Großmachtkonflikt kann Anleger nicht kalt lassen

Investors need to take note of the great power competition

The two superpowers, China and the US, are on course for renewed confrontation as a result of the decoupling of strategically important sections of their economies. The latest regulatory moves by Beijing must be viewed in this context and have shaken up the stock markets. What does the dispute mean for investors?

The battle for supremacy between the world’s two biggest economies is not something that investors can simply ignore, not least because of its economic significance. China is aiming to double its gross domestic product (GDP) by 2035, thereby knocking the US off the top spot. But this is more than just economic rivalry; the two superpowers are competing for global influence and primarily for technological hegemony.

At the heart of the dispute, however, is the increasing decoupling of the Chinese and US economies. The great power competition is progressing through different phases in waves. During Donald Trump’s presidency, the rivalry escalated dramatically from 2018 onward, with each side imposing punitive tariffs and sanctions on the other. This phase came to a temporary halt in January 2020 when a trade deal was reached in which the parties made promises to each other on some issues and raised the prospect of a further deal on more fundamental matters.

China, an economic force to be reckoned with

China, an economic force to be reckoned with
Sources: CSIS, Fortune Global 500, Macrobond, World Bank, Union Investment. SOEs = state-owned enterprises in China, as at end of august 2021.

Détente proves to be a false dawn

But none of this has materialised to date. The changeover in the White House has not altered the main battle lines and the dispute is simply better orchestrated. Under US President Joe Biden, the dispute is becoming more of a question of national security than ever before. The core points include measures designed to restrict China’s access to fundamental technologies, especially semiconductors and related technologies. There are also measures aimed at making the US more competitive, for example by strengthening the resilience of strategically important supply chains, channelling public investment into research and development, creating investment incentives, and giving preference to goods manufactured in the US (‘buy American’).

The Biden administration’s current drive for investment and innovation has not come about simply because of the coronavirus pandemic. In the autumn, for example, the US$ 250 billion US Innovation and Competition Act is due to be approved. It focuses almost exclusively on competition with China and is likely to lead to extensive government spending and investment incentives. One of the consequences is expected to be stronger US growth, which could mean a more definite rise in inflation and higher interest rates in the medium term.

China at a crossroads

On the other hand, China has identical national security interests, resulting in increasing centrifugal forces between the two countries. There are growing indications of a deliberate, progressive decoupling of the two biggest economies. President Xi Jinping is moving China towards greater state control and stronger intervention in privately run companies. Under its dual circulation economic strategy, the Beijing government wants to achieve more autonomy, for example regarding the import of strategically important goods. This should put the country on a stronger footing in the difficult foreign policy arena.

China is at a critical stage of its development. In the chip sector, it is reliant on foreign expertise and will not be able to reduce this dependence very quickly through the transfer of knowledge and domestic manufacturing. Moreover, new regulatory initiatives are designed to bring the interests of large, private Chinese technology companies – such as Alibaba and Tencent – into line with those of the state. The aims of these initiatives include preventing data from reaching other countries and making these companies invest more heavily in Chinese hardware development. Regulatory intervention is also intended to counteract potentially growing dissatisfaction among the Chinese people as a result of rising social inequality.

Revaluation in the Chinese equity market

All of this is leaving its mark on the capital markets. Since the IPO of the Ant Group, a payments service provider, was cancelled on 3 November 2020, China has seen targeted investigations of individual companies and regulatory intervention in entire sectors, such as the tech industry. A particularly dramatic move came on 23 July 2021, when the Chinese government declared that privately run education providers would no longer be able to take a profit or raise capital on the stock markets. The share prices of the affected Chinese companies came under significant pressure, and the Chinese equity market underwent a revaluation that has probably still not quite run its course. Although the Chinese government is likely to take greater account of the impact on growth when it comes to future regulatory intervention, there has so far been no clear statement from the highest political echelons about an end to the wave of regulation.

The regulatory moves by Beijing should therefore also be viewed in the context of the great power competition. This means that investors will need to continue to study the possible fallout from this dispute, not only from a timing, regional and sectoral perspective but also at individual company level. The consequences of many of these long-term measures will probably only become apparent and their impact will only be felt in a later phase. After all, investment decisions and adjustments to supply chains often take many years to implement. In that time, they are often ignored by the capital markets even though they are critical factors for any long-term investment strategy.

However, the increasing decoupling of China and the US is highly likely to have an influence on economic growth, profit streams and interest rates around the world. The US, for example, is currently focusing mainly on expansion fuelled by strategically designed infrastructure packages. By contrast, China is accepting a slowdown in growth as a result of the tightening of regulation and reduction of fiscal stimulus because these should strengthen the domestic economy and financial system in the long run.

Conclusion: resilience beats efficiency

Investors need to remain especially alert with regard to strategically important sectors, such as communications (5G mobile phone standard), semiconductors and healthcare. Shifts are also likely at regional level, for example due to production being moved (back to domestic locations in some cases). Because of the great power competition, investing globally increasingly means investing locally too. This makes the investment strategies of international investors more complex. Resilient supply chains are generally becoming more important than efficient supply chains. The knock-on effects for companies’ costs and operating margins are still unclear, which is why the risk mark-ups on any potentially affected investments are likely to rise.

This also opens up investment opportunities: Larger companies will probably be better placed than smaller companies to adapt to the new business environment created by the decoupling of the superpowers. Depending on how flexible they are, companies may be able to limit the impact of the dispute on their business and even translate it into higher profits. When investing in China or the US, investors need to take account of factors such as the importance of a company to the particular country’s national interests.

Too many interdependencies for a complete decoupling

China, an economic force to be reckoned with
* Information and communications technologies. Sources: Bloomberg, Rhodium Group, UNCTAD, Macrobond, Union Investment, as at end of august 2021.

 

As at: 3 September 2021