2022 international news was dominated by the brutality of the war in Ukraine. As a result, the relationship between the USA and China has not been at the center of investors’ attention. Especially as news about China was more focused on first the 20th communist party congress and then on the end of the COVID restrictions.
It would be a mistake to let our guard down. Relations between the two richest and most powerful countries on Earth have degraded steadily throughout the last year.
So as investors, the question we should ask is, “how can we avoid losing money and instead profit from the situation?”
New Lows in Bilateral Relations
For a long time, the USA and China had pretty efficient relations. The US brought technology and capital. China offered cheap production costs. These relations became more strained as China asserted itself as a world power.
In parallel, it has become normal in the US to see China not as a partner but as an “adversary.” This started under Trump, with the then-president initiating trade wars. And it’s still going on with Biden.
Most notably, sanctions on the semiconductor sector have gone from “only the most advanced chips” in 2018 to a move to destroy all chip manufacturing in China.
In a politically divided country, it might be the last bi-partisan consensus.
Beyond competition in trade and technology stands the question of Taiwan. De facto independent since 1945, Taiwan is still considered by China as a rebel province that WILL be brought back under the control of Beijing. Peacefully or not is the only open question for the Chinese leadership.
On the other side, the USA is highly reliant on Taiwan’s production of semiconductors. It also sees the question of Taiwan’s independence as a matter of principle. Something worth defending with US troops, according to Biden, even if his administration quickly backtracked.
In that context, the support China provides to Russia is only increasing the hostility and suspicion between the USA and China.
Ukraine War Fallout
No matter who wins in Ukraine, this will have negative consequences on China-USA relations.
If Ukraine wins, Russia will be severely weakened. This will make China more isolated and extra worried about being the next target of the US-led alliances and permanently losing any chance to regain control over Taiwan. Disruption in the Russian supply of oil, gas, metals, and food would make China especially vulnerable.
If Russia wins, it will make NATO aware of the need to re-arm and handle growing threats. The rhetoric against “non-democratic powers” and the threat they represent for the world will also go into overdrive. This will increase tensions with the Chinese Communist Party (CCP) and limit possibilities for diplomatic detente.
What to Expect?
At the heart of the tensions are two different incompatible objectives. The USA wants to maintain the post-Cold War, US-led order. China wants to create a “multipolar” world divided into spheres of influence.
There is also the replacement of the IMF, NATO, and World Bank with Russia and Chinese-led initiatives like the Shanghai Cooperation Organisation (SCO) and the Belt and Road Initiative (BRI).
So even if we (hopefully) avoid a Taiwan invasion and/or open war, we should not expect the situation to improve significantly. The two countries will be rivals and struggling to change the balance of power for a while.
We should invest accordingly.
What to Avoid
Before we look at ways to make money from all this, we should look at investing situations that we should avoid, knowing the tensions are not going away and are likely to get worse:
- Chinese companies with links to the military: Any company supplying equipment to the Chinese army is likely to be already under sanctions or will be in the future. It would make them un-investable for US citizens and corporations. This includes a lot of tech and AI companies.
- US-listed Chinese companies: delisting is an easy-to-implement threat and a good way to increase separations between the two economies. Investing in Chinese companies can be fine, but only for China-listed companies.
- US companies with more than 30% of revenues coming from China. US stocks whose price depends on growth coming from China are in the same situation.
- Taiwan-based companies: The island will be the focal point of two superpower rivalries. This means that we should see in the future some heightened tensions and a crisis of some sort that is likely to make investors panic and sell en mass. No matter how good the companies are, this is the same type of risk that investing in Ukraine or Russia in 2020-2021.
Many of these companies may appear to be fundamentally attractive based on financial results because the market is pricing in geopolitical risks. Those risks are still very real and should not be ignored.
Different Ways to Benefit From USA-China Tensions
The Internet and financial media are full of “doom and gloom” commentators. But money is usually made by finding the right opportunities instead. Luckily, there are plenty of options.
Re-Shoring & De-Globalization
With the pandemic and the war in Ukraine, Western governments have realized foreign supplies come with risks attached. Strategic supplies are likely to be brought back home. Building massive semiconductor factories in the US is just the beginning of this trend.
US and EU suppliers for industries like pharmaceutical and defense energy will likely see business booming in the 2020s and 2030s. The same old true for strategic natural resources like fossil fuels or rare earth metals. Probably anything energy-related as well, including renewables.
Chinese companies replacing Western suppliers can be an option too. For example, Goldman Sachs forecasts explosive growth for Chinese software companies and semiconductor suppliers in 2023.
Globalization Spreading Out of China
Many international firms will not bring production back home. Instead, they will diversify their geographical risks over many countries. In any case, China’s labor was already getting too pricey.
So we should see a lot of industrial production relocate to cheaper locations. Apple moving out of China is going to be followed by many more.
The best places combine a few factors like cheap and large labor pools, good infrastructure, good energy supply, proximity to Western markets, and geopolitical neutrality.
A few of the areas to look out for are:
- Indo-China /Mainland South-East Asia (Vietnam, Thailand, Laos, Cambodia)
Each of these countries will likely experience massive growth from factories moving out of China. There are several ways to play it out:
- A bet on the whole country’s economy: general economic growth will translate into more income and investment. This will boost real estate prices and consumer spending from a rising middle class. REITs, dominant retail brands, banks, and healthcare should be the main winners from it.
- Local suppliers: who is the next local Foxconn positioned to provide full services to the moving corporations? If you can answer that question, you might have found a good long-term opportunity. High-quality local partners to international corporations usually grow A LOT and go up the value chain over time.
- Construction: Beyond existing real estate, new factories and an economic boom will need a lot of new buildings. Architects and builders see corresponding booming profits.
- Service providers: these could be law offices, HR services, industrial facilities, rental of office space, or anything a corporation moving business there will need. It includes logistics (railroad, harbors, trucking).
- Expat-focused services: there will be plenty of engineers and manager-level ex-pats moving into the country to supervise the building of the freshly moved operations. International schools, high-end real estate, specialty foods … a lot of small but profitable niches will grow suddenly.
All of these sectors are likely to boom in the countries that move into China’s “factory of the world” role.
After the fall of the Soviet Union, geopolitics did not matter for a decade or so. Idealists believed this was the “End of History.” 2022 put this idea to rest completely.
But this is not a reason to panic either. The rise of China as a competing power will also redistribute the benefits of globalization more equally to the rest of the world. We should expect many other developing countries to get richer and more influential over time.
This is a great opportunity for investors. If you missed the rise of China or were too young to invest in it, it is time to correct that.
Countries like Indonesia, India, Vietnam, and Brazil will be the big winner of the US-China rivalry. Investors betting on them can ride this new great growth story with them.