China in the global fragmentation game

Quarterly Outlook
Redmond Wong

Chief China Strategist

Summary:  The article discusses China's strategy to pursue alliances and bloc-building, while embracing globalisation to secure its access to markets and resources. China is actively seeking to establish bilateral agreements and regional ecosystems to increase its sphere of influence and hedge its position.


Globalisation benefits fade

Since 2020, China has been moving toward a new economic development strategy emphasising “domestic circulation” as opposed to “external circulation”. It is not that China no longer considers that exports are an important driver of economic development, but only that it aims to avoid excessive reliance on exports.

China’s decades long, labor- and energy-intensive, export-oriented model has benefited from globalisation. Since the economic reforms and opening up in the 1980s, China has increasingly integrated with the world economy. Its exports as a percentage of GDP have grown from 5% in 1980 to 36% at their 2006 peak.

World trade slumped to 26.5% of GDP after the Great Financial Crisis and then oscillated between 27% and 30%, save for a brief slide during COVID-19. However, China’s external trade as a percentage of GDP declined steadily to around 20%, far below the global level.

In the global fragmentation game

China seeks to play a bigger role in multilateral economic institutions of the prevailing international economic order established by the United States after the Second World War. China has pushed its officials to high positions in these institutions, such as Deputy Director General at the WTO, and proactively seeks reform of the WTO to ensure its voice is being heard and its interests addressed.

China recognises the hegemonic international economic and financial order created and defined by the US and has been acting mostly within its frameworks in its drive for economic development since the 1980s. As its national might grows and strategic competition with the US intensifies, China is looking to displace the American order, not entirely, but selectively and regionally.

This is similar to the strategy in the Asian board game of Go, in which winning does not mean eliminating the opponents’ playing pieces, but placing your pieces on the appropriate intersections to secure more spheres of influence. China has been investing in relationships with selected countries in key geopolitical regions with the aim of controlling key resources, blunting American influences and building China’s own influences. While continuing to embrace globalisation and the benefits that it brings about, China pursues to augment the globalised order in its favor, with an additional layer of bloc-building and alliance formation.

To hedge its position as well as to pursue strategically advantageous positions, China is actively seeking to establish bilateral agreements and regional ecosystems to secure access to markets for its products, and more importantly, the supply of key resources which are vital to the Chinese economy, as well as increasing its sphere of influence for national security considerations. China launched the Belt and Road Initiative, alongside the China-centric Asian Infrastructure Investment Bank and the New Development Bank in 2013. It has accelerated the signing of numerous bilateral and regional free trade agreements since 2015. China has also actively sought to sign bilateral currency swap agreements to push for the use of the renminbi (RMB) in its external trades, reducing its own reliance on the US dollar, as well as its trading partners’ use of the dollar.

Meanwhile, in pursuit of strategic competition with China, the US has fragmented the globalised order that it created to deny China access to some advanced technologies, investment, capital and markets, as well as to face higher tariffs and other trade barriers.

China marches West to secure energy supplies

After not going overseas for more than two years due to the pandemic, President Xi visited Central Asian countries Kazakhstan and Uzbekistan in September 2022, Saudi Arabia in December 2022, and Russia in March 2023 and received a visit from the Iranian President in February 2023.  During Xi’s visit, China and Saudi Arabia entered into a large number of trade, investment, technology and infrastructure agreements. Xi also calls for Saudi Arabia to accept the renminbi in settling crude oil trades. China has also recently brokered the restoration of diplomatic relations between Saudi Arabia and Iran. China is building ties to the Middle East to secure its crude oil supply and in the process blunting American power marginally in the latter’s traditional sphere of influence.

The location of Central Asia is key to China’s Belt and Road Initiative and an important source of crude oil and natural gas. The land-locked region used to be within the sphere of influence of Russia and most of its pipelines are still going to Russia. As Russia is busy at war and in need of China strategically, China is expanding its economic power in Central Asia.

Financial fragmentation

In spite of embracing globalisation in the past few decades, China has a firm grip on its currency, capital account and banking system. China has strict control over cross-border capital movements and a currency tied to a basket of currencies of major partners. Its banking sector is dominated by majority-state-owned banks.

China ring-fences its financial system from external financial shocks and uses its banks to channel funding to the corporate sector and local governments to finance economic growth and policy initiatives. While the US regional bank woes and the Swiss bank saga weighed on the share prices of US and European banks, listed banks in China are less affected, as they are relatively insulated from those shockwaves. Nonetheless, China’s banks have their unique issue of having to heed the People’s Bank of China’s window guidance to lend in accordance with Beijing’s policy initiatives. Chinese banks are often in a far different credit cycle stage than the rest of the world at any given time and their operating environment is outside of the global financial system.

In March 2023, China announced setting up new apparatuses directly under the Chinese Communist Party to take over from the government the policy settling and oversight of the financial sector in a move to centralise and tighten the ideological grip over the financial sector.

Technology and data fragmentation

In pursuit of self-reliance in technology amid restrictions imposed by the US on access to advanced technology, China is establishing a central science and technology commission under the Chinese Communist Party to mobilise nationwide resources and efforts across multiple government entities to advance technological innovation and scientific discovery.

Often acclaimed as the new oil for the information economy, data is a key strategic asset that China strives to insulate from the rest of the world. China also prohibits its population from accessing numerous overseas websites.

Investing in fragmentation

As China makes headway on providing infrastructure construction for Saudi Arabia recently and potentially with other resource-rich Gulf countries and Central Asian countries, it may be worthwhile to monitor some leading companies in the infrastructure space, such as China State Construction, Nari Technology and China Energy Engineering.

For additional inspiration, investors can look at Saxo’s China Consumer and Technology equity theme basket and China’s Little Giants equity theme basket for lists of companies that are exposed to China’s boost in domestic consumption and technology. 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.