Presidential tweets have resonated in financial markets, but as Amy Celico from Albright Stonebridge Group told the BNP Paribas Asset Management 2019 Investment Forum, there has been a much broader and deeper change in Washington’s views on China.
While US policy towards China through to the Obama administration had been one of constructive engagement, it has now shifted to strategic competition. This is based on the belief that China was not going to change fundamentally despite greater integration in the West’s economic system. A policy change looks unlikely regardless of who wins the US presidential election, even if the means of strategic competition might change. A Democratic president might, for example, try to bring Europe and Japan on board as allies to pressure China more effectively on intellectual property rights.
A more assertive China
The 2013 election of Xi Jingping as president was followed by what were viewed as more assertive economic policies, for example the Belt and Road Initiative or Made in China 2025. The West’s resistance to some of these has led China to become more reactive in its dealings with the West. Leaders have to navigate a host of flashpoints and Ms. Celico believes China will remain defiant while it burnishes its global position relative to its main geopolitical competitors.
Beijing’s priorities are enhancing control of the party over all aspects of society, and reinforcing state-owned enterprises to drive growth. The top economic priority for 2020 is managing the slowdown – annual GDP growth has fallen from 6.8% early in 2018 to just 6% in Q3 2019. The goals of deleveraging and rebalancing the economy remain in place, but achieving them is more difficult with lower growth.
One consequence: the Belt and Road Initiative is becoming leaner as China builds on recent successes while responding to international scepticism and growing competition in global infrastructure investment.
As for the relationship with the US, technology competition is the most visible area of tension and the risk of at least a partial decoupling of the two countries’ systems is rising. The US is now pursuing export controls and investment restrictions in the interest of national security. China’s own rules governing critical information infrastructure and data flows reinforce this decoupling trend. A limited trade deal will likely not stop the development of policies to restrict technology flows.
An additional challenge for foreign companies operating in China are policy uncertainty and regulatory obstacles. The latest EU Chamber of Commerce in China survey showed that 48% of respondents expect regulatory obstacles to increase over the next five years; the US-China Business Council survey had 14% of companies pessimistic or somewhat pessimistic on the five-year outlook for their business in China. While most felt it was still a priority to be in China, they were well aware of the challenges.
Exhibit 1: Despite continued opportunity, businesses face more pressure than ever
What does this mean for investments?
The investment implications are that portfolio managers will need to re-evaluate the opportunities presented by the Belt and Road Initiative. The amount and breadth of investment are likely to be not as high as initially projected. Managers will need to closely evaluate the business models of both US and Chinese tech companies to identify the sources of technology, production, and sales.
While the new restrictions will hinder some companies, others will be able to benefit from reduced competition. Non-Chinese companies may find it difficult to compete in areas using artificial intelligence as the technology depends on vast amounts of data. This is often more readily available in China than in the West where privacy laws restrict access.
Investments in companies operating in China will need to be regularly evaluated to account for the evolving business and regulatory environment, to anticipate threats to business models as well as new opportunities.
This is part 4 of the Investors’ Corner series on the main points from the four keynote speakers at the BNP Paribas Asset Management 2019 Investment Forum on the theme of disruptive change in a superstar economy.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.