China’s relationship with the United States and the global economy is a critical factor that has the potential to dramatically shape economic growth and investment opportunities, not only in China but also globally. We thus believe that it is critical for investors to understand the nuances of the U.S.–China relationship, one that has become increasingly fraught over the past decade under President Xi Jinping’s leadership of the Chinese Communist Party (CCP).
We explored this dynamic during a panel discussion that was part of CONNECTIVITY 2021, a virtual conference William Blair hosted that focused on cybersecurity, privacy, and politics and how they are affecting the investing landscape. Malcolm Riddell, founder of CHINADebate, and Dr. Michael Spence, Nobel laureate in economics, joined William Blair partners and portfolio managers Vivian Thurston, CFA, and Hugo Scott-Gall, to explore what many have dubbed the “new Cold War.”
If U.S.–China relations have indeed reached the point of being a cold war, it is important to understand the differences between this iteration relative to the United States’ multi-decade confrontation with the Soviet Union, the speakers suggested. Whereas the original Cold War centered on the establishment of democratic and communist governance systems in other countries, much of the current tension—at least for now—centers on China’s growing and evolving influence, both economically and geopolitically.
The extent and shape of U.S.–China cooperation going forward is a critical variable for investors to consider, one with a wide range of potential outcomes. To understand those outcomes and their impact on global markets, investors should start by examining both superpowers’ goals in this conflict.
China’s Geopolitical Goals: Sovereignty, Influence, and Respect
On the surface, China’s priorities are relatively clear, the panelists agreed. Geopolitically, China is focused on protecting its sovereignty and reestablishing what it views as its rightful position of power in Asia and on the global stage, Riddell said.
During the so-called “Century of Humiliation” that started in the mid-1800s, China was subject to invasion and rendered to semi-colonial status by Japan and Western powers. From China’s perspective, reestablishing its position as the unquestioned power broker in Asia involves regaining or maintaining control over regions that the CCP considers to be part of Greater China, including Taiwan, Hong Kong, Tibet, and Xinjiang. China’s Belt and Road Initiative and its effort to assert more control over the South China Sea are other ways China is seeking to recover its sphere of influence.
“Longer term, the idea is to push the United States at least out of the Western Pacific and also to take a much greater role in shaping the world order as it stands today to serve China or to create an alternative world order that fits China’s ambitions,” Riddell said.
Can the Chinese Communist Party successfully course-correct if signs emerge that state interference in economic activity is stifling the growth and innovation necessary for enhancing prosperity for China’s 1.4 billion people?
Whether China can accomplish this objective without sparking a global conflict is very much in doubt. “Relatively rarely does a rising power do this without tension,” Spence said.
At the heart of much of the current tension is China feeling disrespected by the United States and other global powers. “[China’s leaders] respect other countries’ differences with respect to governance, and they don’t like other countries’ disrespect for their form of governance,” Spence said. “It’s a way of seeing the world, and it’s really different from the postwar period in which we had an international communist movement.”
China’s Domestic Goals: Common Prosperity and Stability
Domestically, China’s agenda is focused on continuing to drive increased prosperity for the country’s 1.4 billion people, Thurston said. The country’s gross domestic product (GDP) per capita exceeded $10,000 in 2020, more than double the amount in 2010 and more than 10 times the amount in 2000, according to the World Bank. While these gains over the past two decades have been truly remarkable, they haven’t been broad-based.
Thurston noted that massive wealth inequality in China poses a threat to the CCP’s support, and President Xi has responded by amplifying efforts to achieve “common prosperity.”
After blocking Ant Group’s IPO on the Shanghai exchange and influencing the company’s decision to suspend its IPO on the Hong Kong exchange in November 2020, Chinese authorities have increasingly begun asserting control over various aspects of the Chinese economy and consumer behavior.
It remains to be seen whether these moves toward orthodox socialism will suppress the dynamism and innovation needed to drive continued GDP growth in China. Similarly, it is impossible to know how successfully the CCP can course-correct if signs emerge that state interference is stifling growth. Meanwhile, investors should watch these dynamics closely to assess how they will shape the investment landscape in China.
It would be a mistake, however, to view decisions related to state interference with economic activity as coming from just one voice at the top of the CCP. There are meaningful ideological debates within the party’s leadership about the best path forward.
“The party’s leaders realize that their governing authority ultimately stems from their ability to deliver prosperity for the country’s 1.4 billion people,” Thurston said. This realization should give investors at least some confidence that the CCP’s push for “common prosperity” will be leavened by the need to foster innovation and growth.
U.S. Goals: Containment—But Without Clarity?
While China’s geopolitical goals are relatively clear, deciphering the United States’ specific objectives when it comes to China is much more challenging. Containing China’s influence and slowing its growth as a rival superpower are likely at the heart of U.S. policy, but China’s continued emergence appears to be inevitable at this point.
“It’s very difficult for me to understand what the American position is on this unless there’s a bunch of people making policy mostly on the national security front who really think you can contain or hold China down,” Spence said. “I wouldn’t bet my kids’ savings on that [being achievable].”
Are win-win solutions possible, or does the nature of this cold war suggest that both sides are bound to view the U.S.–China dynamic as a zero-sum game?
There is also debate about which country should be viewed as the primary instigator of the rising tensions seen over the past decade.
From one perspective, it can be argued that China’s recent actions should be viewed as responses to U.S. efforts to try to exert influence in the region and impose its values and capitalist system abroad, as well as to the Trump administration’s tariffs and aggressive rhetoric, Thurston said.
On other hand, it is important to note that for nearly 40 years the United States supported China’s economic rise, including its membership in the World Trade Organization, Riddell said. “U.S. concerns about China’s respect for intellectual property and other international trade laws, as well as concerns about China’s increasingly aggressive foreign policy, from ‘Wolf Warrior’ diplomacy to actions in the South China Sea, have been escalating ever since Xi Jinping became president in 2012,” Riddell said. “So, viewing China’s recent actions as simply a response to actions initiated by the Trump administration seems to overlook the larger context.”
U.S.–China Cooperation: Are Win-Win Outcomes Feasible?
Regardless of which side is rightly viewed as the instigator of today’s rising tensions, the question of whether the two countries can cooperate economically remains central for investors and policymakers. Are win-win solutions possible, or does the nature of this cold war suggest that both sides are bound to view the U.S.–China dynamic as a zero-sum game?
China’s development as a low-cost manufacturer has been tremendously beneficial for the U.S. economy by tamping down inflation over the past several decades. But now that the GDP and technology gaps between the two countries have narrowed, the U.S.–China dynamic was bound to change. Economic cooperation has also become more challenging because many commercial technologies now have vast national security considerations in an age of cyber warfare, Spence said.
Spence added that cooperation will require both sides to be willing to compromise on areas that can be mutually beneficial, such as climate change, despite the United States’ and China’s fundamental differences in values and governance systems.
“If we decide to pick a fight every time we find a difference that’s meaningful to us in terms of our own value system, it’s going to make it doubly difficult to make progress and [cooperate economically],” Spence said.
Amid today’s rising tensions, it seems that both sides are not prioritizing finding areas of potential cooperation. “We’re going in the opposite direction,” Spence said.
Watch the CONNECTIVITY replay here.
To access more insights about how cybersecurity, privacy, and politics are affecting the investing landscape, we invite you to explore other posts about the sessions at our 2021 CONNECTIVITY conference: Privacy and Policy Implications of Connected Commerce and Barbarians at the Digital Gate.