The meeting between US President Joe Biden and Chinese leader Xi Jinping at the G20 Summit in mid-November marked a turning point for the capital markets in a fraught period for US-China relations.
Since the Bali conversation – the first meeting of the two superpowers since 2019 – overseas-listed Chinese equities have rebounded from their post-Covid lows. As of January 10, the Hang Seng China Enterprise Index of Chinese stocks was up more than 20%, while the Nasdaq Golden Dragon China Index of US-listed Chinese equities had gained 37%.
Yet despite the apparent thaw in diplomatic relations, the many rifts between the two sides – spanning ideology, geopolitics, security, trade and the battle for tech supremacy – are unlikely to be bridged easily, argued a panel of experts and academics at the recent BNP Paribas Global Markets Conference APAC in Singapore.
“[Beijing and Washington] now seem to be interested in resuming some of the communications and dialogues, officially or semi-officially, which were cut off,” said Xingdong Chen, Chief China Economist at BNP Paribas, speaking at the Singapore event. But there remain “so many irreconcilable differences” between the two nations, he added.
A strategic and ideological threat
The future trajectory of relations between the two countries will inevitably be determined by strategic competition, China foreign policy experts have observed. That dynamic will be viewed by many within – and indeed some outside – China as containment rather than competition, resulting in continuing tensions.
Moreover, China under Xi has hardened its resolve to follow its own ideological path rather than moving towards a more liberal, Western-style approach. Guest speakers at the BNP Paribas forum say this will result in Xi and his top brass speaking out more vocally against the US on ideological, political and human rights issues.
Fears have grown in recent years that such heightened rhetoric will lead to armed conflict – yet none of the BNP Paribas executives speaking at the event saw this as likely.
“There is sincere interest in Washington and Beijing to stop a freefall deterioration in bilateral relations,” said Chen. After all, he added, the two sides remain keen to discuss cooperation on areas of mutual concern, such as climate change, public health and food security.
US allies will fall in line
Still, competition between the US and China looks set to be particularly fierce over technology.
The US last year imposed sanctions to limit Chinese access to advanced chip technology and has pressured allies to follow its lead. For example, the Netherlands initially resisted calls to curb shipments of its cutting-edge chipmaking machinery to China, but eventually relented in December.
And despite recent calls by France and Germany for engagement with China, other EU countries seem likely to side with the US on strategic and security issues, fuelling a technological decoupling.
“Especially when it comes to areas that European countries deem to have national security implications, there will be restrictions on Chinese investment,” said Chen.
China’s enduring allure
However, foreign companies remain committed to doing business with and in China where they can – as evidenced by continued foreign direct investment into the country in 2022.
While confidence in China-dependent supply chains was shaken by the near-three-year pandemic-induced hiatus, the efficiencies of Chinese manufacturing make it hard for global companies to justify moving away.
Politically, too, China appears to be in a strong position. Following the 20th Party Congress in October, Xi and his top leadership have a renewed mandate to implement an ambitious vision to further the country’s economic development.
“These leaders are strong and committed to delivering their promise to modernise China’s economy. The rising trend is unstoppable,” concluded Chen.
The recent rebound in Chinese equity valuations reflects investors’ belief that Xi also has a very strong incentive to re-accelerate GDP growth, which the World Bank predicts will recover to 5.2% in 2023 from 2.7% last year.
For that to happen, foreign investment and market participation in China will be crucial. A cooler phase for US-China relations would lend more weight to that improved outlook.