What Wall Street can expect from key Biden-Xi meeting as U.S.-China relations remain tense

Published Tue, Nov 14 20233:01 PM ESTUpdated Tue, Nov 14 20233:20 PM EST

Investors are cautiously optimistic ahead of Wednesday's meeting between U.S. President Joe Biden and Chinese President Xi Jinping, as both leaders gather in person for the first time in a year to ease tensions between the world's largest economies. The meeting is set to occur during a critical time for both economic giants. China is facing an economic slowdown driven by a deteriorating real estate industry and weak levels of consumer spending. On top of that, U.S.-China tensions have been exacerbated in recent months by a growing rivalry between for tech supremacy. Signs of smoother communication between the geopolitical heavyweights this week could provide a slight lift to markets, according to some analysts. Moves will likely remain muted, however, as trade policies affecting key areas of the market — such as U.S. semiconductor export controls — are expected to persist. The best-case scenario out of this meeting, according to HSBC co-head of Asian economic research Frederic Neumann, is that both nations form a framework for more frequent discussions moving forward. "We shouldn't get carried away with expecting too many deliverables. This is really about two sides, two presidents, looking eye-to-eye," Neumann said. "Few concrete signals may help the market. One is military communication, and also making some progress on climate change cooperation." Biden and Xi, who will meet during the Asia-Pacific Economic Cooperation summit in San Francisco, are expected to discuss a variety of global issues, ranging from tariffs on Chinese products, economic relations and a fentanyl crackdown . The presidents are also set to pledge a deal limiting the use of artificial intelligence in military technologies, according to The South China Morning Post. The talks "could reestablish military communications between the two countries, which in turn could reduce geopolitical risks – a positive for the markets," Stifel chief Washington political strategist Brian Gardner said in a Tuesday note. Investors shouldn't anticipate any breakthroughs, though, Gardner noted, as the firm's base case remains that the U.S. will extend most of its tariffs on Chinese imports and will set new restrictions on chip exports. In October, the U.S. Department of Commerce announced it will prevent the sale of some advanced AI chips to China due to worries they could be used for military development purposes. Biden in August signed an executive order to limit U.S. investments going towards the Chinese development of sensitive technologies — such as semiconductor, quantum computing and artificial intelligence companies — over national security concerns . Chinese companies, meanwhile, have accelerated in global patent holdings in the cybersecurity sector, according to a recent Nikkei report. Still, the U.S. is behind in overall chip development. Its manufacturing share has dropped from 37% to 12% in the last three decades, largely due to higher operating costs in the U.S. compared to Asia. Impact on companies The Biden administration's recent bans, as well China's economic slowdown, have been top-of-mind concerns for investors who have parked their money in chip stocks and tech names with sizeable markets in the region. Shares of these companies continue to rally, however, as they continue to innovate despite facing geopolitical headwinds. The recent U.S. export restrictions inhibited sales of Nvidia's A800 and H800 chips, which were both created for the Chinese market to comply with previous export rules, as well as chips made by Advanced Micro Devices and Intel . Nvidia fell nearly 4.7% the day the restrictions were announced, but the stock has since picked up. Shares gained 2% on Tuesday after the company unveiled its newest high-end graphics processing unit. AMD and Intel are also up 86% and 48% for the year, respectively. According to Evercore ISI analyst Neo Wang, this week's meeting could be a pivotal stage for Xi to welcome foreign investment. Wang noted the Chinese commerce minister recently assured Micron's CEO of China's commitment to strengthen the investment environment for foreign businesses, in an attempt to convince the executive to grow its presence in the country. Even amid its reshoring efforts, memory chip maker Micron maintains a strong presence in China and is pivotal to its economy, Wang said. Micron is planning the biggest chip factory in U.S. history in an attempt to bring advanced memory production back to its home country. The company aims to increase the share of chips it makes in the U.S. from 10% to roughly 60% in the next two decades. Its shares have gained 54% this year and rose 3% on Tuesday. MU YTD mountain Micron YTD Electric vehicle maker Tesla and tech companies such as Microsoft — which has had a long-standing presence in the country — are also emblems of foreign investment in China. "Beijing really needs Tesla in China as a spur to its domestic EV makers...to put pressure on the domestic EV makers, which helps to improve the efficiencies and productivity of the whole sector," Wang said. Tesla's China-made electric vehicle sales fell in October, while its Chinese rival BYD saw an increase in its deliveries in October. Tesla has popped more than 90% this year but is down 6% this quarter. More reassurance to Chinese investors To be sure, while these stocks continue to rally, investors in the U.S. largely remain cautious about making any trades based on expectations ahead of the Biden-Xi talks. If anything, Chinese investors could leave Wednesday with more reassurance—which China's economy desperately needs as it struggles to make a post-pandemic recovery. Chinese investors "remain concerned that the deterioration in the bilateral political relationship could have a negative impact on the Chinese economy," Matthews investment strategist Andy Rothman said. "A positive meeting will reduce those concerns ... and make it easier for them to get their confidence back to invest in their own market." Shaun Rein of China Market Research Group told CNBC last week that the meeting "might lower down the temperature," but that he does not expect "anything meaningful" to come from it. Ahead of the meeting, Rein had said that he is "cautiously optimistic" for China's 2024 growth as multinational companies — from Europe, South Korea and Japan, rather than the U.S. — plan to make a big comeback in in the country next year. In the meantime, he said the Biden administration's recent restrictions have 'depressed' the wealthy Chinese consumers who deal more with international trade. "The problems the U.S. has with China are going to continue, and therefore you're not looking for some big improvement to the relationship, you're looking to put a floor under the relationship," Derek Scissors, senior fellow at the American Enterprise Institute, told CNBC's "Power Lunch" on Monday.