Citi Global Wealth UNSToPPABLe TreNDS | | 57 Investments Admittedly, China has various relative This would better manage domestic private and Amid the sharpening polarization, the US and strengths that could enable its ambitions in multinationals’ enterprises alike. China will likely make valuable technological semiconductors and other technologies in advances. We also envisage both powers the medium to long term. These include the The US chip technology restriction is a double- going further to keep their most sophisticated highest savings ratio of any leading economy, edged sword. It is not just Chinese chipmakers technologies out of the others’ hands. This the second-largest capital markets, the who stand to suffer. For US chipmakers, the could see pressure from each country upon second-largest consumer market, and the most new regulations mean less business near term. nations within its sphere of influence to pick a engineers and scientists working on applied They are also withdrawing US personnel from side and not to deal with the other insensitive innovation and scientific research. Government their operations in China and are expected also areas, just as the US is doing over sophisticated policies have helped various sectors become to redeploy certain equipment away there too, semiconductors and equipment. global leaders, including AI, 5G, quantum perhaps in the US. Some firms face potential computing, clean energy and electric vehicles. failure as they transition away from serving As part of this, we look for the redrawing/ China – see Deepening digitization. regrouping of global supply chains to accelerate. That said, China also faces major obstacles. This could see production of a variety of key Among them are limited support to basic We expect an escalation of this tech rivalry over inputs serving the western markets shift away research, distorted incentives, online time. Indeed, we see it as similar to the Cold from China and toward Southeast Asia but also information blockage and weak intellectual War “space race,” where the US and the USSR beyond. There is a case for leading Taiwanese property protection. Overall, we see the US sought to outdo each other in space exploration. and South Korean semiconductors to add to restrictions as likely to disrupt near-term And despite its near-term challenges, China has their capacity in Europe but mainly the US, means to retaliate if it so chooses. For example, 1 tech sector operations in China and hinder its helping to diversify and shore up supply chains. innovation ambitions for many years to come. the country dominates global mined production This will also lead to slower GDP growth in China and processing of rare earths, a group of The upheaval involved should not be in the coming decade, making China’s ambition materials critical to electric vehicles, wind underestimated. And bifurcating technology to become the largest economy difficult to turbines and energy storage, to name just a few. blocs, duplicate supply chains and diminished achieve if not impossible. cooperation are less economically efficient Might the G2 standoff evolve into open conflict, than a globalized system. Many companies To play to its strengths and offset its particularly over Taiwan? We believe China and sub-sectors worldwide that have done well weaknesses, China may take certain actions. is unlikely to take the military route unless from serving China will have to seek business First, we think markets may play a more provoked further by foreign interference or elsewhere because of the technological important role, even amid government-led Taiwan unilaterally declaring independence. bifurcation. Restricted markets mean diminished industrial policy. Second, innovation policy US legislative changes offering military and overall opportunities compared to free markets. and funding support from the government other support to Taiwan and next year’s should be equally accessible to private and Taiwanese presidential election could both also foreign companies. Third, the government increase friction. should communicate its economic thinking and consider external interests more transparently. 1 Citi GPS: Global Perspectives & Solutions, October 2022, CHINA’S INWARD TURN The Pursuit of Economic Self-Reliance