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)

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

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.