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US-China Technology Battle: Playing Both Sides to Win

The technological rivalry between the US and China will continue to intensify as both countries continue to strengthen their capabilities. Investors should gain exposure to both markets to capture growth opportunities.

US and China Flags

The world’s two largest economies – the US and China – have outlined ambitious plans to propel growth by investing heavily in technology. Rather than picking a side, investors can leverage both engines of growth while reducing risks through diversification.

Clash of the two tech giants: a new “Cold War”?

At the height of the Cold War, fierce competition between the US and the former Soviet Union resulted in many technological innovations. Back then, both had few economic and trade ties.

Today, a new round of competition is taking place – China wants to reduce its dependence on foreign technology, while the US wishes to protect its own high-tech turf. Still, it will be difficult for both to pursue separate paths given their intertwined fates through the global supply chain (Figure C1).

Figure C1. The US-China economic relationship is much bigger than trade. US companies rely heavily on Chinese purchases much more than Chinese firms rely on US purchases.

The US-China economic relationship The US-China economic relationship

Source: Gavekal Dragonomics / Macrobond

China’s vision for technological self-reliance

In March 2021, China unveiled its 14th Five-Year Plan for 2021 to 2025 where it outlined its technological ambitions and desire to become more self-reliant. With an annual 7.0% increase in research spending budgeted over the next five years, it is investing heavily in technology to drive its future economic growth.

Its plans include:

  • Addressing vulnerabilities by ramping up semiconductor manufacturing capabilities to reduce reliance on US and Taiwanese imports;
  • Breaking new frontiers in Artificial Intelligence (AI) and quantum computing; and
  • Building infrastructure to support key areas of growth, including the construction of data centres, investments in clean energy projects, boosting of 5G coverage from 22% to 56% and preparing for 6G networks2 while tapping on a large population to feed machine learning.

The US’ ambitious infrastructure plan

Meanwhile, the Biden administration has announced a “once-in-a-generation” US$2.3 trillion infrastructure bill to develop key infrastructure and capabilities (Figure C2). Unlike Donald Trump’s punitive moves to undermine China, the Biden administration has adopted a more constructive approach by focusing on upskilling to compete strategically with China.

Figure C2. Biden’s plan focuses on raising US competitiveness rather than punitive measures against China.

Biden’s plan focuses on raising US competitiveness rather than punitive measures against China Biden’s plan focuses on raising US competitiveness rather than punitive measures against China

All figures quoted are in USD.

Source: “The American Jobs Plan”, The White House (March 2021)

Both countries are well-positioned to compete even as technological rivalry intensifies

For 30 years, the US has enjoyed strong growth because of its leadership in innovation and technology. China is following a similar trajectory as it positions itself as a global innovation centre.

Although the US and China face potential regulatory headwinds, they are still well-placed to compete. The US remains a hotbed of innovation, while China’s companies are battle-hardened by its highly-competitive domestic market. It will be difficult to predict an eventual winner in this global technology race.

Investors who have invested in the S&P 500 index over the past two decades have realised consistent annualised returns of 10.7% from 1991 to 2020. China’s market is poised to deliver similar strong returns, driven by strong corporate earnings performance and inflows from institutional investors.

Build market exposure on both sides to capture growth opportunities and reduce risks

Since 2010, US and Chinese equities have demonstrated a low correlation with the 10-year average at 0.125. This low correlation, coupled with regional diversification, will help to reduce overall portfolio volatility. Investors can potentially achieve a better long-term portfolio return by investing in winners from both the US and China markets.

Click here to find out more about the long-term drivers for China.

2 Societe Generale Cross Asset Research (March 2021)