China - Has the pandemic accelerated China’s closing gap on the US?

With the US and China firmly in the spotlight over the recent pandemic, we look at how two of the most powerful economies are dealing with COVID-19. 

The pandemic has exacerbated the geopolitical recession, with the US evading their leadership role in the international response and China taking full advantage of this absence. This builds on a trend that started before the outbreak with the US increasingly looking inwards with regard to its foreign policy. The US had already begun isolating itself and cutting foreign ties, whether that be the Paris Climate Accord, the Iran nuclear deal or the disengagement with the United Nations.

However, while the rest of the world continues to suffer, China inches toward a full recovery, despite the role they played in the origin of the outbreak. When the province of Wuhan showed signs of a second outbreak, Chinese leaders ordered to test all 11 million residents in 10 days. When compared with the US, the small province of Wuhan has completed nearly 60% of the testing that the entire 50 US states combined have achieved. 

As China continues to achieve success with containment, they are likely to use these gains to tout their own governance model. China may well reach out to provide international assistance to a number of countries, including US allies. They will likely do so with the conditions that the implementation is led by Chinese companies and transactions are conducted in the Chinese currency. Furthermore, as the US presidential election nears, Trump is likely to strike out more aggressively at China. China will no doubt react, with further moves like the recent ban on US journalists in the Chinese mainland and Hong Kong. 

China is now effectively challenging US supremacy and is expected to pass the US in terms of nominal GDP by 2027. With the onset of COVID-19, both economies are looking at their domestic markets as travel restrictions and supply chains are disrupted. Add to this an expedited decoupling process between the two super powers and you have a strong likelihood that the balance of power could shift. With a homegrown consumer market four times the size of the US, if isolation is the key to winning this battle, China will overtake the US sooner rather than later. 

However, with this decoupling becoming ever more prevalent private equity firms are seeking out these market dislocations, as they deploy vast sums of capital to take advantage of both reduced borrowing costs and lower asset prices. Given China’s sheer size, growth trajectory and increasing consumer wealth, we expect the pool of investment opportunities to only increase, especially for private equity firms looking for exposure to Chinese markets.