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“Dual circulation” has become the latest catchphrase in geopolitical chatter around China. Broadly speaking, it refers to the government’s long-term plan to power the Chinese economy through both external and internal channels — but with more emphasis on the latter by spurring household incomes and domestic consumption. (See my last blog post: Consumers are the engine of China’s growth.) In that sense, it’s consistent with the ongoing theme of China’s decoupling from the US and other countries.

In my view, dual circulation is not really a departure from the path China has been on for some time now, but rather a formalization of some aspects with a name attached to it. That being said, I have a few differences of opinion on what it means relative to many interpretations I have read in the media.

1. The word “circulation” matters

The mainstream narrative is that dual circulation marks a sharp pivot inward and a “closing off” of the Chinese economy as part of a stepped-up drive toward self-sufficiency. I have a somewhat different take. The way I see it, the thrust of the plan is to…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

Bilateral relations between the US and China have gone from bad to worse in recent months.

On 12 November 2020, President Trump issued an executive order (EO) that prohibits US investors from transacting in publicly traded securities of entities classified by the Department of Defense as “Communist Chinese military companies (CCMCs).” Slated to take effect on 11 January 2021, the EO fueled my concern that the outgoing administration would attempt to derail the US-China relationship before President-elect Biden takes office (on 20 January). I wouldn’t be surprised to see further efforts on this front before Trump leaves the White House.

So with that as a springboard, how might the fractured US-China dynamic evolve during Biden’s upcoming first term? I envision four potential paths…

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Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston
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It’s no secret that the US and China have been “decoupling” from one another, in keeping with the broader deglobalization theme that has been underway for some time now. The decoupling is occurring across a variety of vectors — goods and services, people, ideas, technology (see my last blog post on that topic) — and should only continue to gain traction going forward.

Supply-chain migration

One of the most talked-about forms of US-China decoupling is that of supply-chain migration. China’s role in global supply chains is gradually becoming…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

In my last blog post, I discussed how China’s enthusiastic plunge into a digital economy is unleashing massive changes that are reshaping Chinese society and, along the way, creating a bounty of investment opportunities. Rapid digitalization, however, is only one of the forces driving this transformation. Even more potent change is occurring on the back of China’s 40-year-old, now-flourishing “innovation ecosystem.”

Lay of the landscape

Innovation is the advent of new ideas, technologies, business models, and products/services (Figure 1). Over the past 40 years of China’s transition to a market-driven economy, the conditions slowly developed for a vibrant innovation ecosystem to take root. The critical elements of this ecosystem — human capital, technical and experiential knowledge, and the institutions and incentives to promote an innovative culture — are relatively new in China, having only emerged over the past decade or so. (Before then, most “new” things that appeared in China were adaptations or copies of existing things.)

Figure 1

Innovation results in rising complexity and sophistication of the economy

Thus, the ecosystem has only recently become truly “innovative” and is just starting to produce meaningful results — a tsunami of new…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

In my last blog post, I likened the US-China digital competition to an arms race of sorts — albeit (fortunately) without the imminent threat of military aggression. I posed the provocative question, “The future is digital, who will get there first — the US or China?” We don’t know the answer yet of course, but if it isn’t the Chinese, it certainly won’t be for a lack of trying on their part. China has enthusiastically embraced the inexorable shift toward a digital global economy.

US vs China: An economic cold war

I also noted in my previous post that, in the not-too-distant future, a country’s level of digitalization will be synonymous with its level of economic advancement. That’s what makes technology so valuable and so worth fighting for. Just as resources like oil have created conflict between nations in the past, so access to and control over digital resources is now creating conflict between the US and China. It’s an economic cold war, and both countries are…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

US-China relations were already bad and getting worse before the COVID-19 outbreak. The pandemic and its economic effects have only accelerated the deterioration of the relationship. In the US, a growing cohort is calling for a post-pandemic decoupling from China.

What should investors do? Prepare for disruption across the global economy as more and more sectors and industries become geopolitically sensitive, with technology topping that list. At some point, nations may no longer be distinguished by their state of economic development, but rather by their level of digitalization (or at least those will become synonymous).

Which brings us back to the US and China, the world’s two superpowers. Their global domination extends to today’s digital economy, as shown in…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

Given recent developments in the bad-to-worse US-China relationship, I’d like to share my latest views on what I see as the most consequential long-term geopolitical issue the world has faced in decades.

Lay of the landscape

  • The US-China relationship is in long-term structural decline, exacerbated in recent months by the COVID-19 pandemic and its domestic political fallout. Both the Trump administration and President Xi’s government have tried to divert blame away from their respective management of the severe health and economic crisis.
  • Recent polling data reflects this downward spiral in bilateral relations and suggests the “bash China” approach adopted by many US politicians has gained favor with the populace. According to the Pew Research Center, 66% percent of all Americans (and 72% of GOP voters) had a negative view of China as of March 2020.
  • US-China rhetoric will likely only heat up going forward as the November 2020 US elections draw near, potentially causing…
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Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

The impact of the US-China trade conflict could be longer-lasting and farther-reaching than many investors realize.

The conflict carries implications for innovation and productivity, which ultimately drive economic growth. Innovation depends, in part, on inputs from abroad via the flow of trade (goods), investments (capital), and human interactions (people). Restrictions on these channels can hamper innovation and productivity.

China and the US are imposing curbs on these channels, to the likely detriment of both countries. By contrast, trade and foreign direct investment (FDI) look poised to pick up for some emerging market (EM) countries, to their potential benefit…

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Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

Counterintuitive though it may seem at first blush, I believe the answer is yes. Why? China’s sensitivity to global trade is actually much lower than many investors may realize (Figure 1).

Figure 1

Trade concerns are likely overdone

So while talk of trade wars, tariffs, and US-China investment limits may rattle markets, I believe high-quality, domestically exposed Chinese equities are well positioned to climb this “wall of worry.”

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Philip Brooks
Philip Brooks
CFA
Equity Investment Director
Singapore

The US-China tension is one very visible illustration of this reality, but this trend towards deglobalisation has been in place since the start of the financial crisis. For instance, it’s notable that global trade (as a share of global GDP) has been flatlining for 10 years now, after rising on a continual basis for over 30 years.

There will still be economic cycles, but this structural theme of deglobalisation is changing the nature of those cycles and the underlying trends they oscillate around. This is a clear frame break from the past and will be played out over multiple years. While we will likely see an ebb and flow, driven by the broader dynamics of the economic cycle, the path is clear and concerning for economic growth.

So where do things go from here? In this post, we share seven macro directions related to the theme of deglobalisation. The long-term investment implications of these trend breaks are clear, but over a cycle, how markets respond will depend on how policymakers respond. We believe these responses will likely vary across countries and be much less synchronised than in the past.

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John Butler
John Butler
Macro Strategist
London
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