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

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Source: The post is based on the articleDe-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”.

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