Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 373

China and US ‘decoupling’ likely to be mild

The ‘Line of Actual Control’ is the name for the unformalised border that separates Indian-controlled and Chinese-controlled territory in the disputed area where the Asian neighbours meet and where in 1962 the pair fought a war. In June 2020, violence flared up again and at least 20 Indian soldiers were killed. The response of India’s government? New Delhi banned 59 Chinese mobile applications, including ByteDance’s popular video-sharing TikTok.

Tensions but they still need each other

The incident was yet another to strain the relationships between China and the US and their respective allies. Tension between China and the US over data, Hong Kong, military reach, human rights, investment, the South China Sea, Taiwan, technology and trade is fashioning talk of a ‘decoupling’ between the pair.

If globalisation is the free flow of goods, capital, people, information and ideas, how to define a decoupling? One extreme would be another Cold War-like separation between the world’s two most powerful countries and their allies where economic ties almost evaporate. The benign extreme might be a token split. The term could cover any division in between.

The China-US decoupling is likely to be a mild separation for five reasons, even if their antagonism flares at times.

First, their rupture is not the ideological and existentialist clash that was the Cold War of 1945-1989. The China-US tussle is more a mercantilist power struggle between economically interwoven and flexible countries that have different political systems and values. Such scuffles typically find an equilibrium where rivals coexist, even cooperate.

Second, it’s an oversimplification to view the world as settled into two groups. The US and Europe have disputes over data privacy and the regulation and taxation of tech companies. It’s a simplification, too, to talk of the Belt and Road Initiative as a China-led bloc. The countries involved have no common ideology.

Third, the fact that China and the US (and their allies) are so financially and economically entwined means it would be too costly, time-consuming and complicated for the powers to separate. The US relies on China to buy its government debt and for rare-earth materials. Western companies have production, commercial and investment ties to China. For its part, China depends on western banks, universities, agricultural produce, raw materials and tech parts such as microprocessors. Many Chinese companies depend on foreigners for much of their revenue. Chinese companies own or have stakes in many western household names.

Fourth is that China and the US face common financial and economic challenges. Both are keen to reinstall sustainable economic growth, repair their finances and trade with each other.

Fifth, the pair face common challenges away from finance and economics that can be better met in a cooperative fashion. These include the coronavirus pandemic, climate change, failed states, global terrorist organisations and nuclear proliferation.

A mild decoupling with ongoing strains

Even though the decoupling will be mild, it will consist of two noticeable tears. The first is broadly around technology and will be most noticeable in how the internet will segment. But the internet was rupturing anyway because governments were always going to extend regulatory powers and security measures to cyberspace. The fractured internet or ‘splinternet’ means that some countries could exclusively use US or Chinese tech for critical spheres.

The other tear, helped along by the pandemic highlighting the importance of ‘health security’, is that production will drift from China because western countries and companies are unwilling to rely for critical supplies on a country with divergent interests and opposing values. Over time, the production capacity shifted could be noticeable.

These tears come with costs. Western consumers will face reduced choice and higher prices as friendly companies producing essentials are protected and Chinese tech stars are blocked. Global production networks will be less efficient. Personal ties between China and the US will be lower than otherwise. The internet will serve national and regional interests, not global ideals. Cyberattacks might become even more common. Spikes in China-US tensions could trigger gyrations on financial markets.

Costs are likely to prove mild

People will know that, while insults and feints between China and the US might look divorce-like, the pair are likely to remain untrusting and squabbling competitors rather than turn into foes.

To be sure, the UK and Germany were each other’s biggest trading partner before World War I. Like in 1914, miscalculations could trigger a proper decoupling nowadays. Other tears in the China-US relationship could be the Chinese public boycotting US brands, Beijing targeting specific items over alleged trade breaches and Washington, exploiting US dominance of the world’s finance system, expanding financial sanctions on the Chinese – but these rips are unlikely to get too large.

Western companies were shifting production from China because Chinese labour costs have risen and concerns about climate change, tech advancements and other shocks to global trade could have hastened that trend anyway. Let’s not mythologise globalisation pre-2020; there were many impediments to the free flow of things.

Even allowing for the barbs between Beijing and Washington, flashpoints over key technologies and the production of essentials shifting from China, it might be hard for most westerners to notice the difference in daily life of any China-US decoupling.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

  •   2 September 2020
  • 3
  •      
  •   

RELATED ARTICLES

The pivotal fight between China and the US

China's EV and solar backlog and future trade wars

Engineers vs lawyers: the US-China divide that will shape this century

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.