So far, so good. This appears to be the initial assessment of investors watching for signals from the new Biden administration on future policy changes.
The Democrats’ plans to move forward with the economic stimulus and tackle the pandemic have helped drive the US and global stock markets to new highs this week.
There will of course be many other policy changes for investors to digest. But there is a theme that will likely persist from the Trump years in the White House. The latest news from Washington to China suggests that an already combative economic and technological rivalry between the two powers has great strength.
“China is clearly our most important strategic competitor,” Janet Yellen told lawmakers during her confirmation hearing this week as US Treasury secretary under the new president. “It has stolen intellectual property and engaged in practices that give it an unfair technological advantage, including forced technology transfers.”
Ms Yellen’s comments come after a number of Chinese companies pulled off Wall Street in the late stages of the Trump administration, causing investor unrest.
It is possible that the Sino-U.S. Rivalry will increasingly involve and destabilize financial markets over the next four years, as the global economy recovers from Covid-19.
Trying to make life more difficult for businesses and industries for reasons of national security can lead to higher costs and lower revenues. During the Trump presidency before the pandemic, the explosion of US-China tensions hit stock markets, raising concerns about the economic outlook.
“The strategic competition between China and the United States is here to stay and will be a persistent dynamic,” said Jean Boivin, director of the BlackRock Investment Institute.
But many on Wall Street believe China’s rise to power will provide opportunities for investors. The likes of Ray Dalio of the Bridgewater hedge fund firmly believe that China is on its way to becoming a financial center within the global economy and one that will eventually rival London and New York.
Foreign asset managers are expanding their presence in China, as the country welcomes them to help Beijing open up its financial markets to the rest of the world. More Chinese stocks and bonds are included in global benchmarks overseen by large index groups such as MSCI and FTSE Russell.
This propelled a surge of foreign capital into the country last year and helped Chinese stocks outperform the rest of the world. The CSI 300 is up 35 percent in the past year compared to the MSCI All World’s ascent of 16 percent.
Mr Boivin said the low level of global ownership of Chinese assets and better long-term growth prospects in the Asia region compared to the rest of the world was an interesting combination. Over the next five years, BlackRock estimates that Chinese A shares will produce average annualized returns of 6.4% compared to 4.1% for US large-cap companies.
“In our view, there is a clear case for a greater allocation of the portfolio to assets exposed to China for returns and diversification,” Mr. Boivin said.
The fact that Chinese sovereign bonds offer much higher fixed interest rates than those of developed countries is also attractive to global investors. Chinese 10-year bonds generate 3.10%, well above those of the major economies.
In addition, a strong renminbi strengthens the case for Chinese assets. The currency is not far from testing a band of 6.0 to 6.25Rmb per US dollar which represented peaks observed in late 2014 and 2018.
Alan Ruskin, strategist at Deutsche Bank, said that if Beijing aims to slow the pace of appreciation, the exchange rate should strengthen.
“It’s positive for long-term investors [buying renminbi denominated assets] in China, ”he added. Ruskin said the prospect of a sustained rise in global demand for Chinese financial assets from their current lows represented a structural boon for the renminbi.
However, a more predictable currency and an impressive rebound from the pandemic doesn’t mean investors should lower their guard on Chinese markets. Questions about its corporate governance and legal standards remain. Beijing also faces long-term challenges, including a heavy debt burden with increasing business failures, low productivity and an aging population.
“There are many reasons why investors should be exposed to China, but a lot of good news is already being assessed by the markets,” said George Magnus, research associate at the China Center at the University of Oxford.
He thinks Wall Street has “a selfish argument for being optimistic about China.” But in general, there will likely be a “much more hostile global environment for China.”
This increases the risk of China changing the rules with little warning. It currently hosts global capital, but it is not set in stone. Especially if the tension between the United States and China escalates.