Biden-Xi meeting eases superpower tensions, but competition remains

After a year of heightened geopolitical stress, Wednesday’s meeting between US President Joe Biden and his Chinese counterpart Xi Jinping marked a constructive and welcome development for markets, though economic rivalry remains the underlying theme between the two superpowers.

At the meeting in San Francisco, Biden and Xi agreed to resume high-level military communications, which China cut last year after then-US House of Representatives Speaker Nancy Pelosi visited Taiwan. The communications agreement is a step to stabilising relations, which had deteriorated over the fate of Taiwan, Beijing’s expanding military, and trade ties – particularly US export controls on cutting-edge technology.

“We’re back to direct, open, clear communications,” said Biden after the meeting. Xi added that the door to talks between the two superpowers “cannot be closed gain.”

The restoration of high-level communications channel significantly reduces the risk of military miscalculation and outright confrontation over the Taiwan Strait. We expect the status quo to be maintained on Taiwan, but with easing tensions. The de-escalation may help to restore market confidence, as tensions between the superpowers have hurt sentiment about the recovery in China.

It was notable that at a function with business leaders after the summit, XI said Beijing is ready to be a “partner and friend” of the US. The US administration had sought to massage down expectations ahead of the summit, at which Biden and Xi held talks for four hours – only their second in-person meeting since the US president took office in 2021.

Despite the warm words and re-opening of the military communications channel, competition and economic rivalry between the two countries will likely remain amid the technological containment imposed by the US. In particular, areas directly relevant to national security and advanced technology may see increasing restrictions.

Moreover, the trend for multinational firms to divert their marginal investment and supply chains away from China and towards the US or US-aligned countries will likely continue.

All in all, the Xi-Biden meeting signals a dial down in the confrontational rhetoric between the two countries, while trying to restore a sense of predictability. But the basic shape of the US-China relationship will not be altered, evidenced by the increasing competition on the economic and technological front.

The meeting took place against the backdrop of mixed economic pictures in both countries. China’s recovery is proving bumpy, while US economic resilience will be tested next year as the impact of interest rate rises filters through to consumers in an election year.