President Joe Biden and General Secretary Xi Jinping concluded their first in-person meeting under Biden’s presidency on Monday morning ET in Bali, Indonesia. Please see this link for a short video with comments by Kim Wallace, head of 22V’s Washington policy research, and China research head Michael Hirson on main takeaways from the meeting. We also summarize key points below.
Our preview note (link here) had framed this meeting as unlikely to produce breakthroughs, but still an important opportunity to put a floor under the US-China relationship and avoid a mishap or miscalculation on flashpoints such as Taiwan, Ukraine and North Korea. With this backdrop, the meeting appears to have been a success based on the initial readouts, with a notably constructive tone from both sides and agreement to revive several dialogues that should help to lower tail risks and find some scope for limited cooperation on issues such as climate. The White House also announced that Secretary of State Antony Blinken will visit China for follow-on discussions.
The buzzword heading into this meeting and now coming out of it is “managed competition” – a phrase that Biden used in his press conference and was also a theme of Xi’s opening remarks. Simply put, the two sides recognize that their increasingly intense global rivalry defines the relationship, but that they need to do a better job constructing “guard rails” that lower risks of a geopolitical or economic crisis.
Key highlights:
- Tone: The official readouts and Biden’s press conference pointed to a candid conversation lasting three hours. Biden noted in his press conference that the US does not seek a “new Cold War”, while China’s readout quotes Xi as saying that China “does not seek to challenge or replace the US”; neither phrase is new but the emphasis is welcome. China’s readout of the meeting contained predictably strong language warning the US against interference in Taiwan – this is Xi’s most sensitive geopolitical issue – but on the whole took a constructive tone relative to past meetings.
- Taiwan: Biden’s press conference remarks emphasized stability in the US position over Taiwan, and he answered a reporter’s question by saying he does not see an imminent threat of invasion by China – a message that he may have aimed partly at tamping down uber-hawkish rhetoric on Taiwan in Congress. To be clear, there is no breakthrough on Taiwan but the meeting may serve to slightly lower the temperature and the risk of an accident.
- Ukraine: Both readouts took a mild tone on this issue but treated it briefly. The US readout had both leaders affirming opposition to nuclear escalation. China’s readout gave no indication that Beijing is prepared to step up its involvement in the crisis but avoided past language that largely blamed the US and NATO for the conflict. Again, this suggests no breakthrough but an effort to improve coordination, which will no doubt be a key topic of Secretary Blinken’s follow up visit to China.
- Resuming dialogues: The two sides agreed to revive dialogues and government channels that China had suspended during Speaker Nancy Pelosi’s visit to Taiwan in August. While the US readout is vague, China’s readout says the two sides agree to diplomatic consultations and “strategic communications”; cooperation on climate change, public health and food security; and dialogue and communication between financial teams on macroeconomic policies, economic and trade issues and other issues. Increased dialogue on economic issues would be helpful – a point US Treasury Secretary Yellen also emphasized in advance of the meeting – but progress on bilateral trade and investment issues is unlikely.
Where the two sides go from here
The main outcome from this meeting for markets is to lower tail risks around key flashpoints, principally Taiwan. We see little prospect of significantly reducing trade, investment and technology tensions, given an economic relationship dominated by national security and ideological concerns and the overwhelming focus in both capitals on domestic industrial policy. An agreement to lower tariffs remains very unlikely. Biden will not rollback recently imposed restrictions on advanced semiconductor technology to China but will seek to keep the scope fairly targeted and avoid the degree of economic dislocation for China. Beijing will be disciplined in its retaliation. Both sides will focus on shaping behavior of third countries and companies in how the export controls are implemented.
President Biden is among the biggest beneficiaries of the unanticipated US midterm results. Moving from united to divided Congress, as most presidents do after their first midterm, still implies a greater White House focus on international affairs. Democrats’ strong bottoms-up momentum produced by individual candidates more than the party, which led to retaining Senate control, bolsters Biden’s hand with other heads of state. We believe this was on display earlier today in Bali.
The elections were very unlikely to change the bipartisan China hawk stance Congress has increasingly displayed the past decade. Against the backdrop of declining US direct investment abroad in China, and stagnating portfolio investment flows, a divided Congress provides Biden useful negotiating leverage. The question of whether the president will stand for re-election will temper that leverage, but Biden is in a position of unexpected strength to continue a ‘firm competition’ stance vs. China at least through 2023.
The administration’s industrial policy is another advantage President Biden enjoys in discussions with President Xi and other international heads of state, especially in semiconductor investment at home and export controls directly affecting China. The midterm results mitigate fears a unified GOP Congress would have sought to dismantle Biden’s industrial policy.
For Xi Jinping, reducing tensions with the US, on top of measures to fine-tune Covid restrictions and support the property sector (see recent coverage here), serves to boost confidence during a fragile time for the economy as he kicks off his third five-year term. A key question in all these areas, however, is the extent to which Xi is truly willing to modify key policies, with a risk that the turn to pragmatism and boost to confidence proves short-lived.
