Daily Management Review

The Impact Of China-West Tensions On World Markets


The Impact Of China-West Tensions On World Markets
Rising trade barriers, tech competition, and eavesdropping allegations are just a few of the factors contributing to tensions between the West and China.
As Washington and Beijing work to reduce their dependence on one another, the effects on international markets are profound, shattering old supply lines.
This might contribute to maintaining high inflation and interest rates. Even still, there are advantages for developing countries and IT behemoths on the winning side of the power struggle.
Here are some market effects of the Western-China hostilities.
Joe Biden, the president of the United States, is adamant about relocating manufacturing operations in key industries like semiconductors and electric vehicles.
The biggest chipmaker in the world, TSMC, is shifting some of its production to Germany to meet the demands of global corporations seeking to diversify their supply chains from China.
Bringing production home may have inflationary effects, according to Goldman Sachs research, especially if Western industry does not scale up quickly enough to make up for falling imports.
"We built a globalised world for a reason, it was efficient and cheap," said Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust.
"If we unwind some of that, it will add cost."
Long-term US inflation results in rates remaining higher for longer, which strengthens the dollar.
By making European countries pay more for things priced in dollars, a stronger dollar can export inflation to those countries.
Many central banks aim for 2% inflation, and market indicators reflecting traders' long-term expectations for inflation in the United States and Europe are rising.
The concept of "friendshoring"—replacing China's position in supply chains with friendly nations—is being promoted by Washington.
According to research done by Laura Alfaro of Harvard Business School, the two countries that have benefited the most from the U.S. supply chain change thus far are Vietnam and Mexico.
In order to mine rare earths—materials used in high-tech goods like smartphones—Mongolia is looking for U.S. funding. The Philippines is seeking American infrastructure funding.
Sino-U.S. tensions, according to Anna Rosenberg, head of geopolitics at the Amundi Investment Institute, offer a "new lens" through which to examine the development prospects of emerging economies.
India is thought to be the country most capable of competing with China in low-cost, mass manufacturing. Multinational corporations that are doing less business in China have prospects thanks to its sizable, young population and growing middle class.
The likelihood of investor inflows into the bond market just received a lift from JPMorgan's decision to include India in a significant government bond index next year, which has helped Indian stocks rally by 8% this year.
"India is a very large opportunity," said Christopher Rossbach, chief investment officer at asset manager J. Stern. "The global companies we are invested in are working on it."
China's GDP is likely to increase by about 5% this year, according to the central bank of China, while India's economy is predicted to rise by 6.5% this fiscal year.
According to Barclays, India might over the next five years increase its yearly economic growth to close to 8%, making it the largest contributor to global growth.
There are victors and losers on both sides of a China-West conflict.
The EU is looking at the possibility of applying punitive tariffs to Chinese electric vehicle imports that it claims get excessive state subsidies.
The U.S. government's support of local semiconductor production has increased Intel's stock price. Large U.S. tech equities and global share indices are however susceptible to indications of Chinese reprisal.
Early in September, reports that Beijing might forbid government employees from using iPhones caused Apple stock to decline by more than 6% over the course of two days.
Chinese consumers are the world's largest consumers of luxury products, which has Western design businesses caught up in politics. China's top anti-corruption body has vowed to end what it refers to as Western elites' hedonism. Chinese banks have instructed employees not to wear designer clothing while working.
"Higher levels of government scrutiny have started to weigh on the spending of more affluent (Chinese) consumers," Barclays analysts Carole Madjo and Wendy Liu said in a note.
As soon as China relaxed COVID-19 restrictions in early 2023, shares in the luxury sector increased. Since then, they have declined as a result of the stagnant Chinese economy and rising Western tensions. In Q3, European luxury stocks fell 16%.
The bearish China investment case goes beyond politics because to the country's weakening economy and the unrest on the real estate market.
However, the likelihood of enduring tariffs and the inconvenience of working around American limitations on investing in Chinese technology are not helpful.
Investors disagree on how to approach the Chinese stock market as it underperforms other global markets.40% of credit investors surveyed by JPMorgan were pessimistic about China, yet about the same number wanted to expand their exposures.
"I'm actually warming to China because everyone hates (this market) so much," said RW Baird vice chair of equities Patrick Spencer. "Market expectations are really severe and the reality is slightly better."