South East Asia poses tricky questions for asset allocators. Many of the region’s nations rely on the US for military and political muscle but all – including countries such as Australia – are more reliant economically on China than the US. To date, many of these South East Asian countries have been beneficiaries of the trade war. Vietnam, for example, has seen huge increases in foreign direct investment as supply chains have relocated from China. India, Thailand, Japan and Taiwan are also winners. But will the US be content to continue providing for these countries’ defence if the world divides around, say, different technological standards, or will tough choices have to be made?
China is now one of the few truly bipartisan issues in America
China’s leaders know that they must act quickly to reduce dependence on American technology, US dollars and overseas energy. Meanwhile, responsible corporate management will re-engineer supply chains to minimise future risk. Rapid technological advances will supercharge this trend. The auto industry, for example, has long been the poster-child of globalised manufactured goods. As old technologies are retired, however, businesses are likely to consolidate production of new models with shorter supply chains – a further tailwind to this de-coupling. Pandemic disease risks will also focus minds. Economic disentanglement will accelerate. Alongside China, Germany looks especially vulnerable as a large manufacturing and exporting economy.
Cold War II comes at a vulnerable moment for the CCP. Every major economy with a per capita GDP of more than c$10,000 is a democracy. China is approaching this level of wealth, seeking to become the first autocracy over the line. Will it succeed? China’s financial system looks vulnerable. Over-indebtedness remains a chronic issue, complicated by an ageing population. The historic challenge to keep China together and stable remains real. The CCP’s authority rests on competence, prosperity and ‘national resurrection’. A material knock to any of these pillars would be dangerous and could emerge out of the blue. A botched response to a major disease, for example. The Orwellian Social Credit system of which Pence also spoke is as much a confirmation of fragility as it is of strength, as is the ‘Golden Shield’ public surveillance project. Surveys suggest that more than one fifth of urban Chinese consumers would permanently leave China, given the chance. This rises to over one third in the high-income bracket, suggesting widespread discontent. Simultaneously, the Xi era has – so far – been characterised by a growing Mao-style cult of personality around the president and the tightening grip of the CCP over politics, society and the economy. In Xi’s own words: “the Party leads everything.” The reform and opening era instigated by Deng is under threat, and China’s long-term economic prospects with it.
As the CCP grapples with these challenges, America has moved decisively from engagement to containment of China’s technological and economic power, and its geographical, military and political reach. Regardless of any trade deal, de-globalisation of supply chains critical for national security will gather pace. In time, hegemonic economic blocks with their own primary currencies, bond markets and business and credit cycles may emerge. China simply cannot offer the sort of concessions which the West quite reasonably demands – equal treatment for companies operating in China’s internet or domestic market, for example – because these would undermine the CCP’s hold over China’s economy and society.