SUMMARY
Fresh signs pointing toward official US-China substantive re-engagement reinforce our expectation of incremental steps for the remainder of the year. This was always going to be and still is a fraught process given four-plus years of escalating acrimony. Trade remains the more likely path to a healthier relationship. Domestic and global politics require cautious if not low near-term expectations. G2 statecraft is more important to policymakers than markets, but a realistic deal isn’t possible without thoughtful structure around talks to build mutual trust. This remains a slow process in our view. We continue to see an environment more conducive to meaningful progress after US and China elections this fall.
Russia is not an impediment to improved G2 relations. In fact, as seen above, Chinese exports seem to have fallen after the invasion, but that process began at the end of last year. We’d speculate China’s economic contraction was responsible for the trend’s start. The imports we believe are mostly crude, which isn’t sanctioned if stored and not used (a regime very difficult to enforce/verify, in our view).
Recent conversations with Administration officials reinforced that Secretary Blinken’s May 26 speech is Biden’s north star. Blinken enunciated the following principles in a 1Q21 “60 Minutes” interview which remain the G2 playbook:
Climate remains crucial to the G2 relationship as nothing significant is possible without cooperation. US and China national security advisors and finance ministers spoke in the past three weeks. Secretary Blinken and Foreign Minister Wang Yi reportedly are scheduled to meet in Bali later this week during a G20 breakout session. China Vice President Wang Qishan perhaps is the most practiced US hand in Beijing. Any news of his involvement would further validate constructive commitment.
