China’s multilateral pacts seen as more political than economic

Investors believe the nation's multilateral cooperation objectives with Europe and Asia are mostly based on efforts to expand Beijing's political reach versus that of the US.
China’s multilateral pacts seen as more political than economic

China’s multilateral agreements with the European Union (EU) and Asia as well as its international cooperation white paper published this month are seen by some experts as political manoeuvres that highlight China’s ambition to advance its influence in light of its tension with the US.

However, it will likely take time for investors to see any concrete effect of the agreements, given the uncertainty of the broader economic environment and tense US-China relations. 

Beijing published a white paper titled “China’s International Development Cooperation in the New Era” on January 10. The document outlined the country’s plans for multilateralism, a word the paper mentioned 13 times. It cited the US only once.

Two weeks earlier, on December 30, China and the EU struck a deal known as the China-EU Comprehensive Agreement on Investment (CAI). The agreement took seven years to negotiate and allowed market access for European investors in the Chinese market. In November, China also signed the world’s largest multilateral trade agreement known as the Regional Comprehensive Economic Partnership (RCEP) with 14 other countries.

Market participants told AsianInvestor that the white paper was a geopolitical win for the country and that the CAI is “a big step forward”, even though material investment benefits could take time.

Ronald Chan, Manulife IM


Ronald Chan, chief investment officer for Asia (ex-Japan) equities at Manulife Investment Management, said the CAI is “more a political than an economic move.”

“China is trying to find allies against the US,” he said. Still, the agreement will bring economic benefits to both sides. “We do see potential capital flow between China and the EU in sectors such as semiconductor, automotive industry and renewable energy, which could provide the engine to related assets in China,” Chan said.

“The EU market is open to investment with very few restrictions for China, so the CAI might bring opportunities for EU countries who are hungry for China’s assets,” he added.

Sven Schubert, a senior investment strategist at Vontobel Asset Management, told AsianInvestor that the CAI gives China a winning edge over the US. China will probably see higher foreign direct investment (FDI) flows from the EU under the CAI, he said.

“Long-term investments into China are unlikely to ebb away. Even during the phase of [China-US] trade tensions, we have seen a lot of smart solutions by corporates to legally bypass export restrictions into the US,” Schubert explained.

According to European Commission data, cumulative flows of Chinese FDI into the EU amounted to almost €120 billion ($147 billion). However, EU investment into China was even higher, at more than €140 billion, as of December 2020.

However, Chan said investors might not see material benefits from the CAI until early 2022.


Sven Schubert, Vontobel

Tommy Wu, the lead economist at Oxford Economics, believes the CAI would increase all parties’ engagement. He echoed Chan’s view that investors might have to wait to see any impact of CAI and RCEP, given uncertainties about polices under incoming US president Joe Biden’s leadership and the Sino-US trade war.

Under the Trump administration, China-US relations plunged to their lowest point in decades. One of the most damaging policies was an executive order signed in November by Trump that banned US investors from purchasing shares in 31 Chinese companies listed in the US. The move prompted the New York Stock Exchange to delist three Chinese telecom companies on January 6.

Schubert told AsianInvestor that there is little hope to see a big easing of tensions between the US and China. The US may delist more Chinese companies in the future, and the market is still waiting to see what the new leadership will do, he said. Chan also does not see China-US relations returning to the position it was four years ago. However, he expects “some repairs.”

With Donald Trump to depart the White House on January 20, the market is on the lookout for foreign policy cues from Biden. With high US unemployment and rising Covid-19 cases, Biden's hands are full. Chan said any policy changes towards China may not be forthcoming until summer.

“Tariffs will be the first thing for the new leadership, which is trying to figure out ways to lift US’s weak economy,” he said.


Freddy Wong, Invesco

With the US focusing on domestic issues, China is taking the opportunity to expand its influence. The government’s latest white paper only expounded views on international development cooperation and also laid out its foreign policy plans for the future.

Notably, the Belt and Road Initiative (BRI) was one of the headlines of the white paper.

BRI, a key policy of China’s multibillion-dollar project investment programme aimed at connecting Asia, Europe and Africa with railways, roads and ports, was a controversial project, widely seen as president Xi Jiping’s foreign policy to expand China’s authority.

While its progress has slowed since 2018, the mention of the project in the white paper as well as China’s latest trade agreements point to China’s plans to revive the initiative. These agreements demonstrate China’s commitment to continue to invest in infrastructure to support its BRI, Freddy Wong, head of Asia Pacific fixed income at Invesco, told AsianInvestor in an email response.

“The sensitive China-US relationship has pushed China to deploy more capital into the Belt and Road region,” Wong said, adding that China’s solid economic recovery should help to support any infrastructure investments.

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