Navigating the U.S.-China Divide

Kasia Kiladis


Decoupling, self-sufficiency, self-reliance: These are common terms used to describe the various elements of the deglobalisation between the U.S. and China. Despite the recent rhetoric, this isn’t a new phenomenon.  


With tensions increasing between the two superpowers, U.S.-China relations rank among U.S. companies’ top challenges, along with Chinese policies on issues ranging from data, personal information, and cybersecurity to government procurement and intellectual property. It is, therefore, no surprise that the pace of planned new investment by American companies in China is expected to slow next year.  

China paved the way for formal supply chain decoupling with its Made in China 2025 programme seven years ago. The state-led industrial policy is intended to update China’s manufacturing base by rapidly developing high-tech industries such as electric cars and other new energy vehicles, next-generation technology, and robotics, to name a few.  

This shifting landscape could be problematic for investors seeking stable returns as globalisation over the last several decades has benefited both countries as well as big multinational companies. Well-known U.S. companies such as Apple, Starbucks, and Nike have a strong presence in China and derive a notable amount of revenue from the region. U.S. chipmakers have far more significant revenue exposure to China and are likely to experience heavy losses with the U.S. banning exports of semiconductors to China.  

How far this decoupling will go is difficult to forecast. China remains an important market for U.S. businesses and farmers across the country who benefit from this export relationship. In 2021 $149 billion of U.S. goods and $37 billion in services were exported to China as global trade recovered from the pandemic. The number of U.S. jobs supported by all exports to China was just over 858,000 in 2020.

U.S. Goods Exports to China (billions, USD)
Source: The U.S.-China Business Council, U.S. Export Report 2022.

The hope is that the economic relationship, which in the past has helped to stabilize the overall relationship, will once again be properly prioritized. Meanwhile, investors should look to diversify their investments by investing in those companies that will benefit from decoupling both in the U.S. and China.  

The U.S. (S&P 500®) and Chinese markets (CSI 300) have demonstrated this recent decoupling with the correlation between them turning negative. There have been occasions where the correlations between the two markets have been negative including in the second half of 2021, Q4 2019, and early 2018, just to name the most recent. Outside these bouts of negative correlations, the two markets have consistently displayed low correlation, typically below 0.40. The exception recently was in early 2020 when all markets fell during the early days of the COVID-19 pandemic.

Correlation Between U.S. and China Markets
Source: Bloomberg. Data as of November 1, 2022. Daily correlations between SPX vs. CSI 300 over a 60-day rolling period.

China’s capital markets have increased by nearly 40% since the onset of the pandemic and are the second largest equity and bond markets in the world but international investors only hold 5% of China equities and slightly less for bonds. China’s retail investors are also underinvested in domestic financial assets compared to other major economies with household savings concentrated in property holdings and bank deposits. While China remains committed to opening its financial markets and recognizes Hong Kong’s role in providing China with connectivity to the global financial system, the full impact of multinational decisions by the two superpowers remains to be seen.

Past performance is not a guarantee of future results.


Diversification does not guarantee a profit or protect against a loss in declining markets.


Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market.


This represents the views and opinions of Veritas Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme.


Data is from what Veritas believes to be reliable sources, but it cannot be guaranteed. Veritas Asset Management assumes no responsibility for the accuracy of the data provided by outside sources.


The S&P500® Index (SPX) is a capitalization-weighted index of 500 stocks. The S&P500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.


The Shanghai Shenzhen CSI 300 Index (CSI 300) is one of China’s most closely followed stock market indices. It includes the 300 A-share stocks traded on the Shanghai and Shenzhen stock exchanges, and is seen as indicative of trends in both those markets.


The indices are unmanaged, are not available for investment, and do not incur expenses.


© Copyright 2022 AMG Funds LLC. All rights reserved.


Kasia Kiladis


PUBLISHED: December 2nd, 2022
4 Min Read

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