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U.S.-China Relations: Resuming Integration or Globalization in Reverse?

This commentary provides an update on the U.S.-China relationship and discusses China's responses to limit the adverse impact of the changed global environment on its medium term growth prospects. We have passed the Biden administration's 100 day mark and, on the surface, little appears to have changed with regard to the economic relationship between the U.S. and China. Nonetheless, there is evidence of an important strategic shift in the U.S. approach toward China, and a subtle shift on the part of China as well. Although we do not expect any precipitous actions that severely undermine global growth prospects, this evolving relationship between the largest economies in the world remains critically important to the overall global outlook and may have implications far beyond their own borders.

Key highlights include:
-- The U.S. strategy toward China has undergone a meaningful shift from a bilateral and transactions-based approach under the Trump administration to a multilateral, values-based approach under the Biden administration.
-- China's policy response remains focused on promoting domestic demand and transitioning from labor-intensive to advanced manufacturing and integrating further into the world economy. While both countries have strong incentives for continued collaboration, prospects have increased for a more overt rivalry in economic matters that may have some impact on cooperation in other areas as well.
-- The shift in the U.S.-China relationship adds to China's existing challenges. However, DBRS Morningstar consider risks to near-term growth and financial stability sufficiently counterbalanced by China’s economic and policy buffers.

“Prospects have increased for a more overt rivalry in economic matters that may have some impact on cooperation in other areas,” notes Rohini Malkani, Senior Vice President in the Global Sovereign Ratings Group. “Chinese authorities are nonetheless continuing to strengthen economic relationships with other countries.”