If you think of the global economy as a giant chess match, China’s Xi Jinping now seems a few moves ahead of US President Joe Biden.
That’s a plausible take on China’s leader hosting French President Emmanuel Macron in Beijing in recent days. Tesla billionaire Elon Musk was in China to double down on the Xi era with plans to build a new plant to produce large-scale batteries in Shanghai – not in Nevada, the site of Tesla’s original “gigafactory.”
On the other side of the chess board, Malaysian Prime Minister Anwar Ibrahim made his maiden state visit to China. With US$39 billion of investment commitments, Xi created real doubt about Malaysia’s position that it’s neutral in the mushrooming Cold War between Biden’s Washington and Xi’s Beijing. Advantage Beijing, it seems.
Meanwhile, Huawei Technologies Co, which has had a rough time in the Biden era, edged closer to making Riyadh its Middle East headquarters. It would be a big win for Mohammed bin Salman’s ambitions to position Saudi Arabia as a major business hub and destination for global investment – and a reminder that Washington and Riyadh are drifting further apart.
Put all these moves and pieces together and it’s clear that Biden has serious work to do to articulate and implement a vision for the US economy as the world’s preeminent investment destination at a pivotal geopolitical moment.
Economists can debate whether these gambits are driven by Biden’s policies or a hedging of bets in case of a Donald Trump 2.0 reign after the 2024 election. Suffice to say, though, what Biden is selling, geopolitically speaking, isn’t necessarily landing as the White House likely hoped.
Anwar’s visit here is not to be downplayed. The US has long sought to rebuild ties with his resource-rich and moderate Muslim-majority nation after the events of the late 1990s. Back then, prime minister Mahathir Mohamed and president Bill Clinton clashed over economic policy amid the 1997-98 Asian financial crisis.
A decade later, efforts by former US leader Barack Obama to mend fences blew up amidst prime minister Najib Razak’s corruption scandal. Najib went to jail over the billions of missing dollars from state fund 1Malaysia Development Bhd (1MDB), some of which turned up in his personal bank accounts.
In Beijing, Anwar secured investment pledges in renewable energy, electric vehicle production, digitalization and reinvigorating long-delayed Belt and Road Initiative infrastructure projects in the Southeast Asian nation.
The irony here is that Anwar was Washington’s chosen man in Malaysia in the late 1990s. At the time, Mahathir enraged US Treasury Department and International Monetary Fund officials by imposing capital controls, pegging the ringgit and blaming Jews — George Soros in particular — for the global run on Malaysian assets.
Anwar, then Mahathir’s deputy and finance minister, favored, for better or worse, policies championed by the US and IMF. Now, Anwar is quite publicly cozying up to Xi’s economic vision.
Musk is doing the same, just as Li Qiang ascends to China’s premiership. It was on Li’s watch as Shanghai party boss that he successfully lobbied Tesla to build an electric-car factory in the city — Musk’s first overseas facility. That gave Beijing considerable bragging rights at a moment when Xi was investing big in his “Made in China 2025” vision.
Li, of course, was also believed to be close to Alibaba founder Jack Ma in the 2010s when the premier was governor of Zhejiang province, where the e-commerce giant is headquartered. As such, Li’s rise to the top of Beijing power seems a bullish signal for global investors hoping that regulatory assaults on the high-tech sector are now in the past.
This remains to be seen. But with Li assuming the role of financial reform czar – reportedly with buy-in from Xi – investors are hopeful that the private sector will have more political space to innovate, increase productivity and create good-paying jobs from the ground up.
The good news for Li is that the People’s Bank of China is making restrained moves to safeguard national growth without adding to “moral hazard” risks. In late March, PBOC Governor Yi Gang cut banks’ reserve requirement ratios by 25 basis points.
The message, notes analyst Pramod Shenoi at advisory CreditSights, is that “unlike elsewhere in the world, China has been adopting a dovish stance in monetary policies to stimulate economic growth with multiple rounds of loan prime rate cuts and RRR cuts.” But, Shenoi notes, not formal rate cuts that might encourage bad lending behavior in property and other sectors.
Economist Carlos Casanova at Union Bancaire Privée says that the PBOC’s liquidity boost “might not suffice to offset tighter global liquidity stemming from banking sector stress in the United States and Europe. Moreover, we continue to foresee pressures surrounding Fed tightening.”
In sum, Casanova adds, “we can expect more easing from [the] PBOC in the months ahead. Governor Yi, who was recently reappointed, made comments ahead of the National People’s Congress (NPC) in March, stating that real interest rates were at ‘appropriate levels’ while lowering RRR to provide long-term liquidity is still an effective policy tool.”
Casanova concludes that he expects another 50 basis points to 75 basis points worth of RRR cuts to “provide support through liquidity injections and lower interbank rates.”
Herein lies another way Xi might be outplaying Biden: positioning China as a major growth engine at a moment when the Fed is hitting the brakes in Washington.
While fears of a US recession haven’t panned out, there’s growing concern that US Federal Reserve Chairman Jerome Powell might be engineering a downturn to tame the worst inflation in 40 years.
It hardly helps that the US national debt is careening toward the $32 trillion mark. That, coupled with political dysfunction in Washington and hyper-aggressive Fed tightening moves, has the biggest holders of US debt — including China and Japan — worried about the safety of trillions of dollars’ worth of their state wealth.
The Fed’s current tightening cycle might have made sense in the 1970s, 1980s and 1990s when Paul Volcker and Alan Greenspan chaired the Fed. In the 2020s, though, monetary policy cannot address upward price pressures coming from the supply side. The Fed, for example, can’t fix post-Covid-19 era supply chain disruptions any more than it can counter recent moves by OPEC+ to slash oil production by 1.2 million barrels per day.
Such price pressures are better addressed by Biden’s White House via diplomatic outreach to petroleum exporting nations and policies to increase productivity and reinvigorating innovation.
Last year, Biden set the groundwork for that latter effort, marking a U-turn from the Donald Trump era. Trump blew up global trade flows and signed a ginormous $1.8 trillion tax cut. But he neglected domestic capacity building. Had lower taxes boosted innovation and productivity, US inflation might not be the highest since the early 1980s.
By sharp contrast, Biden signed the CHIPS Act which deployed a fresh $300 billion to boost domestic research and development. Yet Biden’s White House likely needs to add a zero to keep pace with Xi’s mega investments in leading the future of semiconductors, biotechnology, aerospace, renewable energy, self-driving vehicles, artificial intelligence, green infrastructure and logistics.
Xi’s 2025 vision is amplified by efforts to create a kind of Silicon Valley East in southern China. This “Greater Bay Area” project links Hong Kong, Macau, Shenzhen and eight other municipalities all destined to be powers of their own: Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.
It was no coincidence that Xi brought Macron to Guangzhou, an economic epicenter of southeastern China, to give the French leader and his delegation of corporate chieftains a glimpse of China’s vision for 2025 and beyond.
Significantly, Xi managed to keep most discussions — and joint statements— tightly focused on trade, not tensions over China’s support for Russia’s Ukraine invasion.
Economist Yanmei Xie at Gavekal research notes that “a steady procession of European leaders has been visiting China in recent months.” Macron’s visit shows that “despite China’s support for Russia in the current war, most European countries still do not see China as a critical security threat,” Xie says.
One way Biden has tried to counter China’s increasing dominance in Asia is turning to like-minded democracies for investment. Last February, Japanese giant Toyota Motor doubled down on US production while agreeing to produce electric vehicles in the state of Kentucky.
In May 2022, Hyundai Motor upped the ante on Korea Inc peers by pledging to invest $10 billion in the US by 2025. Biden is surely thinking there are more investment opportunities to be had from Samsung, SK hynix and other Korean giants.
Yet the parade of pivotal world leaders making a beeline for Beijing as Xi’s third term begins is noteworthy. It suggests China is doing a better job of checkmating Biden’s White House than meets the eye.
Follow William Pesek on Twitter at @WilliamPesek