Equity investors ignore US-China split at their peril

“I had a great relationship with President Xi,” US president Donald Trump told Fox Sports Radio. “I like him, but I don’t feel the same way now.” Washington and Beijing’s troubled relationship has taken a turn for the worse recently, with the two sides clashing over everything from stockmarket listings and tech to Hong Kong. Consulates have been closed and credit cards blocked. Hong Kong’s leader Carrie Lam admitted this week that she has struggled to pay with plastic since she was targeted by US financial sanctions.

Ironically, trade is one of the few areas where the two countries still seem able to engage constructively, says Laura He for CNN Business. A cautious truce in January drew a line under a bitter two-year trade war. Scarred by recession, neither side appears inclined to resort to new tariff hikes for now.

The internet splits in two

On Monday, the US administration announced more measures aimed at choking off Huawei’s access to computer chips. Earlier this month Donald Trump signed an executive order barring US companies from doing business with TikTok and WeChat, two wildly popular Chinese social-networking apps.

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A “new digital iron curtain” is falling over the world, says Garry White in The Daily Telegraph. The internet is increasingly divided into different tech spheres centred on US and Chinese software. American allies such as Britain and Australia have joined in with bans against Huawei’s 5G technology. Yet this “splinternet” is bad news for US tech giants too. They will have to “rein in their global ambitions” in a world where trading with both camps becomes nigh-on impossible. Global supply chains are also splitting apart, reports Debby Wu on Bloomberg. The chairman of Hon Hai, which assembles iPhones for Apple, declared last week that China’s “days as the world’s factory are done”. The Taiwanese group has shifted production to southeast Asia to avoid US tariffs.

An expensive divorce

Yet unwinding all commercial ties would be prohibitively expensive. Unless either side can find “a spare $5trn to $10trn” to reconstruct their supply chains completely then the US and Chinese economies will remain bound together for years to come, says Zachary Karabell in Foreign Policy. Talk of a new Cold War is historically illiterate. The US and the Soviet Union barely traded with each other; US-China bilateral trade in goods has fallen but is still likely to be $450bn-$500bn this year. Despite a pandemic and tariffs, that figure is only back to where it was in 2011. “The United States and China are not in a cold war. They are in a bad marriage.”

Once attuned to every development in the trade war drama, markets have become strangely blasé about worsening trans-Pacific relations, says Reshma Kapadia in Barron’s. The rich valuations of tech giants such as Apple, which makes 15% of sales in China, will be far less plausible in a world that is segmented into “incompatible” tech spheres.