Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 373

China and US ‘decoupling’ likely to be mild

The ‘Line of Actual Control’ is the name for the unformalised border that separates Indian-controlled and Chinese-controlled territory in the disputed area where the Asian neighbours meet and where in 1962 the pair fought a war. In June 2020, violence flared up again and at least 20 Indian soldiers were killed. The response of India’s government? New Delhi banned 59 Chinese mobile applications, including ByteDance’s popular video-sharing TikTok.

Tensions but they still need each other

The incident was yet another to strain the relationships between China and the US and their respective allies. Tension between China and the US over data, Hong Kong, military reach, human rights, investment, the South China Sea, Taiwan, technology and trade is fashioning talk of a ‘decoupling’ between the pair.

If globalisation is the free flow of goods, capital, people, information and ideas, how to define a decoupling? One extreme would be another Cold War-like separation between the world’s two most powerful countries and their allies where economic ties almost evaporate. The benign extreme might be a token split. The term could cover any division in between.

The China-US decoupling is likely to be a mild separation for five reasons, even if their antagonism flares at times.

First, their rupture is not the ideological and existentialist clash that was the Cold War of 1945-1989. The China-US tussle is more a mercantilist power struggle between economically interwoven and flexible countries that have different political systems and values. Such scuffles typically find an equilibrium where rivals coexist, even cooperate.

Second, it’s an oversimplification to view the world as settled into two groups. The US and Europe have disputes over data privacy and the regulation and taxation of tech companies. It’s a simplification, too, to talk of the Belt and Road Initiative as a China-led bloc. The countries involved have no common ideology.

Third, the fact that China and the US (and their allies) are so financially and economically entwined means it would be too costly, time-consuming and complicated for the powers to separate. The US relies on China to buy its government debt and for rare-earth materials. Western companies have production, commercial and investment ties to China. For its part, China depends on western banks, universities, agricultural produce, raw materials and tech parts such as microprocessors. Many Chinese companies depend on foreigners for much of their revenue. Chinese companies own or have stakes in many western household names.

Fourth is that China and the US face common financial and economic challenges. Both are keen to reinstall sustainable economic growth, repair their finances and trade with each other.

Fifth, the pair face common challenges away from finance and economics that can be better met in a cooperative fashion. These include the coronavirus pandemic, climate change, failed states, global terrorist organisations and nuclear proliferation.

A mild decoupling with ongoing strains

Even though the decoupling will be mild, it will consist of two noticeable tears. The first is broadly around technology and will be most noticeable in how the internet will segment. But the internet was rupturing anyway because governments were always going to extend regulatory powers and security measures to cyberspace. The fractured internet or ‘splinternet’ means that some countries could exclusively use US or Chinese tech for critical spheres.

The other tear, helped along by the pandemic highlighting the importance of ‘health security’, is that production will drift from China because western countries and companies are unwilling to rely for critical supplies on a country with divergent interests and opposing values. Over time, the production capacity shifted could be noticeable.

These tears come with costs. Western consumers will face reduced choice and higher prices as friendly companies producing essentials are protected and Chinese tech stars are blocked. Global production networks will be less efficient. Personal ties between China and the US will be lower than otherwise. The internet will serve national and regional interests, not global ideals. Cyberattacks might become even more common. Spikes in China-US tensions could trigger gyrations on financial markets.

Costs are likely to prove mild

People will know that, while insults and feints between China and the US might look divorce-like, the pair are likely to remain untrusting and squabbling competitors rather than turn into foes.

To be sure, the UK and Germany were each other’s biggest trading partner before World War I. Like in 1914, miscalculations could trigger a proper decoupling nowadays. Other tears in the China-US relationship could be the Chinese public boycotting US brands, Beijing targeting specific items over alleged trade breaches and Washington, exploiting US dominance of the world’s finance system, expanding financial sanctions on the Chinese – but these rips are unlikely to get too large.

Western companies were shifting production from China because Chinese labour costs have risen and concerns about climate change, tech advancements and other shocks to global trade could have hastened that trend anyway. Let’s not mythologise globalisation pre-2020; there were many impediments to the free flow of things.

Even allowing for the barbs between Beijing and Washington, flashpoints over key technologies and the production of essentials shifting from China, it might be hard for most westerners to notice the difference in daily life of any China-US decoupling.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

RELATED ARTICLES

The pivotal fight between China and the US

Three waves to keep inflation high over the next decade

Three reasons China could become the world’s leading consumer

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Overcoming the fear of running out of money in retirement

There’s an epidemic in Australia that has nothing to do with COVID-19, the flu, or the respiratory syncytial virus. This one is called FORO, or the fear of running out of money in retirement, and it's a growing problem.

Latest Updates

Investment strategies

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Economy

A pullback in Australian consumer spending could last years

Australian consumers have held up remarkably well amid rising interest rates and inflation. Yet, there are increasing signs that this is turning, and the weakness in consumer spending may last years, not months.

Investment strategies

The 9 most important things I've learned about investing over 40 years

The nine lessons include there is always a cycle, the crowd gets it wrong at extremes, what you pay for an investment matters a lot, markets don’t learn, and you need to know yourself to be a good investor.

Shares

Tax-loss selling creates opportunities in these 3 ASX stocks

It's that time of year when investors sell underperforming stocks at a loss to offset capital gains from profitable investments. This tax-loss selling is creating opportunities in three quality ASX stocks.

Economy

The global baby bust

Across the globe, leaders are concerned about the fallout from declining birth rates and shrinking populations. Australia, though attractive to migrants, mirrors global birth rate declines, and faces its own challenges.

Economy

Hidden card fees and why cash should make a comeback

Australians are paying almost two billion dollars in credit and debit card fees each year and the RBA wil now probe the whole payment system. What changes are needed to ensure the system is fair and transparent?

Investment strategies

Investment bonds should be considered for retirement planning

Many Australians neglect key retirement planning tools. Investment bonds are increasingly valuable as they facilitate intergenerational wealth transfer and offer strategic tax advantages, thereby enhancing financial security.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.