Blog What’s going on with the US-China relationship? It’s complicated…

What’s going on with the US-China relationship? It’s complicated…
The modern dating game is difficult to navigate, more so when you are the world’s biggest superpowers. So it was no wonder that panelists at the 22nd Credit Suisse Asian Investment Conference (AIC) struggled to agree on the correct romantic metaphor to describe the state of the relationship between the US and China. Are they a married couple that is thinking about a divorce? Or a pair that have been dating for a while but are yet to fully commit? Whatever the description, one area of agreement was that all is not well between the world’s two largest economies. 

A panel of leading experts on geopolitics shed light on the future of China-US relations.

“We are entering a new era of confrontation. It’s wrong to say competition, as competition suggests something friendly. The great era of cooperation is over,” said Minxin Pei, Professor of Government, Claremont McKenna College in California, who is an expert on China and US relations. 

On the rocks

It would be fair to characterise Pei as a pessimist on the prospects for the US-China relationship and about China’s political and economic trajectory more generally. For him, a reconciliation is off the cards for now.

“In terms of first order interests, the US and China are completely at odds. The US’s fundamental long-term interest is to stop other countries from dominating Asia, while China’s aim is to be the dominate country in Asia. The US had hoped China would find a place in a US-dominated system but that has not been the case.”

But if Pei is the divorce lawyer arguing that separation seems the most likely outcome, then David Daokui Li is the marriage counsellor urging the two sides to look for common interests that will bring them together. Li, who is a Director at the Academic Center for Chinese Economic Practice and Thinking at Tsinghua University, says these common interests revolve around maintaining stability and include preventing the proliferation of nuclear weapons, stopping the spread of Islamic extremism and avoiding another global financial crisis. 

I’m pretty sure that in 2020 when the US election comes, China will be the country people love to hate in the debates. Dong Tao, Vice Chairman Greater China, Private Banking, Asia Pacific, Credit Suisse

Irreconcilable differences

So what does all this mean for the trade war? Well the good news is that some sort of deal on trade will be struck, according to Dong Tao, Credit Suisse’s Vice Chairman Greater China for Private Banking Asia Pacific. The bad news is that the tension between the two countries will remain with the possibility of the conflict broadening beyond trade. 

“I do believe that in Q2 or Q3 they could reach some kind of trade agreement because both sides need to claim a victory, but I’m pretty sure that in 2020 when the US election comes, China will be the country people love to hate in the debates,” said Tao. 

“I don’t think this issue is going to be solved in my lifetime. I think this competition is going to last a long time and it’s going to spill over from trade into other areas.”

Unfortunately, the AIC panellists felt those spill-over areas could include territorial claims around the South China Sea, although a direct military conflict was considered to be unlikely, if possible. 

Moving on 

However, it’s not just on the international front that China faces challenges. Under the leadership of President Xi Jinping, the county is undertaking economic and political structural reforms that are creating tensions domestically. 

For Li, the most important policy of the last year has been China’s attempts to deleverage and its negative impact on economic performance with GDP growth falling to 6.6% in 2018, the lowest rate since the slowdown forecast to continue this year. 

Slowing total social credit growth

Source: CEIC

“I’ve been saying for the last few years that the policy of deleveraging has been badly designed. Overall leverage in China is not that high, in fact I would say that it is too low because the China national savings rate is much higher than in the US. Instead of talking about overall leverage, the focus should be on bad debts,” said Li.

To illustrate, Li shared the example of infrastructure investment which he said grew at 0% in 2018 if inflation is taken into account. 

“Infrastructure consists about 22% of total fixed asset investment and total fixed asset investment is about 38% of GDP so no wonder the economy is slowing down,” he explained. 

And maintaining sustainable economic growth will be key for President Xi if he is to realise his ambition to lead the country for a third term as he is under enormous pressure to “deliver a satisfactory report card,” said Pei. 

“Is a third term a shoo-in? If China’s external environment is favourable, the economy is thriving and party officials are hopeful, then maybe.”

If not, then President Xi might find that his relationship with his country and his party could hit a rough patch.