It may seem like a distant memory now, but for much of 2018 and 2019, global markets were periodically shocked by the unorthodox diplomatic moves of then-President Trump as he sought to reset the relationship between the US and China. Such tensions between the world’s two largest economic powers have taken a brief hiatus while the new Biden Administration is settling in. And investors are now wondering if the calm will last. Unfortunately, a protracted calm is unlikely.
As we take the temperature of the major bilateral relationships with China, we assess that the probability of more intense disagreements and confrontations with the world’s second-largest power is only increasing.
Beijing remains at odds with India, for example, following the recent armed skirmishes on the shared border between the two countries. India continues to ban nearly 60 Chinese apps in its country, including TikTok, reflecting India’s commitment to a long-term “economic battle” with China.
Meanwhile, Japan’s defence minister told reporters recently of the need to study ways for the Japanese Self-Defense Forces to cooperate with US forces defending Taiwan in the event of China’s aggression. This is rather extraordinary for a country that deems war unconstitutional.
Here in Australia, the political relationship has deteriorated sharply following our government’s insistence on a covid-inquiry, resulting in multiple trade sanctions from Beijing, including in wine and coal. Australia, in turn, has cancelled China’s Belt and Road Initiative (BRI) agreements with Victoria.
It is perhaps not surprising, therefore, that the Quadrilateral Security Dialogue (US, Japan, Australia and India), or the “Quad”, hosted its first high-level meeting in recent weeks. The Quad is viewed by the US as critical in its objective to preserve the status quo in the Indo-Pacific region. After all, in the recently-released and previously-classified strategy document from the Trump Administration, we learned that the White House at the time assumed that:
“China aims to dissolve US alliances and partnerships in the [Indo-Pacific] region.”
It appears President Biden’s new team sees the issue in a similar way. This month, the Biden Administration’s Office of the Director of National Intelligence released its Annual Threat Assessment, stating that:
“China seeks to use coordinated, whole-of-government tools to demonstrate its growing strength and compel regional neighbours to acquiesce to Beijing’s preference.” Not to mention that: “China will remain the top threat to US technological competitiveness… Beijing uses a variety of tools, from public investment to espionage and theft, to advance its technological capabilities.”
These perspectives likely explain the rather testy meeting between the two nations in Alaska the prior month.
In the UK, the government recently released its strategic review with equally strong views on China’s current trajectory:
“The fact that China is an authoritarian state, with different values to ours, presents challenges for the UK and our allies… China also presents the biggest state-based threat to the UK’s economic security.”
Needless to say, Beijing was unimpressed.
In Europe, currently one of the friendliest western counterparts to China under Angela Merkel’s effective leadership, a recent provincial vote in the South-Western region called Baden-Württemberg may have set Europe on path towards a sharp reset in the relationship with Beijing.
Merkel prepares to exit Germany’s political stage at the country’s next election in September, there is an increasing likelihood that the coalition that forms government will include The Greens (and likely exclude the Social Democrats). In Baden-Württemberg in recent weeks, The Greens won decisively, beating Merkel’s Christian Democrats, and thumping the Social Democrats.
This is significant because The Greens care deeply about human rights and the rule of law. While Merkel carefully managed a constructive relationship between the EU and China, her successor may well take a less-supportive approach. And based on the recent exchange of sanctions in a major escalation over human rights abuses, the EU now appears to be on a path to prickliness with Beijing, similar to that felt by the likes of Australia, Canada, Japan, India and the US.
Top China analyst, Richard McGregor, pointed out recently that:
“The world may be dividing into two geopolitical camps aligned with the US and China. But it does not operate in two separate commercial realms.”
This is exactly right. And this is why the risks of future market-moving trade disputes, sanctions and confrontations with China are only increasing.
 (Reuters) India retains ban on 59 Chinese apps, including TikTok, January 2021
 (FT) TikTok’s India ban should be a warning for tech companies, April 2021
 (AFR) Canberra tears up Victoria’s China deals, April 2021
 (White House) US Strategic Framework for the Indo-Pacific, declassified January 2021
 (ODNI) Annual Threat Assessment of the US Intelligence Community, April 2021
 (Brookings) The US and China finally get real with each other, March 2021
 (HM Government) Global Britain in a competitive age, March 2021
 (DW) Germany: Greens are jubilant while Merkel’s CDU suffers defeat, March 2021
 (Politico) China throws EU trade deal to the wolf warriors, March 2021
 (FT) Australia can teach the UK a lesson in Chinese wrath, March 2021
Andrew Macken is the Chief Investment Officer at Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.