US-China relations: parting clouds or eye of the storm?

On 9 July, US Treasury Secretary Janet Yellen returned from her four-day trip to Beijing saying her visit represented a ‘step forward’ in US-China relations. The sigh of relief from investors was audible.

Relations between the world’s two largest economies have been troubled since the start of the Trump presidency in 2017. Since then, we’ve seen rows over tariffs, intellectual property, alleged espionage and naval patrols in the South China sea (to name but a few). The ongoing turbulence in such a vital relationship has given investors globally an extra helping of anxiety they didn’t ask for.

But does Secretary Yellen’s successful visit mark a turning point? Or is the current bonhomie just an interlude between further bouts of tension?

Two countries, both alike in dignity

Though relations have been civil of late, both sides have cultivated a laundry list of complaints about each other. While disputes over trade characterised the early phase of the dispute under President Trump, under Biden the focus has moved to industrial policy.

These frictions have resulted in a much more rigorous US sanctions regime to combat Chinese support of strategically important sectors, particularly semiconductors.¹ China has responded, limiting access to some rare metals² and components for solar panels.³

Other frustrations have been levelled at China. In particular, Taiwan (off the coast of mainland China) remains a focal point for tension, particularly in the lead-up to Taiwan’s presidential election in January. America’s allies in the region, particularly Japan and Australia, have been watching China’s military build-up with mounting alarm.

Ongoing diplomatic engagement with Russia, despite Moscow’s invasion of Ukraine, has raised suspicion among America’s allies in Europe.

What we have joined together, let no row put asunder

In contrast to the diplomatic wrangling, the depth of the economic relationship between the two countries remains more globally significant than any other. The value of goods traded between the two countries amounted to over $700bn last year, the largest amount traded between any two countries globally.

Interconnection between the two economies was evident during the COVID-19 pandemic, with lockdowns in China and supply chain stress reflected in heightened inflation worldwide.

What’s more, to tackle global challenges, including climate change, global security and artificial intelligence, the two countries have to work together. Establishing a common framework for monitoring the emergence of future diseases, essential for preventing a repeat of COVID-19, is another area where the US and China have a common interest. Making progress in these areas requires both parties to put aside their differences and collaborate.

Tension is the order of the day

We believe US-China relations will balance the political desire for confrontation with economic interests, keeping investors on their toes. Short-term ruptures in relations will always have the capacity to surprise markets, as evidenced by a spat over an alleged surveillance balloon in February of this year.

Nevertheless, we judge the countries’ shared interests will be enough to keep relations from breaking down completely.

For Chinese assets, we think the recent calm in US-Chinese relations has the potential to provide a support to improved performance. However, given the fundamental disputes between the two nations and the relationship’s vulnerability to shocks, we do not expect this to provide a sustained recovery.

1. Source: https://www.reuters.com/markets/us/us-heightens-export-controls-advanced-chip-gas-turbine-engine-technologies-2022-08-12/ 

2. Source: https://www.reuters.com/technology/us-firm-axt-applying-permits-after-china-restricts-chipmaking-exports-2023-07-04/ 

3. Source: https://www.reuters.com/breakingviews/china-ban-would-slow-not-halt-western-solar-push-2023-02-03/