This remains a major issue. According to the January 2020, “Phase One” trade deal between China and the United States, China agreed to increase its purchases of U.S. goods and services by $77 billion in 2020 relative to 2017 levels in covered areas. This would have implied total U.S. exports to China of $263 billion in 2020, (assuming no change in non-covered areas). However, extrapolating from trade data released on Friday, it appears that, in 2020, actual exports from the U.S. to China were just $162 billion, actually 13% below 2017 levels. While missing the targets is understandable given the pandemic, the Biden Administration is likely to push for further measures to address the imbalance. Within the trade arena, Washington will likely continue to be particularly aggressive on issues related to technology.
The Biden Administration is also likely to pursue a more multilateral approach than the Trump Administration and is less likely to be in conflict with traditional U.S. allies. Engagement with China may also be broader than with the Trump Administration with a greater focus on areas where cooperation is necessary, such as climate change as well as areas of potential confrontation, such as human rights and territorial disputes.
That being said, President Biden is likely to take a more strategic approach to relations with Beijing and the uncertainty caused by sudden threats of tariffs or other actions is less likely to be an issue over the next few years than the last few.
The Road Forward
China’s progress in emerging from the pandemic, returning to normal economic growth while avoiding financial bubbles, and negotiating its relationship with the rest of the world will undoubtedly have an impact on Chinese and global markets in 2021. However, for long-term investors, it is important not to miss the forest for the trees.
The most important Chinese theme is simply one of growth. China already has the second largest equity and fixed income markets in the world and we estimate that, by 2027, China could surpass the United States to become the largest economy in the world. The growth in the Chinese economy should come from stronger consumer spending on the demand side and growth in the development and use of technology on the supply side.
Despite very strong gains in 2020, the MSCI-China index still sports a lower forward P/E ratio than the S&P500, while yields on Chinese government bonds remain significantly higher than in the U.S. and Europe. As the global pandemic winds down, many Americans will be looking to resume international travel. Their portfolios might also benefit from a more global perspective, including taking a closer look at China.
David Kelly is chief global strategist at JPMorgan Funds.