5 March 2021

China or the US – which way will Europe lean?


Whatever some economic wunderkid at Morgan Stanley says about 6.5% US growth driving global recovery this year, it’s more likely to be China’s growth, economic recovery and rising commodities demand that drives the strong recovery underway in post-Covid Asia. De facto, the global economy is already split East and West.

That’s an important issue for asset allocators. Why focus so much on the increasingly low-growth, demographically challenged Europe, or the potential of a politically unstable US, when global growth is strong, and markets cheaper in Asia? That’s why it’s so critical to consider how the long-term economic/market accommodation showdown between China and the West plays out.

The future pace of Chinese growth will be set by the National People’s Congress when it meets this week to ratify China’s 14th five-year plan (officially it’s called a programme) during a series of meetings known as the Two Sessions. The economic plan will call for further rebalancnig of the economy towards domestic consumption, but also, critically, to shift to producing everything from high-value aircraft, semiconductors, quantum computers, and low-carbon tech, directly competing with the US and other hi-tech economies. It will target carbon-neutrality in 2060.

The meeting will throw up challenges for Western investors. The NPC will clamp down hard on Hong Kong, as President Xi Jinping consolidates power. Human rights abuses in Xinjiang and the Uighers are increasingly cited as reasons to hold back from investment into the new China. Questions will arise about the South China Sea. 

If you are looking for reasons not to invest in China there are plenty. Nor is China’s economy perfect. The real estate sector is in crisis with multiple defaults. The degree of squander in its Belt & Road trade initiatives is right up there with the most wasteful European infrastructure projects.

Much will depend on geopolitics. If the US decides the only way to beat China is a second cold war – outcompeting China economically while politically isolating it from markets, then it will need the support of the rest of the global economy – particularly Europe. 

And that’s where this gets really interesting – which way will Europe lean?

A few years ago that wouldn’t even have been a question. The US and Europe were perfectly aligned in all things; democracy, free markets, the global economy, ecology and human rights. Not any more. Following Trump, unquestioning European support for the US is no longer a given.

Europe has changed. That was very clear earlier this week when a headline shot across the screen: Exports from Germany to the UK plunged around 30% year-on-year in January as Brexit took effect, according to a preliminary estimate published by the country’s Federal Statistics Office. Wow. Europe is going to be looking for new markets as desperately as the UK.

Brexit is important in terms of the geopolitics of China too. Europe has made clear the UK will be punished harshly for leaving. It’s not just shellfish and goods that are going to be blocked – intellectual services like finance and insurance that are also closed to perfidious Albion. The expulsion of UK financial services from Europe on the basis of unproven equivalence has so far benefitted US derivatives markets, but for how long? How long before the French determine FinanzplatzEuropa doesn’t need US firms either – they speak the same financial language as the detestable Brits and they are all Anglo-Saxons together.

Four years of Donald Trump undid much of what held Europe in close alliance to the US. Walking away from the Paris Climate Accords was just one thing, but insulting them on defence was quite another. With Trump still lurking in the American political background, apparently mulling another run in 2024, European leaders are unconvinced President Biden’s promises of reengagement make much sense or are even deliverable. 

Nor are the Germans particularly bothered. China is not a threat to Germany’s/Europe’s borders, and China is German’s single most important market – which is why Merkel’s approach of “equidistance” between the US and China was anathema to Donald Trump.

Meanwhile, Brussels is flexing its powers and increasingly superseding the smaller nations of Europe – even if the response to coronavirus has exposed the weakness of the European Commission, the unelected Kommissars who actually run Europe. EC President Ursula von der Leyen, or VDL as we now know her, and her team of “shunky retreads” as the Australian ambassador described them, are symptomatic of change in Europe. Power is concentrated, and there is a growing sense in Brussels that 450 million Europeans in a single block are a force to be listened to.

And if China offers a stable trading relationship and better markets than the US – then why not engage? Of course there will always be issues, such as human rights, to be discussed – but there will just as surely be ways of sweeping such concerns under the proverbial carpet.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge (www.morningporridge.com).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.