Donald Trump pledged to be tough on China and he was true to his word. But does the end of the US president’s four years in office signal a change in direction for US/China relations? Many emerging market managers believe the incoming US leader, Joe Biden, is set to take a lighter approach than his predecessor but this doesn’t equate to a wholesale shift in stance.
‘The superpower competition between the US and China will continue to dominate under a Biden administration,’ said Kunjal Gala, lead global emerging markets portfolio manager at Federated Hermes. ‘Instead of a full reset of Trump’s tariffs and technology restrictions, the Biden administration is likely to deliver recalibrations.
These ‘recalibrations’ could also entail a change in rhetoric. Rob Petty, co-CEO and co-CIO for Fiera Capital (Asia) is among those who think that Biden’s diplomatic experience will provide a more positive steer.
‘We expect the tone of US/China relations to become more professional and less polemical under a Biden administration. The foreign and trade policy leadership teams in this administration are deeply experienced internationally and with China specifically,’ he said.
‘They have personal relationships across the board, not the least of which is between President Biden and President Xi. This doesn’t mean, however, that policies will be easily reversed. The US administration’s stance towards China will continue to be cautious and concerned in many areas, while also trying to find areas of cooperation.’
This will be welcomed on the ground in Asia, according to Jian Shi Cortesi, investment director for Asia and China growth equities at GAM. Cortesi said a less brash stance from Biden would help improve positivity in several sectors.
‘Trump’s aggressive approach, including verbal threats, tariffs and technology bans, has been a major source of market volatility for Asia/China equity during the Trump presidency. Markets don’t like uncertainty. Under Biden, we expect to see a period of relative stability between the US and China and less negative news flow, which would be favourable for market sentiment.
’Cortesi believes China has been forced to reflect on its independence following the war of words with the Trump administration. This has led to an acceleration of existing plans to scale-up internal consumption.
‘At the same time, China is pouring billions into developing self-sufficient technology supply chains. In the area of clean technology, China’s goal of carbon neutrality by 2060 is not just an environmental win, but also provides huge business opportunities. China is a leading global player in solar panels, wind turbines and lithium batteries. Domestic consumption and technology advancement are two of the best investment themes in China.’
Resilience and revival
Gala (pictured) said China has been able to weather the worst of the US trade dispute without taking a meaningful knock to its global standing. The pandemic may have curtailed growth in some areas, but he said an expected growth of around 2% shows remarkable resilience. This has fed through to non-Chinese companies keeping their operations in China with an eye on the long-term potential of the country.
‘Recent business surveys show many European and American companies are staying put in China. While some production and supply chains will eventually shift overseas, those moves will be slow and drawn out. The pattern of setting up shorter supply chains to serve consumer demand in the US, Europe and Asia will continue.
‘Locating final assembly closer to the point of demand, say in Mexico for the US, or Eastern Europe for Western Europe, lowers logistics costs and shortens delivery times. China is both a major market and the most obvious place to locate a supply chain to serve the rest of Asia.
‘Business logic does not demand a rapid or drastic relocation of supply chains out of China. So, while companies may need to invest in supply chains in other locations, they also need to keep investing in their China operations,’ he added.
Even a significant shift in onshoring by US firms is unlikely to cause too much of a headache, said Min Chen, head of China at Somerset Capital. Citing the same point about resilience that Gala mentioned, Chen said China has been reducing its reliance on external actors steadily since 2014.
‘In fact, from 2014 to 2019 (2020 figures not available yet), net export was a drag on China’s GDP growth. In its place, more sustainable sources of growth like domestic consumption have increased in importance,’ he said.
Echoing Gala’s point about European and US companies staying put, Chen added that the emphasis in China will be to show it is the best long-term bet. ‘It has the world’s largest emerging middle class, which many companies simply cannot ignore.
‘For example, Tesla opened its Shanghai Gigafactory in 2018 during the height of US/China trade tensions. Covid-19 also illustrated China’s manufacturing prowess with its ability to quickly restart and, in many cases, re-pivot its supply chain to gain share. Overall, while many multinational companies will continue to implement a “China Plus” strategy and diversify their operations, we do not expect an exodus of manufacturing capacity.’
Chen has therefore adopted a long-term, bottom-up approach to China and noted how renewable energy companies such as LONGi and Longyuan Power could benefit from greater cooperation between the two nations when it comes to a global effort to combat climate change.
Petty is among those not overly worried about the influence of reshoring on China’s economic strength and believes that investment prospects are too compelling a universe to ignore. However, he said a closer focus on which industries could be affected by changes in the business environment – which neatly align with those Trump focused his tariffs on – would be an intelligent approach to the country.‘
There will indeed be industry and company-specific impacts from reshoring, such as technology and telecom supply chains – however the scale and cost advantages of China are very hard to replicate or replace and we should not expect these transitions to happen quickly, nor do we expect the impact to be hard for China to manage overall.
‘We are also seeing a notable intra-Asia supply chain system developing with China at its centre, and we should expect this reshoring and regional supply chain rend not only in North America but intra-Asia and intra-Europe as well,’ he added.
Asia first?
This intra-Asia element will be further solidified by the Regional Comprehensive Economic Programme, which was signed at the end of 2020 to offer a bilateral means of ensuring global trade for the pan-Asian region. Gala said that President Biden may look at how he strikes his own deals with trade partners if China is spearheading unorthodox measures.
Denise Simon, co-head of emerging market debt at Lazard Asset Management, believes a broader approach could extend beyond economics and bleed into how Biden approaches China on a political footing as well.
‘Biden is unlikely to back down on crucial issues such as abusive trade practices and technology. The key change is that Biden’s administration will take a multilateral approach to enlist the support of US allies to present a united front. These issues have been simmering for years and we do not expect any swift resolutions, nor do we see them boiling over into a full-blown crisis.’
Simon, who is named on seven emerging market debt funds at the US group, said Biden has been vocal about his focus on China’s ‘abusive practices’, notably in stealing intellectual property, illegal subsidies and technological innovations. These, she warned, could be potential sticking points for when Biden and Premier Xi Jinping sit down to talk.
With a climate crisis, domestic challenges over the legitimacy of his rule, and the ongoing effort to contain an increasingly lethal pandemic, Simon noted that China will not be at the top of Biden’s agenda when he finally gets his feet under the table in the Oval Office.
‘Unlike the Trump administration, which pursued tougher policies unilaterally, Biden will be less confrontational and more diplomatic. However, US/China relations do not seem to be a top priority for Biden, so while further tariffs don’t appear to be on the cards, we are unlikely to see an immediate and drastic roll-back of existing tariffs,’ she said.
It is partly for this reason that Simon is bullish on the Chinese renminbi for the China story alone, rather than how a new US president responds to existing economic challenges.
‘China is likely to lead a sharp recovery in global growth in 2021. We also view local rates in the country as attractive versus peers. Our stance is based on positive fundamentals in China, rather an expectation of positive developments in US/China relations.’
This article appeared as part of a special publication focused on China, which came out in January 2021.
