The US and China: Diplomacy is Back, but Will it Work?
Despite Biden’s confident claim that “diplomacy is back”1, was he successful in persuading his allies to unite behind US efforts to curtail the dominance of China? And in this highly globalised world would this even be possible, particularly as without China’s co-operation the twin fights against the pandemic and climate change would become even more challenging? Additionally, what would greater tension between the west and China mean for investors?
The G7 also called on China “to respect human rights and fundamental freedoms,”3 stressing both Xinjiang and Hong Kong. These words not only highlighted the ideological differences between the US and China – democracy versus autocracy – but also signalled Biden’s resolve to mobilise the G7 – and other sympathetic nations – to take on the might of China.
As with the G7 communiqué, NATO’s official statement delivered a stronger line against China than it has done previously, by highlighting it as a security risk and calling “on China to uphold its international commitments and to act responsibly… in keeping with its role as a major power.”4 That said, NATO secretary-general Jens Stoltenberg sought to minimise these words by insisting that China should not considered an ‘adversary’5.
Significantly, it was reported that China’s military aircraft initiated a large incursion into Taiwan’s air defence buffer zone on 15 June. To what extent this should be interpreted as a message of China’s displeasure towards the west’s perceived interference in China’s rule (which includes its stance on Taiwan) or a timely demonstration of its military strength is uncertain. But it implied that relations between China and the west will remain strained.
Given China’s growing dominance in global trade, it is not surprising that countries were reluctant to criticise too strongly. Last year, China was quick to retaliate to Australia’s call for an independent coronavirus enquiry by halting its imports of several Australian commodities. The need to maintain cordial relations with China is also crucial for the G7’s ambitions to address both climate change and the pandemic.
China is starting to play its part. As well as pledging to reduce emissions and reach carbon neutrality by 2060, China’s Belt and Road Initiative, which has provided infrastructure support to developing nations, has already established green projects in many emerging markets.
The G7’s commitment to ‘Build Back Better for the World’ aims to challenge China here by offering a financial and infrastructure model, underpinned by higher environmental standards and transparency. Yet, the group failed to agree how this initiative would be funded or what it would involve, currently representing little more than good intentions.
Ultimately, both climate change and the pandemic present China with an opportunity to show itself as a benign global leader – exactly the position that Biden is striving to diminish. However, co-operation and collaboration will be needed if the world is to truly make progress on these issues.
At BNP Paribas Asset Management, we believe, depending on your investment goals that given its growing weight in major global market indices and its maturing financial markets (the country now accounts for nearly 18% of global GDP and 11% of global equity market capitalisation ), China cannot be ignored in a balanced portfolio. Moreover, Chinese assets historically show a low correlation with developed and other emerging markets – providing attractive diversification qualities.
China will also play an important role in the evolution of the energy transition and associated infrastructure development, as well as the need to establish more sustainable food and water supplies given its significant population and its shift to middle-class living standards. However, investors wanting to consider the social and governance elements of ESG (Environmental, Social, and Governance) are right to be wary of China.
That’s why we include Environmental, Social, and Governance factors into the heart of our investment process and investigate all angles to make sure the companies we invest in meet our high responsible investment standards. In our view, it shouldn’t be a question of whether China features in an investors’ portfolio, but how that investment is managed.