China-US Economic Ties

China-Western Tensions Reshaping Global Business

 

Geopolitical tension between China and the West has had a growing impact on global trade and investment in recent years.

Many multinational companies have begun to shift production to ‘more friendly’ countries to reduce risks of getting entangled in disputes over Hong Kong, Taiwan, the South China Sea and other concerns.

With the US imposing export controls on advanced tech items such as computer chips, plus concerns about spying and large-scale state subsidies, the ramifications for global markets have been significant.

Long-established supply chains have frayed, as Washington, Europe and Western states seek to loosen dependence on each other. That could help keep inflation and interest rates elevated.

Still, there are gains for emerging nations and tech giants on the right side of the power battle. Here’s how Western-China tensions are shaping markets.

 

1. INFLATION

US President Joe Biden is determined to bring manufacturing in strategic sectors such as electric vehicles and semiconductors back home.

TSMC, the world’s largest chipmaker, is moving some production to Germany and Japan to satisfy multinationals’ need to diversify supply chains from China.

Goldman Sachs research found that bringing production home may have inflationary repercussions, particularly if Western manufacturing does not ramp up quickly enough to offset declining imports.

“We built a globalised world for a reason, it was efficient and cheap,” Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust, said.

“If we unwind some of that, it will add cost.”

Prolonged US inflation also means rates staying higher for longer, boosting the dollar.

A stronger dollar can export inflation to resource-importing nations in Europe by forcing them to pay more for commodities priced in dollars.

Many central banks target 2% inflation; market gauges of traders’ long-term US and European inflation expectations are running higher.

 

2. FRIENDSHORING

Washington is pushing “friendshoring” – the idea of replacing China’s role in supply chains with friendly nations.

Research led by Harvard Business School’s Laura Alfaro identifies Vietnam and Mexico as the major beneficiaries of the US supply chain shift so far.

Mongolia is seeking US investment in mining rare earths, materials used in high-tech products such as smartphones. The Philippines is courting US infrastructure investment.

Anna Rosenberg, head of geopolitics at the Amundi Investment Institute, said Sino-US tensions, provide a “new lens” through which to analyse emerging markets’ growth prospects.

 

3. INDIA RUSH

India is viewed as the most able to compete with China in low-cost, large-scale manufacturing. Its large, young population and a burgeoning middle class also creates opportunities for multinationals seeing less business in China.

Indian stocks have rallied 8% this year and the prospect of investor flows into the bond market just got a boost from JPMorgan’s plan to include India in a key government bond index next year.

“India is a very large opportunity,” said Christopher Rossbach, chief investment officer at asset manager J Stern. “The global companies we are invested in are working on it.”

India’s central bank forecasts that the economy will expand 6.5% this fiscal year, while China is expected to grow around 5% this year.

Barclays reckons that if India raises its annual economic growth closer to 8% over the next five years, it would be in a position to become the biggest contributor to global growth.

 

4. CHIPS TO COUTURE

A China-West clash creates winners and losers on both sides.

The EU is investigating whether to impose punitive tariffs against Chinese electric vehicle imports it says benefit from excessive state subsidies.

US subsidies for domestic semiconductor manufacturing have boosted Intel’s shares. But the performance of big US tech stocks and global share indices are vulnerable to signs of Chinese retaliation.

Apple stock slid by more than 6% over two days in early September on reports that Beijing would ban government workers from using iPhones.

With China the world’s dominant buyer of luxury goods, Western fashion houses are also ensnared in politics. China’s top anti-corruption watchdog has vowed to eliminate what it calls the hedonism of Western elites. Chinese banks have told staff not to wear European luxury items at work.

“Higher levels of government scrutiny have started to weigh on the spending of more affluent (Chinese) consumers,” Barclays analysts Carole Madjo and Wendy Liu said in a note.

Luxury sector shares surged as China loosened Covid-19 restrictions in late 2022. Since then, with China’s economy in the doldrums and tensions with the West ratcheting up, they have slumped. European luxury stocks slid 16% in Q3.

 

5. SELL CHINA?

A faltering economy and property market turmoil mean the bearish China investment case extends beyond politics.

But the prospect of continued tariffs and the hassle of navigating US restrictions on investing in Chinese technology does not help.

With China underperforming global stocks, investors are split on how to approach this market.

A JPMorgan survey of credit investors found that 40% were bearish on China, but almost the same proportion wanted to increase allocations.

“I’m actually warming to China because everyone hates (this market) so much,” said RW Baird vice chair of equities Patrick Spencer. “Market expectations are really severe and the reality is slightly better.”

 

  • Reuters with additional editing by Jim Pollard

 

ALSO SEE:

 

US, Euro Firms Switch Investment Focus From China to India

 

Foreign Investors Shunning China, Piling Pressure on Yuan

 

Taiwan Asks EU to Deepen Ties if it Wants TSMC Chip Investments

 

‘EU Must Prepare for China Decoupling if Taiwan Invaded’

 

China War Risk Sees Taiwan’s TSMC Moving Fabs to US, Japan

 

Apple ‘to Raise India Production to 25%’ in Retreat From China

 

Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years.

Recent Posts

Bitcoin Comeback Sees Market Worth $1 Trillion Again

The globe’s biggest crypto coin has soared 22% in value this year after the US…

12 hours ago

China’s Free Trade Olive Branch to EU Amid Subsidy Probes

Beijing’s Foreign Minister Wang Yi said the EU and China could avoid confrontation through cooperation

13 hours ago

Curbs on ASML ‘to Stop Use of Advanced Chips by China Military’

ASML tools are used to make advanced semiconductors that can go into "high-value weapons systems…

15 hours ago

Chinese Rocket Failure Opened Door for SpaceX in Indonesia

The failure of a Chinese rocket launch in April 2020 gave Elon Musk's SpaceX the…

15 hours ago

Fake Chinese Accounts Flourish on X, Analysis Shows – WaPo

Researchers say Chinese propaganda "has increasingly sought to stoke existing US divisions in the same…

16 hours ago

Hang Seng Lifted by Rate Cut, Nikkei Dips on Tech Worries

China’s markets were slow to react to its biggest ever mortgage rate cut while Tokyo’s…

16 hours ago