New Cold War, or new frontlines?

China did things at its own, measured pace. On Nov 13, a week after Biden’s win was called, a spokesperson congratulated him at a daily routine briefing from China’s Foreign Ministry. Subsequently, Chinese President Xi Jinping sent a congratulatory message to Biden on Nov 25, while Vice-President Wang Qishan congratulated his running mate Kamala Harris on the same day. When Trump won in 2016, President Xi offered congratulations the day after.

Ryan Hass, former Director for China on Obama’s National Security Council, does not see the late congratulation necessarily as a sign of China’s hostility towards Biden’s administration. He suggests that Beijing was probably looking to avoid getting into Trump’s “political crosshairs” while he remains in office. “Beijing likely sees more risk than gain in getting ahead of Trump in acknowledging the outcome of the election,” he tweeted, noting that officials want to avoid being seen as interfering in US domestic politics.

But there will certainly be much uncertainty about Biden’s future policies in Beijing. On the one hand, China will be glad to see the back of Trump’s fire-and-fury approach to diplomacy. More than just Trump’s hostile attitude, the economic cost has been considerable, with the trade war causing China to suffer losses of some US$35 billion ($47.1 billion) in exports in 1H2019. The Global Times, a state-run nationalist paper, quoted a netizen saying that having Biden as president will help smoothen China-US ties. “Beijing is [a] For-Biden City,” the netizen quips.

Yet, China recognises that the pre-Trump era of US-China cooperation may have drawn to a close. Even with a familiar face from the Obama administration as the new leader of the US, experts expect Biden to continue his tough stance towards China. Jin Canrong, associate dean of Renmin University’s School of International Studies, told Global Times that given the strategic consensus between both Democratic and Republican parties to pursue a tough China policy, expectations of returning to the status quo before Trump are probably unrealistic. In short, a prolonged cold war may have been averted, but new frontlines seem to have taken its place.

Another school of thought rues Biden’s victory as a missed opportunity for Beijing, since Trump’s leadership is seen as a means of weakening the US vis-a-vis China. Yan Xuetong, dean of the Institute of Modern International Relations at Tsinghua University, told the BBC that China would have preferred a Trump victory as he would “damage the US more than Biden”. Trump is even popularly called the “nation-builder” in China, due to the belief that his misrule will strengthen China’s relative power vis-a-vis a diminished US alienated from its traditional allies.

On the other hand, Biden — as a more “normal” and competent leader who is a former foreign policy expert in the senate — could prove to be a threat by uniting US allies against Beijing. Under Trump, traditionally pro-US allies like Japan have discussed rapprochement with China due to a fear of US unreliability under the populist president’s erratic foreign policy. Biden, it is feared, will shore up US alliances to exert pressure on China on the human rights and technology fronts, giving Chinese foreign policymakers far less geopolitical room for maneuver.

Basically, observes Kishore Mahbubani, distinguished fellow at the National University of Singapore’s Asia Research Institute, a Biden win is of short-term benefit to China in terms of more predictable US behaviour and better management of the trade war. But in the long run, a recovery of US influence among its allies could increase its long-term global influence vis-a-vis China. Dylan Loh, assistant professor at Nanyang Technological University, believes, however, that ever-pragmatic China is already prepared to deal with whoever wins the election.

Towards a Biden doctrine

If the “Trump doctrine” can be exemplified by the phrase “America First”, or “Maga — Make America Great Again”, then Biden’s approach to foreign policy perhaps reflects the opposite impulse — internationalism. Instead of approaching the world through a strict zero-sum calculus and making choices that are perceived to enhance short-term US interests at the cost of global stability, Biden believes that the US should exercise global leadership and mobilise US allies and the international community to solve global challenges.

“We must once more...rally the free world to meet the challenges facing the world today. It falls to the US to lead the way...We have to champion liberty and democracy, reclaim our credibility, and look with unrelenting optimism and determination toward our future,” wrote Biden in Foreign Affairs in March 2020. Jake Sullivan, Biden’s new national security advisor, argued in the same magazine in March 2018 that only the US possesses sufficient reach, resolve and a “historical willingness to trade short-term benefits for long-term influence” required to uphold the US-led international order.

This dual respect for international institutions and fierce commitment to the idea of spreading democracy will likely change the qualitative if not quantitative nature of the US-China rivalry. Biden identifies China as a “special challenge” on both the economic and ideological fronts, characterising Beijing as a human rights abuser and an intellectual property thief. Rather than pursue damaging trade wars or proceed recklessly with unilateralism, however, the President-elect intends to rebuild US alliances to confront China on these issues via economic clout, asserting pressure on Beijing well within the framework of the liberal international order.

Some concrete steps are already emerging from Biden’s allies. Chris Coons, senator of Delaware and a key foreign policy advisor of the President-elect, signalled in his conversation with Eurasia Group founder Ian Bremmer that a Biden administration could make greater use of the US’s newly-founded United States International Development Finance Corp (DFC) to compete with China’s Belt and Road Initiative (BRI) to invest in the developing world. The goal, he discloses, would be to raise the bar for development projects in terms of labour and environmental standards, denying China the ability to set its own standards for such investments and exercise leadership unchecked in the emerging world.

In his Foreign Affairs essay, Biden notes that countries will trade with or without the US. The question is, who will be the ones writing the rules; who will look after workers and the environment; and who will push for transparency and help support the wages of the middle class? “The US, not China, should be leading that effort,” declares Biden.

On top of vowing not to let China redefine the rules for the international order, Biden has also promised to invest in the R&D of key technologies ranging from clean energy, quantum computing, AI, 5G, high-speed rail, and even cancer treatment, so as to stave off China’s competition and keep America’s technological edge.

But observers note that Biden is unlikely to lead the US back into the Trans-Pacific Partnership, despite the significant gains in economic and geopolitical influence it offers the US. “We doubt Mr Biden will choose to expend domestic political capital by joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and this will act as a constraint on the ability of the US to project power in the region,” says Tom Rafferty, Asia regional director at The Economist Intelligence Unit (EIU). But with Xi announcing at this year’s APEC summit that China is open to joining CPTPP, an about-turn may be forthcoming from Biden to preserve the US’s relative influence in the Asia-Pacific.

A return to detente?

Yet, Biden’s reputation as a relationship builder across partisan lines could open the door for improved relations with China. In a 2016 article for The Atlantic, Steve Clemons — who has first-hand experience of Biden’s foreign policy work abroad — says that the President-elect’s strong emphasis on relationships in diplomacy helped achieve the seemingly impossible, including brokering rapprochements between Turkey and Israel, and between Japan and South Korea. Biden, according to unnamed White House regulars, often “makes space for things to happen,” perhaps opening a window towards some form of future reconciliation, notes Clemons.

Other commentators share varying degrees of optimism. “We expect the Biden administration to be less aggressive and more predictable in its foreign policy, including vis-à-vis China, which will be a positive,” says Louis Kuijs, head of Asia economics at Oxford Economics. This less erratic style of diplomacy alone is likely to at least limit the escalation of US-China conflict; even if structural tensions remain, there should be a resumption of a more constructive US-China engagement absent under Trump. “Relations aren’t likely to be chummy, but Beijing is hoping diplomacy between the two superpowers can be restored,” writes Bethany Allen-Ebrahimian, a China correspondent at Axios.

Aidan Yao, senior Emerging Asia economist at AXA Investment Managers (AXA IM), expects some tactical changes in Biden’s China policy even if US-China competition remains overall. He notes that Biden has criticised that the US itself has been hurt from the trade war: a Bloomberg Economics report says the war would cost the US economy US$316 billion by end-2020 with no marked improvement in its trade deficit with China. Yao expects a Biden administration to use fewer sanctions, trade restrictions and entity lists against Chinese firms, though a resolution to the “tech war” is perhaps a step too far.

“Even though we don’t expect the tariffs to be rolled back immediately, more constructive trade talks could bridge gaps in the negotiation, helping to remove an overhanging risk for financial markets and economies,” says Yao. Mark Mobius, founding partner of Mobius Capital, notes that even a switch to a softer tone in diplomatic engagement would help reduce market volatility, even if such dulcet tones are ultimately backed by the “big stick” of tough policies.

Biden’s age could also be another catalyst for reconciliation. According to Cédomir Nestorovic, professor of geopolitics at Essec Business School, Biden is likely to be a one-term president, since he will be 82 at the end of his first term. As such, his aim in office would be to solidify his legacy as a political leader, rather than secure re-election to the presidency. Resolving the US-China trade war, Nestorovic tells The Edge Singapore, would prove a meaningful crowning achievement for his long career on the foreign policy front, potentially driving him to seek some form of rapprochement during his time in office.

Ultimately, however, Nestorovic warns that Biden’s foreign policy stance will be shaped by who he enlists into his foreign policy team as he seeks to unite rival camps in the Democratic Party. Stephen Walt, professor of international affairs at Harvard University, writes in Foreign Policy that the desire for US global leadership shared by Biden and his key advisors will be tempered by a desire for greater restraint and focus on domestic politics by Progressives in the Democratic party. At the same time, however, the latter’s concern for human rights and scepticism towards trade could also see Progressive heavyweights like Elizabeth Warren and Bernie Sanders clamouring for tougher action on China.

Robert Kaplan, senior advisor at the Eurasia Group, does not see a Biden administration improving US-China relations significantly. “I know all the people that [Biden] will appoint in the Asia portfolios...and all of these people are moderate Democrats who in the past decades have become increasingly hardline against China,” he told the DBS Asia Insight Conference 2020. Republicans, keen to paint Biden as “soft on China”, are likely to pressure Biden into adopting a more hawkish stance too.

“The first thing is we have to dig out from a strategic deficit that President Trump has put us in...President Trump has helped China advance its own key strategic goals by weakening alliances, abandoning US values on human rights, and debasing America’s democracy,” said Anthony Blinken, Biden’s incoming Secretary of State in a Bloomberg TV interview in August 2020.

An economic great wall

Meanwhile in Beijing, change is also in the air as the Chinese Communist Party tables its 14th Five Year Plan to guide its economic strategy over the next half decade. Details about the plan have not been fully articulated as party leaders develop the finer points. What is clear is that a key pillar will be the strengthening of China’s internal economic drivers, in addition to external ones through a “dual circulation” concept in response to a more complex international environment. Yao of AXA IM says that this inward shift will make up for potential losses of external growth opportunities, fortifying China’s economy against Covid-19 and the trade war.

“We think that certain things will be de-emphasised, such as the BRI, investment in sensitive technology and M&A in areas of national security concerns,” Yao told an AXA IM media briefing in September. With these actions having proven controversial rather than welcome to the rest of the international community, he notes, it would make sense for China to roll back somewhat on these initiatives for the present time. ESSEC’s Nestorovic also highlights that much of this retrenchment was also brought about by economic damage that China sustained from both Covid-19 and the trade war, strengthening the case for an inward turn.

This dual circulation concept could also help correct what Chinese international relations expert Shi Yinhong calls “strategic overdraft”, where an ambitious foreign policy causes an overspending of economic and political capital with diminishing returns. After a period of dramatically “pushing forward”, he said in a Carnegie-Tsinghua Institute podcast, China should readjust its strategic posture to defuse the antagonism of its rivals and consolidate its gains. Shi, chairman of the Academic Committee of Renmin University’s School of International Studies, urged broader and deeper internal structural reforms to ensure economic and financial stability such as improving market access and “giving equal treatment to private and state-owned enterprises”.

China could possibly be moving in such a direction: Yao believes that Beijing will prioritise “internal circulation” affecting the domestic economy over the outward-facing “external circulation” in response to a more complex international environment. Additionally, among its external circulation initiatives are likely structural reforms like financial liberalisation, open capital markets and deregulation of foreign direct investment. At home, it will likely also look to develop new urbanisation projects, upgrade consumption and encourage absorption of capital inflows.

But the new plan also looks to double down on domestic technology and innovation. “For its part, China’s focus is likely to be on investing in self-sufficiency and fast-tracking the building of alternate financial and technological infrastructure. We expect a continued shift to a more bipolar world of divided technology ecosystems, led by the US and China, increasing the importance for investors to diversify globally in the technology sector,” says Mark Haefele, global chief investment officer at UBS Global Wealth Management. But such continued “indigenisation” of frontier technology, says Yao is likely to see the US-China tech war persist, with the mutual decoupling of core technologies limiting globalisation and causing lasting pains to the global economy.

Nestorovic also does not see an inward shift leading to any meaningful rapprochement in US-China ties even if China shifts its focus towards its domestic economy. The fact that China is located in one of the most geopolitically-charged regions of the world — with disputes in the Taiwan Straits and South China Sea, for instance — means that Washington will continue viewing Beijing as a threat for the foreseeable future. Initiatives like developing technology and innovation at home — likely a key part of internal circulation — have also been seen as a form of protectionism.

In any case, says NTU’s Loh, much of the 14th Five Year Plan is likely to be a continuation of existing initiatives that China has already pursued in recent years. Thus, he believes that there is unlikely to be any change in the US’s threat perception of China. Moreover, he thinks that China’s inward-oriented development is not at odds with a continuation of outward-looking initiatives. Not only is China’s emphasis on the BRI likely to remain strong due to continued diplomatic advantages it reaps in the developing world, President Xi’s CPTPP announcement seems to suggest China’s continued willingness to continue economic engagement with regional neighbours.

But the Five Year Plan could include a renewed focus on one issue that both Beijing and a Biden administration could agree on: climate change. With Xi promising at the UN General Assembly that China would aim for carbon neutrality by 2060, an opening for cooperation with a more environmentally-friendly Democratic administration could emerge. But while Biden claims that he is willing to cooperate with Beijing on climate change, it remains to be seen if there remains sufficient trust and goodwill on both sides to work together on this pivotal global crisis.

Of grass and elephants

It is a common saying in Southeast Asian diplomatic circles that “when the elephants fight, the grass suffers”. While the destabilising and erratic Trump is no longer directly in charge of US foreign policy, Rafferty of EIU sees volatility and uncertainty remaining a disruptive feature for regional businesses even as US-China rivalry rages on. For risk-averse regional financial markets, such a development could prove to be a medium- to long-term downside on earnings, especially for the assets with greater exposure to either of the world’s two largest economies.

Such tensions could see political and geopolitical risks to business growing with time. “Rather than a decisive, economy-wide divorce, the US and China are entering years of reluctant co-habitation. Multiple industries will continue to face disruption and political-policy complexities that were once seen as problems only in traditional strategic sectors like defense and strategic national infrastructure,” writes Dane Chamorro, partner at Control Risks Asia Pacific. He sees more sectors becoming “national strategic interests” for investors on both sides, including key industries like technology, healthcare, financial services and data-driven industries.

Loh of NTU also sees these trends spilling over into Asian businesses as well. “It is impossible to disregard the political dimension even if you are making your decision for non-political reasons,” he says, noting that political considerations are beginning to influence the selection of 5G providers by states, a decision that would otherwise be animated by economic and security concerns. Regional start-ups have also suffered from US and Chinese venture capital firms withdrawing from each other’s countries as a result of technological decoupling, which Loh says may hurt those that rely on US and Chinese joint funding.

But there could be an upside for Asean countries as Biden seeks to re-engage with the grouping to enlist their help in supporting US objectives. “For Asean countries, this should imply benefits. For instance, the US may offer a free trade arrangement and improved military cooperation to its partners in the region,” says Michael A Witt, professor of strategy and international business at Insead. He sees Asean possibly playing the two powers off one another to extract “kingmaker gains” for themselves.

For example, the Trump administration has already lifted a US visa ban on Indonesian Defence Minister Prabowo, a former hardline general implicated in alleged human rights violations including Indonesia’s then-occupation of East Timor. From Witt’s perspective, such a move can be considered a friendly overture as Washington seeks to woo the emerging power.

It remains unclear what role the DFC, created just last year, is likely to play in the Biden administration’s engagement with Southeast Asia. After all, says Brian Arcese, portfolio manager at Foord Asset Management Singapore, the DFC is the successor of existing organisations that have been involved in development investing since the 1970s. Still, any moves to strengthen regional infrastructure will be viewed favourably by the region.

According to the Asian Development Bank, Southeast Asia needs to spend at least US$210 billion until 2030 to maintain its growth momentum, resulting in an infrastructure contest between China and Japan throughout the region. But should a Biden administration’s emphasis on human rights see infrastructure investment be tied to human rights conditions, regional states may come to resent what they see as undue interference in domestic affairs vis-a-vis the relative agnosticism of Beijing towards such issues.

For now, Paras Anand, chief investment officer, Asia Pacific, at Fidelity International, sees continued US-China tensions and congressional deadlock over fiscal stimulus weakening the US dollar. “Clearly the points above speak to the attraction of non-dollar denominated assets. With the prospect of increased volatility, this suggests a good risk-reward balance in Asian fixed income markets, and in particular Chinese government bonds and Asian highyield bonds,” he writes. He also sees value in Indian and Southeast Asian equities — which have lagged the Asia Pacific through 2020 — and Japan for ongoing corporate reforms and attractive valuations.

“We see a number of tailwinds that may benefit Asian fixed income. For one, the inclusion of Chinese bonds in global indexes is estimated to usher in more than US$150 billion in potential inflows into the Chinese onshore bond market,” agrees Arthur Lau, co-head of emerging markets, fixed income, and head of Asia ex Japan, fixed income, at PineBridge. He also sees a weakening US dollar also benefiting Asian local currencies in the near term, though he prefers high-yielding local currency government bonds and economies with no near-term refinancing concerns like Indonesia, China, and India.

A weaker greenback in the long term, says Bank of Singapore head of investment strategy Eli Lee, could also benefit risk assets. “Macro trends such as sustained ultra-low rates and waning US dollar strength remain supportive of risk assets,” he remarks in the context of a positive market outlook arising from long-term post-pandemic recovery and an accommodative stance from central banks. Meanwhile, UBS’s Haefele also notes that US-listed Chinese shares could benefit from reduced delisting threats from US stock exchanges, with Biden’s reduced proclivity to use tariffs as a policy tool strengthening the renminbi too.

Arcese notes that investors should avoid building a “zero-one” portfolio and instead build a resilient portfolio that can withstand future political and geopolitical shocks. He sees equities as relatively cheap due to low interest rates, with strong value in energy and healthcare (e.g. United Health), though he urges caution on the back of potential regulatory risks. But he underweights fixed income due to low interest rates vis-a-vis inflation and credit risks for corporate bonds, arguing that precious metals are a better hedge in a low-interest-rate environment.

Still, the strategic risks of the US-China conflict remain some way away; for now, the attention of markets is primarily on Covid-19 developments, which have a more immediate impact on businesses. But once the pandemic is under control, the US-China geopolitical contest will return to the foreground, albeit in a modified form. In the meantime, perhaps businesses and investors should take the calm before the storm to adapt themselves to a world where the line between commerce and geopolitics are blurred like never before.