De-risking, not decoupling: What’s this G7 strategy against China?

Source: The post is based on the article “De-risking, not decoupling: What’s this G7 strategy against China?” published in Indian Express on 23rd May 2023

What is the News?

G7 countries have said that they would build economic resilience for themselves, based on a strategy of diversifying and deepening partnerships and de-risking but not decoupling.

The word “de-risking” was again used in the statement to describe the G7 countries’ stance towards China on economic matters.

What is de-risking?

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.

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.

Why is there a focus on de-risking instead of de-coupling?

De-risking ties with China became a more regular part of diplomatic conversations 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 has said, “In this era of volatility and uncertainty, it’s important to de-risk the global economy and yet to ensure that there is very responsible growth”.