So far, so good. That seems to be the initial assessment of investors watching signals from the new Biden administration on future policy changes.
The Democrats’ plans to go big on economic stimulus and get to grips with the pandemic helped drive US and global equity markets to fresh peaks this week.
There will be many more policy changes for investors to digest, of course. But there is one theme that is likely to persist from the Trump years in the White House. The latest tidings from Washington towards China suggest an already combative economic and technological rivalry between the two powers has plenty of staying power.
“China is clearly our most important strategic competitor,” Janet Yellen told lawmakers during her confirmation hearing this week as US Treasury secretary under the new president. “It’s been stealing intellectual property and engaging in practices that give it an unfair technological advantage, including forced technology transfers. ”
Ms Yellen’s comments come after a number of Chinese companies were delisted from Wall Street during the final stages of the Trump administration, prompting investor unease.
There is scope for the Sino-US rivalry to increasingly involve and unsettle financial markets in the next four years as the global economy recovers from Covid-19.
A focus on making life tougher for companies and sectors on the grounds of national security can result in higher costs and less revenues. During the Trump presidency before the pandemic, the flaring of US-China tensions knocked equity markets, raising worries about the economic outlook.
“Strategic competition between China and the US is here to stay and will be a persistent dynamic,” said Jean Boivin, head of the BlackRock Investment Institute.
But many on Wall Street believe China’s rise will bring opportunities for investors. The likes of Ray Dalio at hedge fund Bridgewater strongly believe China is on the way to becoming a financial centre within the global economy and one that eventually will rival London and New York.
Foreign asset managers are expanding their presence in China, as the country welcomes them in helping Beijing open up its financial markets to the rest of the world. More Chinese equities and bonds are being included in global benchmarks overseen by large index groups such as MSCI and FTSE Russell.
That propelled a surge of foreign capital entering the country last year and helped Chinese equities outperform the rest of the world. The CSI 300 is up 35 per cent over the past year compared with the MSCI All World’s climb of 16 per cent.
Mr Boivin said the low level of global ownership of Chinese assets and better long-term growth prospects in the Asia region relative to the rest of the world were an attractive combination. Over the next five years, BlackRock estimates China A shares will average annualised returns of 6.4 per cent versus a figure of 4.1 per cent from owning US large-cap companies.
“There is a clear case for greater portfolio allocations to China-exposed assets for returns and diversification, in our view,” said Mr Boivin.
Also appealing to global investors is the fact that China’s sovereign bonds provide much higher fixed rates of interest than those in the developed world. China’s 10-year bond yields 3.10 per cent, well above those of leading economies.
In addition, a strong renminbi adds to the case for Chinese assets. The currency is not far from testing a band of 6.0 to 6.25Rmb per US dollar that represented peaks seen in late 2014 and 2018.
Alan Ruskin, a strategist at Deutsche Bank, said while Beijing would aim to slow the pace of appreciation, the exchange rate should strengthen.
“That’s positive for long term investors [buying renminbi denominated assets] in China,” he added. Mr Ruskin said that the prospect of a sustained rise in global demand for Chinese financial assets from their current low level represented a structural boon for the renminbi.
However, a more predictable currency and an impressive rebound from the pandemic does not mean investors should lower their guard towards Chinese markets. Questions over its governance of companies and legal standards remain. Beijing also faces long-term challenges including a high debt burden with rising corporate bankruptcies, poor productivity and an ageing population.
“There are lots of reasons for why investors should have exposure to China, however a lot of good news is already priced by markets,” said George Magnus, research associate at Oxford university’s China Centre.
He believes Wall Street has “a self-serving case to be bullish on China”. But in general, there is likely to be a “much more hostile global environment for China”.
This raises the risk that China changes the rules with little warning. It is welcoming global capital for now, but that is not set in stone. Particularly if US and China tension heats up further.