Sino-U.S. Rivalry promises to be innovative for investors


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(Bloomberg) – US President Joe Biden’s rallying call for richer countries to counter China’s growing global influence could end up luring investors into rival US markets.

This month’s Group of Seven and NATO meetings in Europe saw the U.S. marshal backing increased investment to compete with China. America also called for a stronger condemnation of alleged human rights violations, a precursor to this week’s ban on certain sun products made in the Xinjiang region.

As the releases circulated, China was busy sending three astronauts to help build its space station and harness additional resources in a stronger push for domestic innovation.

This frenzied race for domination is turning into yet another incentive to gain exposure to Chinese assets, which have already made significant inroads into global portfolios. A strategic rivalry will boost funding for technological development, with wider spillovers to the economy, the argument goes. Chinese semiconductor stocks exemplified the case last week, rising sharply after President Xi Jinping appointed his economic czar to reinvigorate the chip industry in a bid to overcome US sanctions.

“From an investor perspective, competition is always good,” Tuan Huynh, director of investments for Europe and Asia at Deutsche Bank International Private Bank, said in a telephone interview. “Both sides want to invest as much as they can in the technology and at the moment it is too early to call a world leader, but this is a major topic for the next five to ten years.”

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The competition heralds the prospect of the emergence of new national champions in China. Huynh said he favors equities in the clean energy, consumer electronics and entertainment sectors, and that investors should increase their exposure to China over time, alongside their existing U.S. holdings.

Citigroup economist Li-Gang Liu sees a possible “Sputnik moment” for Chinese innovation, with the country’s goal of increased self-reliance sparking an era of rapid technological advancement similar to the US-Soviet rivalry that spurred the 1950s space race. Progress is already apparent, as the Chinese rover Zhurong joined the US Perseverance on Mars last month.

‘Great confidence’

While a technological arms race is likely to boost US assets as well as those of China, it is the latter that is gaining the attention of international investment firms.

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The world’s largest asset manager, BlackRock Inc., sees Chinese equities as a core strategic position separate from other emerging market positions, according to a report released this month.

Pacific Investment Management Company LLC was one of the financial management heavyweights touting Chinese bonds for their higher yields and resistance to this year’s global rate run-off. The yuan, meanwhile, hit its highest levels since 2016 against the currencies of trading partners as part of China’s recovery from the pandemic.

“I look at Chinese assets with great confidence,” Deutsche Bank’s Huynh said. But there are risks in some key sectors “more related to national interests”, notably telecommunications, he added.

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Citi favors companies such as BYD Co. in the automotive sector, and Tencent Holdings Ltd. and Alibaba Group Holding Ltd. among the Internet giants. He also sees several sectors benefiting from China’s innovation momentum, such as semiconductors.

Nonetheless, as the tweeting storms and tariff feuds that characterized the US administration’s previous engagements with China have subsided, the substance of the tension remains unaffected. Biden is pursuing, with some tweaks, a Trump-era ban on U.S. investment in Chinese companies, which affects the three largest in the latter’s telecommunications sector.

Last week, U.S. regulators stepped up pressure on technology vendors they see as potential security risks, with a proposal to ban products from Huawei Technologies Co. and four other Chinese electronics companies. .

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Risks remain

“Biden is in conflict with China and the outcome will be unfortunate for investors who bank on deeper engagement between the United States and China,” said Matt Gertken, geopolitical strategist at BCA Research, who views U.S. stocks as and Chinese stocks face persistent headwinds in domestic and international politics.

Beijing’s regulatory crackdown on tech giants has been among the recent hurdles, as the government tries to exert more control and temper financial risks without stifling innovation. This weighed on their stock market performance this year even as the Nasdaq 100 index in the United States continued to hit new highs.

Overall, the change in tone and conduct of the US-China confrontation may bode well for more orderly diplomatic relations and a better long-term backdrop for investors seeking to exploit the intensifying strategic competition. The two sides are slowly resuming official contacts, in contrast to the feverish mood under Trump.

“The lack of strident rhetoric between the two countries – a hallmark under the Trump administration – is a welcome change for the markets and should reduce geopolitical risk premia for now,” said David Chao, global markets strategist for Asia-Pacific. Japan at Invesco.

© 2021 Bloomberg LP

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In-depth reporting on The Logic’s innovation economy, presented in partnership with the Financial Post.

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