further risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities and persons into less regulated or unregulated channels.

6. Why does G7 prefer De-risking and Not Decoupling?

• Economic Interdependence: The G7 countries recognise the significant economic interdependence between themselves and china. Decoupling would result in major disruptions to global supply chains and trade, potentially causing economic harm to all parties involved.
• Market Opportunities: China represents a large and growing market for G7 countries exports. By pursuing de-risking instead of decoupling, the G7 aims to maintain access to the Chinese market and continue benefiting from trade and investment opportunities.
• Global Economic Stability: Decoupling from China could have adverse effects on global economic stability. The G7 countries understand the importance of maintaining stable and predictable economic relations to promote global growth and prosperity.
• Diplomatic Engagement: The G7 countries believe in engaing with China diplomatically to address concerns and promote mutually beneficial cooperation. De-risking allows for constructive dialogue and negotiation, which can lead to more favourable outcomes for both sides.
• Global Interest: The G7 emphasizes that a growing and responsible China, playing by international rules, is in the global interest. They recognise that economic resilience requires a balance between managing risks and fostering economic cooperation with China.