Janet Yellen, the soon-to-be US Treasury secretary, wasted no time telegraphing Joe Biden’s plans to be tough on China. Events at BlackRock Inc, though, demonstrate how much of an uphill slog the new president faces.
As Donald Trump exited the White House, news dropped that the US investment giant had vacated the top spot for exchange-traded funds tracking onshore stocks.
The new numero uno in the space? China Asset Management (Hong Kong) Ltd. Such funds are popular with China bulls amid US sanctions and other clampdowns on China.
As of Tuesday, the day before Biden took office, CAM’s CSI 300 Index ETF had swelled to roughly US$2.7 billion in assets, trumping BlackRock’s closely-watched iShares fund tracking the FTSE A50 China Index.
It’s a reminder of investors’ determination to avoid Trump-era sanctions. Pivoting to the mainland-owned CSI 300 index fund partly to avoid US actions tells a bigger story of the costly side effects of Trump’s botched trade war.
New York-based BlackRock, the globe’s biggest fund manager, has been forced to dump investments in telecom giants like China Mobile Ltd.
CAM also benefits from holding a broader array of mainland sectors. By contrast, the FTSE A50, which guides BlackRock’s China bets, is finance-heavy.
The good news all around, of course, is the re-emergence of Alibaba Holdings founder Jack Ma. His two-plus-month absence from public view had President Xi Jinping’s government in global headlines for all the wrong reasons.
The same went for questions surrounding the fate of Ant Group’s hotly-awaited $35 billion initial public offering. It vanished from sight in early November along with Ant founder Ma.
On Wednesday, a one-minute video clip featuring Ma was enough to send Alibaba’s market capitalization up by an astounding $58 billion. Ma’s reappearance, says Steven Leung at brokerage firm UOB Kay Hian, “has given investors peace of mind after a lot of rumors,” allowing punters to “pile into the stock” after many large funds had bolted.
Janet’s battle cry
It also served as a reminder that, for all China’s challenges, Xi’s designs on dominating global tech by 2025 march on.
This is the conflict zone onto which Yellen steps.
As a former Federal Reserve chair, and head of the Pacific-facing San Francisco Fed, Yellen understands US-China dynamics as well as anyone Biden could’ve tapped for Treasury. Yellen also gets the incredibly charged environment the Trump gang leaves behind.
The wreckage of a four-year trade war that cost America jobs, untold billions of dollars in subsidies to US farmers and credibility on the global stage won’t be easily flushed away. But equally, nor will the political need to keep the pressure on Xi’s rising China.
Earlier this week, Antony Blinken, Biden’s pick to run the US State Department, said Trump was “right” to be tough on China. Yellen, meantime, signaled that her team will keep the pressure on Xi’s Communist Party.
“We need to take on China’s abusive, unfair and illegal practices,” she told lawmakers. “China is undercutting American companies by dumping products, erecting trade barriers and giving illegal subsidies to corporations.”
She did not stop there. China Inc “has been stealing intellectual property and engaging in practices that give it an unfair technological advantage, including forced technology transfers,” she said. “These practices, including low labor and environmental standards, are practices that we are prepared to use the full array of our tools to address.”
Yellen’s strategy qualifiers might matter most, though. Unlike Trump’s vindictive and unfocused onslaught, Yellen says the new administration will “work with our allies” to bring China to task.
It’s widely expected that Biden’s America will rejoin the Trans-Pacific Partnership, the now Tokyo-led free trade area known as CPTPP. And to grow its ranks, will lobby South Korea, Indonesia and the Philippines to join the effort. The CPTPP is widely seen as a “gold standard” free trade zone.
Yet this ship, it seems, may have already sailed.
Two-pronged approach
After Trump pulled out of the what was then known as TPP, Xi jumped into the void with the 15-nation Regional Comprehensive Economic Partnership. The RCEP positioned China at the very center of the biggest trade deal in history, one linking the ambitions of 3 billion people pivoting toward middle-class status.
CAM bigfooting BlackRock is, of course, a prime example of the futility of trying to contain China’s economic rise and financial potential. So is Biden’s team believing the US has the leverage or global clout, post-Trump, to rein in an economy that may top America’s as soon as 2026.
That’s not China’s timeline, but the one from which economists at Nomura Holdings are working.
Yellen – and Biden’s broader economic team – would be wise to prioritize a two-pronged approach to a China: collaboration and some serious self-care at home to raise America’s game.
There’s no doubt that Trump poisoned Biden’s early policy options. Though Yellen’s predecessor, Steven Mnuchin, spent years propelling Trump’s grievance-driven China policy, he really stepped things up at the end.
Case in point: the 11th-hour delisting from the New York Stock Exchange of China Mobile Ltd, China Telecom Corp Ltd and China Unicom Hong Kong Ltd.
Team Trump raced to add Semiconductor Manufacturing International Corporation (SMIC) and China National Offshore Oil Corporation (CNOOC) to a blacklist that already included Huawei Technologies and other Chinese national champions.
Mike Pompeo, Trump’s secretary of state, did his own policy vandalism on the way out the door. Exhibit A: Pompeo’s move earlier this month to lift restrictions on Washington’s relations with Taiwan. It was a gratuitous ploy to leave Biden, Blinken and Yellen with an early diplomatic mess to mop up.
China has already announced plans to personally sanction Pompeo and other US officials for “nasty” behavior.
What’s needed is a wholesale recalibration of Sino-US relations. At their earliest convenience – and Covid-19 permitting – Biden and Xi must get into a room together and hash out a new way forward.
America’s woes, China’s wins
Trump’s bluster failed to alter trade dynamics between the two biggest economies. The “phase one” deal Trump hyped was really a matter of Xi getting off cheap by buying a ton of soybeans and corn. The basic tensions – non-tariffs barriers like subsidies from state enterprises – remain and constitute fertile ground for negotiation this year.
But the real Biden-Yellen challenge is at home. It falls to Yellen, notes analyst Michael Hewson at CMC Markets, to “use all of her political skills” to convince Republicans in Congress to support additional stimulus.
It won’t be easy. Chuck Grassley, the top Republican on the Senate Banking Committee, told Yellen: “Now is not the time to enact a laundry list of liberal, structural economic reforms.”
Grassley couldn’t be more wrong. While Trump was slapping China around, he wasn’t watching his left flank. As Trump sprinted to cut taxes at home and raise them on China, Xi’s party was limbering up for the economic marathon to come, investing trillions in generating more growth and innovation from the ground up.
The support Beijing is lavishing on aerospace, artificial intelligence, automation, biotechnology, digital currencies, electric vehicles, 5G advancements, renewable energy, robots, semiconductors and creating new tech “unicorns” will pay dividends toward 2025 and beyond.
And Beijing is letting the yuan rise. Tolerating a rising exchange rate is part of Xi’s desire to increase the yuan’s profile in both merchandise trade and finance. It’s a piece of China’s progression from global shareholder to stakeholder.
It makes China’s trade surpluses more palatable, its economic growth more organic and its domestic demand on a sharper upswing. It also will pull increased capital inflows into mainland stocks and bonds. And China’s recovery sure doesn’t hurt.
“The Q4 number is remarkable,” says economist Haibin Zhu at JPMorgan. “If you look at Q4’s 6.5% – that’s even higher than the pre-pandemic growth path. From that perspective, China’s V-shape recovery is complete.”
Julian Evans-Pritchard at Capital Economics says the recent trend “confirms” that China’s revival “has become less dependent on investment-led stimulus in recent months” as the services sector grows in importance.
Controlling the pandemic
Biden’s real challenge is keeping up. His White House is trying to hit the ground running with a nearly $2 trillion stimulus package. On the campaign trail, Biden also telegraphed a $700 billion “Buy American” initiative to drive more business to US companies.
He’ll need to boost that figure – and devise an ambitious and innovative mix of tax incentives and regulatory tweaks to revitalize competitiveness.
Getting the pandemic under control is a necessary precondition to any US effort to reboot China relations. Like South Korea and Taiwan, China is proof positive that only by bending the infection curve can major economies grow steadily.
In America, Biden inherits a full-blown Covid-19 disaster – nearly 25 million cases.
Biden must urgently repair Washington’s balance sheet. Biden is stuck with a national debt of $28 trillion, and heading toward the $30 trillion mark. He’ll need to act fast to buttress trust in US institutions to protect the dollar.
Any further weakness in the linchpin of finance would sharply raise US borrowing costs, spooking global markets.
Those markets are finding ways to look beyond the damage Trump did and what Team Biden might have in store. To see how this might work, Yellen could do worse than ask the folks at BlackRock for a debriefing as 2021 heats up.