Biden Prepares To Meet Xi Jinping In San Francisco: Semiconductors, Taiwan, More Critical Issues To Watch

On Wednesday, President Joe Biden will meet his Chinese counterpart President Xi Jinping in what's building up to be the highest-stake diplomatic encounter of the year.

After years of hostile economic rivalry and mounting military tensions, the meeting will set the tone for the relationship between the two countries for the final year of Biden's term, and possibly into the future if the Democrats win the 2024 presidential election.

The U.S. and China are, respectively, the first and second largest economies on the globe and, in the past decade, the natural antagonism stemming from that relationship has transformed into a state of tensions that many within the political classes of both countries would rather avoid.

While tensions have been on the rise, the two countries need each other more than they're comfortable admitting. Last month National Security Adviser Jake Sullivan wrote in Foreign Affairs that the two countries are "economically interdependent." 

Recent history in U.S,-China relations is plagued with periods of confrontation which systematically intensify and relax.

A trade war between 2018 and 2020 put the two countries in check. The Trump administration ended on a note of discontent with its efforts to reach a stable balance for the role of the two countries in the global sphere, with U.S. Secretary of State Mike Pompeo stating that the era of cooperation between the U.S. government and the Chinese Communist Party was over.

Since Biden began his term in 2021, the relationship with China deteriorated over several key issues. China's increasingly belligerent rhetoric over its claim on Taiwan consistently sparked controversy in the West, where the island country is considered a sovereign nation and a key strategic ally.

Holding a large share of the production of high-performance semiconductors, Taiwan has been at the center of a larger conflict over which country gets to control the supply chain for technology.

During 2023, Biden and the Congress have pushed several measures aimed at slowing down China's chip industry while boosting U.S.-based production. However, S&P 500 companies are showing signs of fear towards China, leading the way in a strategy to slowly derisk their exposure to the country.

Earlier this year, the reportedly incidental case of a Chinese weather surveillance balloon being blown off its course into U.S. soil became a cause of quarrel between the two countries, leading to months of silence for Biden and Xi.

While the Biden administration has consistently developed policies aimed at re-empowering domestic production in certain industries after decades of relocation of jobs and factories to China, trade between the two countries is on the rise, without showing signs of a slow-down.

In 2022, trade between the two countries reached a new record of $758 billion, with exports from China to the U.S. almost tripling the value of those exported by the U.S. exports to the Asian country. 

The diplomatic summit began on Thursday, when Treasury Secretary Janet Yellen launched a two-day meeting with He Lifeng, a Chinese vice premier and one of the country's top economists.

The meetings seek to establish a new framework of cooperation between the two countries. The Biden administration approach is following that of many Western nations, in an strategy described as "derisking without decoupling."

On Thursday, Yellen emphasized the U.S. was not looking to economically decouple from China in any sense.

"A full separation of our economies would be economically disastrous for both our countries, and for the world," Yellen said. "We seek a healthy economic relationship with China that benefits both countries over time."

According to Bloomberg, at a minimum, experts expect a basic agreement over the need to coordinate efforts to combat climate change, restore communication between the two countries' militaries and begin working on efforts to limit the supply of illegal fentanyl to the U.S., with the supply chain believed to originate in China.

Benzinga's Take: While no groundbreaking announcements are expected to come from the Biden/Xi talks, the encounter itself can be read as an intention to cooperate in finding a common ground in the search of both nations to manage a commercial rivalry without aggression.

The event can lead to an increase in perceived stability for companies depending on trade between the two countries, including Chinese companies with stock listings on U.S. exchanges, as well as U.S.-based ETFs following the Chinese market.

Top China ETFs are up on Monday, including:

• iShares MSCI China ETF MCHI, which is up 1.3% at the time of this writing.
• KraneShares CSI China Internet ETF KWEB, up by 1.6%.
• iShares China Large-Cap ETF FXI, up by 1.6%.
• Xtrackers Hvst CSI 300 China A-Shs ETF ASHR, up by 0.7%.

Some of the largest Chinese online commerce and technology companies are listed in U.S. exchanges, and include:

• Alibaba Group Holding BABA, which is down 0.1% on Monday.
• JD.Com Inc JD, up 1.6% on Monday.
• PDD Holdings Inc PDD, up 0.1% on Monday.
• NetEase Inc NTES, up 1.7% on Monday.
• Baidu Inc BIDU, up 1.7% on Monday
• Yum China Holdings Inc YUMC, up 0.5% on Monday.

Image created with artificial intelligence on MidJourney.