Tensions between the West and China are escalating, leading to significant ramifications for global markets. The determination of the US and China to reduce their dependence on each other is causing long-established supply chains to fray, which could result in elevated inflation and interest rates. However, there are potential gains for emerging nations and tech giants that find themselves on the right side of this power battle. The article discusses how Western-China tensions are shaping markets, focusing on four key areas: inflation, the shift in supply chains to friendly nations, India’s potential as a competitor to China, and the winners and losers in various industries as a result of the clash between the West and China.
The first area of impact is inflation. With President Joe Biden focused on bringing strategic manufacturing sectors back to the US, there may be inflationary repercussions if Western manufacturing does not ramp up quickly enough to offset declining imports. This prolonged inflation could also lead to higher interest rates and a stronger dollar, potentially exporting inflation to resource-importing nations in Europe.
The second area is the shift in supply chains to friendlier nations. Washington is encouraging “friendshoring,” which involves replacing China’s role in supply chains with allies. Vietnam and Mexico have been identified as the major beneficiaries of this shift so far, with other countries like Mongolia and the Philippines seeking US investment in their respective industries. Sino-US tensions are providing a new lens through which to analyze emerging markets’ growth prospects.
India is seen as the most capable of competing with China in terms of low-cost, large-scale manufacturing. Its large population and growing middle class present opportunities for multinationals seeking alternatives to China. The Indian economy is forecasted to expand by 6.5% this fiscal year, outperforming China. If India can raise its annual economic growth closer to 8% over the next five years, it could become the largest contributor to global growth.
Lastly, there are winners and losers in various industries as a result of the clash between the West and China. The EU is considering imposing punitive tariffs on Chinese electric vehicle imports, and Chinese retaliation could affect the performance of big US tech stocks and global share indices. Luxury fashion houses are also impacted, as China’s top anti-corruption watchdog aims to eliminate what it considers the excessive spending of Western elites. Chinese consumers’ spending on luxury goods has started to decline under increased government scrutiny.
Investors are split on how to approach the Chinese market due to the faltering economy and property market turmoil, as well as the prospect of continued tariffs and restrictions on investing in Chinese technology. Despite the negative sentiment, some investors see potential opportunities in China, as market expectations are considered overly severe.