Even if the global synchronized recovery will continue this year thanks to the vaccine against Covid-19, the growth gap between China and the US as well as Europe is likely to increase in the first quarter of this year due to renewed lockdowns in the Western world and delays in the vaccine rollout. Later this year, the divergences in economic growth could lessen, as the vaccine proves effective against the virus. However, the US and Europe will be slow in catching up, while China powers on.
While China did impose regional restrictions again recently to stem local virus flare-ups, a renewed nationwide lockdown is unlikely. Also, the Covid variant in Beijing seems to have been reigned in. Infection rates, which spiked in January, are again under control. This reduces the pressure on the government to correct for the slow pace of the vaccine rollout. Hope is in sight with Chinese companies like Sinovac, CanSino and Sinophram making progress on vaccines. Sinovac alone is saying it could provide 600 million doses this year.
Low intensity trade/tech war to continue but US-China relationship to become more predictable
Now that US President Joe Biden has taken office, Chinese economic growth is likely to see less of a threat from a belligerent America. Even if the Democrats align with the Republicans in a rare bi-partisan agreement that China represents a clear threat to US technological, economic and military dominance, they will take a different approach to dealing with it. Former President Donald Trump preferred a “shoot first and then talk” strategy of pushing through tariff hikes and export bans on China and even some of its own allies. Conversely, the Biden administration is more likely to seek a consensus with its allies before approaching China.
Moreover, the Biden administration seems to have a better understanding of the economic costs of the trade war. The dependency of the US corporate sector on Asia and China in particular in terms of earnings is significant. Apple’s recent quarterly earnings revealed that sales growth was strongest in China. Therefore, the risk of a further escalation of the trade war is low as it could inflict significant harm on the US economy.
China and the US aim for increased economic dependencies in their regions
The US will continue to watch China like a hawk on matters of digital supremacy. Jared Cohen and Richard Fontaine, two former members of the US state department have called for a T-12, a group of 12 techno-democracies, which coordinate their response to the digital threats posed by autocratic regimes like Russia and China. Like-minded countries could define standards on topics like the use of private data by digital platforms, start joint venture research projects in areas of new technologies and secure supply chains of goods critical for their economies more efficiently. Therefore, a coordinated answer may lead to more information sharing, more investments in new technologies and possibly stronger growth.
With its Belt and Road Initiative and the recently announced Regional Comprehensive Economic Partnership (RCEP) China is doing the same in Eurasia, trying to increase the dependencies of other economies to the Chinese economy. RCEP is likely to spur growth in the region with positive consequences for Asian markets. Therefore, the relationship between the two regions is likely to become more competitive. Assertive foreign Chinese policy, i.e., in the South Asian Sea remains a risk however. The Biden administration emphasized already – contrary to Trump – that the US would stand by its Asian allies on geopolitical security issues.
Sven Schubert is a senior investment strategist at Vontobel Multi Asset Boutique.