From Russian rain to Chinese storm

Hurricane as Russia in the Look of I Kind. It comes in fast and hard. China, on the other hand, is climate change: long, slow, pervasive.

Rob Joyce, Director of the Cybersecurity Directorate of the National Security Agency (NSA) in 2019.

By the end of 2020, the director general of the British Security Service MI5 Ken McCallum used similar terms to describe the Russian actions as “bursts of bad weather, while China is changing the climate.”

Joyce and McCallum were on the shorter term in the geopolitical situation that Moscow would probably shake up with their money. However, China is currently the world economy for turmoil. Not because of foreign adventures, but through the coronavirus and actions of the government to contain the pandemic.

Xi Jinping and those around him seem to have the best approach about doubts. At any rate, and at any cost, Xi wants to avoid too much of his appointment ahead of an unprecedented third term this year. The consensus among analysts was that Beijing would stick to its zero-COVID policy at least until the autumn. The major question is whether these can be maintained with the more contagious COVID variants.

In any event, the coronavirus revival of the economic impact of the absorption of the authorities also differ. For example, a number of highly placed men – because they are all men – want to boost the property market, further reduce the reserve requirements of banks and provide monetary support.

On the other hand, there are policymakers who believe that the economic blow to the nature of the property is not as good as it could be, and who knows what moreover the dangers of blowing even more bubbles in property prices, for example.

Now that Team Boost has won the battle, among other stimulus measures, another large-scale infrastructure initiative has been announced. In a sense, this is not surprising, since little power can be expected from other potential growth engines. Chinese growth can be basically attributed to three sources: corporate investment, consumption by households and the government and trade surpluses.

Exports are a result of weakening global growth due to Ukraine war and high inflation. At the same time, the so-called terms of trade have deteriorated for China. Moreover, Chinese consumer confidence is eroding, and consumer expenditure is the lockdown to the problem with fraught. Companies are becoming increasingly reliant on the deteriorating economic climate. This is essentially a disproportionately large share of Chinese growth. The property market has accounted for roughly half of these investments in recent years. If this is the way to remain, the property will bubble even bigger.

Increasingly more and more pumping up the property market means investing in more and more investments that will justify the current growth in future investments. However, the long-term challenges point to lower growth. Demographic developments are far from favorable. While the population grew by approximately 10 million people a year, population growth has declined significantly since 2015 and is now roughly at zero. The population is even expected to shrink. In addition, China will likely rely on technological advances for future growth. In recent years, Western technological innovations on China have made huge strides. As a result of shifting geopolitical relations, China will have to go it alone. It is doubtful if this will work. Also, because under Xi, China is taking on more and more of a planned economy.

This changing international political climate is promoted by China’s enormous economic, diplomatic, technological and military rise. However, this upsurge is starting to be partially turned against Beijing because the West was rudely awakened from the dream that China would also become more prosperous. China is therefore actively obstructed. And the country may be a giant, but it is the world that is most dependent on it. In many areas, it still requires foreign exchange reserves (especially dollars and euros) as well as foreign capital.

These three factors are currently at risk. Before the invasion of Ukraine, Western countries had already grown more concerned about the transfer of advanced technology to China, but the war had forced the West to face the facts and the potential autocracies. These are technological applications and products shared at a more critical look.

As for currency reserves, China will become more cautious about holding dollars, euros and possibly yens and Swiss francs, as it has witnessed the risks involved in a scenario where Europe and the US really decide to put on screws: Roughly half The reserves of the Russian central bank have been frozen.

The influx of foreign investment will also reduce. In light of global and social enterprise initiatives, Western companies are becoming increasingly cautious about authoritarian regimes. Moreover, the lockdown in Shanghai has made it crystal clear – and the words of China expert Fraser Howie – “Shanghai has always been a state-owned enterprise creation.” There is no free movement of capital and information and this now includes people.

It is now a clear cut, as China has taken steps to take its economy further in recent years, but it has become increasingly clear that the yuan will not be freely tradable for a time. The Communist Party, and the supervisory authorities and stock exchanges intervene arbitrarily if certain market movements do not please them. In short, China is no more appealing.

At any rate, uncertainty is increasing for companies and investors. The US – combined with many allies and partners – wants to make things tougher for China, a political, military and economic sense. This is achieved, for example, by refusing to transfer knowledge and technology, to a greater military presence in the region such as China and partnerships and organizations such as Australia, the United Kingdom, the United States Partnership (AUKUS), the Quad and the new Indo- Pacific Economic Framework (IPEF).

Tensions in the region are rising considerably. Developments are strategically located in the Solomon Islands – with a population of 700,000 – say: After the Archipelago had signed a security pact with Beijing, the top US diplomats rushed aboard a plane to change the view of the government of the Solomon Islands. In the short, tough battles of influence are being fought by great powers in every corner of the world.

Reference is often made to a decoupling between the West and China in order to be able to win the geopolitical battle. The Russian example has been pointed out. However, decoupling from China is essentially a different order. Western economies and China are intertwined in many ways and massive ways:

  • Two-thirds of China’s foreign exchange reserves are held in Western government bonds and so on.
  • By the end of 2021, foreign parties owned $ 3.6 trillion in direct investments in China and $ 2.2 trillion in shares, bonds and the like.
  • Four of the 40 systemically important banks in the world are Chinese.
  • Only a fifth of China’s trade is conducted in Yuan.
  • China is the most important trading partner in over 120 countries.
  • Chinese products account for 18 percent of US imports and 22 percent of EU imports.

In short, a decoupling between China and the US and its allies may not be an impossible task, but it is likely to result in a different order than the already very expensive ones in Russia.

For the time being, a steady form of bloc formation is more likely, in which China and its partners have one hand and America and its associates have other gradually reduced their mutual dependence. In recent years, this has been demonstrated in China’s reduction of dollar reserves (in 2005, dollars constituted 79 percent of China’s foreign reserves to 58 percent in 2019).

Andy Langenkamp is a senior political analyst who offers independent research on asset allocation, global financial markets, politics and FX & interest rates.

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