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The US-China relationship is important to the future of markets

The relationship between the world’s two largest economies is important to how economies progress and markets behave. It is likely to remain tense under Joe Biden.

The relationship between the world’s two largest economies of the world is important to how economies progress and markets behave. It is likely to remain tense under Joe Biden.

Charles Stanley

in Features


In these dying days of the Trump Presidency, some important Chinese companies are seeing moves to have their shares delisted in the US. The President has also imposed new sanctions on the China National Offshore Oil Corporation, expressing solidarity with allies in the South East Asia region who complain of China’s conduct over oil exploration. These Executive Orders could be repealed by President Biden on taking office, but he too uses strong words about China’s conduct.

The relationship between the two largest economies of the world is important to how economies progress and markets behave. Under President Obama, the West followed a policy of encouraging China to adopt more western values and obey more global rules by giving it scope as a member of leading international bodies. Out of office, President Obama has been more critical of China’s conduct.

President Trump decided to confront China on the trade and intellectual property issues and used tariffs to try to force a change of behaviours. It had little impact, though it led to market worries from time to time about the damage done to global trade.

Biden not a dove

President Biden also has a negative view of Chinese words and deeds. He will wish to widen the disagreements, laying more stress on human rights issues in Hong Kong and Western China in addition to the trade matters. He said: “As we compete with China and hold China’s government to account for its abuses on trade, technology, human rights and other fronts, our position will be much stronger when we build coalitions of like-minded partners and allies.” The grouping to watch is the Five Eyes intelligence alliance between the US, UK, Canada, New Zealand and Australia.

These partners have not been idle in the transition period in the US. Australia has called for an independent enquiry into the origins of the pandemic, which would need to examine the early days of it in China. It has terminated Huawei as a supplier for 5G – and protested about actions in Hong Kong.

The UK has said it will ban Chinese imports if they come from factories using forced labour, asked companies to check their supply chains and has drawn attention to alleged human rights abuses in Xinjiang province, the home of the cotton industry.

Canada has also sent out a reminder to Canadian companies that they need to respect human rights and operate lawfully in the context of allegations about Chinese labour practices. China has responded by denying all these allegations and claiming they are fake news. Huawei was recently reported as having a patent that allowed ethnic facial recognition technology to be deployed. The company has responded by saying that is not the plan and words will be removed from the patent.

Meanwhile, the EU has used the US transition period to announce the signature of an EU/China Investment Agreement. This is not helpful to the incoming President and serves to dilute the unity of the West in its tougher stance on Chinese matters.

New phase for China

President Xi has set out a new phase for Chinese development. He is moving on from the export-led model where China became the prime factory of the world for many products. The 14th five-year plan says it “will finish building a moderately prosperous society in all respects within the set time frame, and will embark on a new journey next year toward fully building a modern socialist country”.

China sees import dependence and reliance on foreign technology as weaknesses, so it is moving quickly to ensure a full range of crucial ideas and capacity rests at home in China, fuelling domestic demand. It has been astute at building its position in the raw materials, intellectual property and capacity for batteries and electric vehicles, recognising their significance to the next phase of western development.

For the time being, China would like to be a leading member of global organisations, increasing its influence worldwide as it invests through the Belt and Road initiative and widens the numbers of states likely to take Beijing’s side in disagreements with the West. China looks forward to the big environmental conference towards the end of this year and pledges general support. It is interesting, though, that in the carefully worded response by President Xi he singles out biodiversity, wildlife cruelty and single-use plastics as matters of particular concern – and does not mention ‘net zero’. As the main producer of manmade CO2 – with its emissions still rising – China needs diplomatic skill to deal with the zero-carbon insistence of the EU, UK and US.

All this means investors will have to live with a range of restrictions and conflicts over trade with China, and with rival digital systems as the Chinese version diverges from the US one. It also means a discount on Chinese valuations as western investors weigh the environmental, social and governance issues with some Chinese investments.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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