Tag: China
Confluence of Ideas – #21 “The U.S.-China Balance of Power: Part II” (Posted 4/30/21)
Confluence of Ideas – #20 “The U.S.-China Balance of Power: Part I” (Posted 4/7/21)
Confluence of Ideas – #19 “The 2021 Geopolitical Outlook” (Posted 2/9/21)
Weekly Geopolitical Report – Back to the Future? Prospects for a New Cold War Against China (October 12, 2020)
by Patrick Fearon-Hernandez, CFA | PDF
This edition of our Weekly Geopolitical Report explores the prospects of a new Cold War between the United States and China. Based on the author’s personal experiences at the end of the U.S.-Soviet Cold War, this report explores the various costs that would likely arise from a new Cold War and what those costs imply for investment strategy.
When I asked her if she had any trouble getting her ticket from St. Petersburg to Moscow to join me for the long weekend, she said, “No.” Then, with a sly grin and a meaningful glance deep into my eyes, she added, “I just asked for help from a friend in the KGB who works for President Gorbachev.” I suppose I grinned a bit, too, since she had just confirmed her association with Soviet intelligence, which I had suspected ever since we met in a hotel bar in St. Petersburg weeks before. If I did let a grin slip out, it probably also reflected the irony of knowing how badly my office at the CIA was going to react to this forbidden dalliance when I got back to Washington. But it was a beautiful, bright, crisp autumn morning in Moscow in September 1991, just after the attempted coup against Gorbachev, and I was still young.
Weekly Geopolitical Report – The Evolving U.S. Policy Toward China and Its Impact on Investors (August 10, 2020)
by Patrick Fearon-Hernandez, CFA | PDF
Looking forward to the coming years and decades, today’s long-term investors face a stark question: will they be investing in a China-dominated world molded by authoritarian leaders in Beijing? Or, will they be investing in a more familiar, Western-dominated environment reflecting the historic leadership of the U.S. and incorporating the values of freedom, private property, and justice, as handed down from British common law? Here at Confluence, we have long discussed the global public goods of security and a reserve currency that the U.S. has provided in its traditional role as global hegemon, and we’ve shown that U.S. citizens have become tired of providing those goods. We’ve argued that the most likely future is one in which the U.S. relinquishes its global dominance, producing an unstable and dangerous transition period from which some new hegemon—perhaps China—will eventually arise.
But the end of U.S. hegemony and its replacement by China are not yet set in stone. High-level “China hawks” in the Trump administration have launched an audacious effort to convince the American people and America’s foreign allies that they must push back against China and its effort to assume the throne of global leadership. At the dawn of the Cold War, the architects of U.S. “containment policy” faced a similar challenge as they built the case for thwarting Soviet expansionism. The question now is whether the new tough-on-China argument will resonate to the same extent.
Weekly Geopolitical Report – Rethinking China: Part II (August 3, 2020)
by Bill O’Grady | PDF
In Part I, we described China’s situation using Japan as a historical analog. This week, we will complete the analogy and examine in some detail the potential motivations of Chinese and U.S. policymakers. As always, we will conclude the discussion with potential market ramifications.
China’s Situation
Similar to Japan in the 1930s, China has become a large economy showing geopolitical power that is threatening the established order. Similar to Japan in the 1980s, it has an economy overly reliant on investment, trade and debt. And, like Japan, it is dependent on sea lanes it does not control. Finally, as was the case with Japan during both the 1930s and 1980s, China has reached a point where the U.S. is refusing to accommodate its rise. However, unlike Japan, China is not as dependent on the U.S. for its security (although it is quite vulnerable to a blockade).
It is arguable that Deng realized China would eventually reach this state and thus encouraged Chinese leaders to bide their time. Simply put, Deng wanted to extend China’s ability to stay “under the radar” for as long as possible before it would inevitably trigger a response from the U.S.
It is important to realize China is not acting in a vacuum. The U.S. has a clear role in how this situation evolves. The American response to China’s rise appeared to be guided by two principles. The first is that eventually China would accept U.S. hegemony and the trading system America had created after WWII. The second was that communism was fundamentally flawed and China would eventually develop into a capitalist democracy.
Weekly Geopolitical Report – Rethinking China: Part I (July 27, 2020)
by Bill O’Grady | PDF
President and General Secretary Xi Jingping has changed the course of Chinese governance. Deng Xiaoping Peng created a collective leadership model to prevent the rise of another Mao. Leaders were carefully selected and surrounded by leading figures of the various factions of the Communist Party of China (CPC). Term limits were put in place to restrict a President/General Secretary to two five-year terms. Deng established a structure of government which was somewhat decentralized. Cults of personality were discouraged.
Xi Jinping has reversed these measures. He has ended the restrictions on term limits. The Standing Committee of the Politburo is mostly composed of allies. Instead of using the structure of government that diffused power, Xi has created a series of informal committees that actually execute policy; this gives him nearly complete control of the government. “Xi Jinping thought” is now discussed in party and academic circles; although no one has bound them into a little red book, it would not be a surprise if that were to occur.
Xi is also changing China’s foreign policy. Under Deng, foreign policy was all about “hide your ambitions and disguise your claws.” Under Xi, foreign policy has been more assertive. However, over the past 18 months, we have seen aggressive and, perhaps more importantly, widespread actions. China seems to be willing to create tensions across a broad spectrum, which does appear to be a new development.
There are two broad themes to this report. In Part I, we will frame China’s situation using Japan as an analog. In Part II, we will continue the analog, discuss recent Chinese aggression and offer a detailed analysis of the potential motivations of Chinese and U.S. policymakers. As always, we will conclude the discussion with potential market ramifications.
Weekly Geopolitical Report – Why China and India Are Fighting (July 13, 2020)
by Patrick Fearon-Hernandez, CFA | PDF
In a bizarre confrontation last month, Chinese and Indian soldiers fought a pitched battle in near total darkness high up in the Himalayan mountains. If that wasn’t strange enough, the weapons used were merely fists, stones, police batons, and wooden clubs wrapped in barbed wire or studded with nails. At least 20 of the Indian soldiers died, many after falling down steep mountain ravines or freezing to death in the cold. An unknown number of Chinese troops also died. In spite of the primitive weapons used and the relatively small number of casualties, the skirmish created a major crisis and risk of war between Asia’s two nuclear behemoths.
In this report, we explain how the confrontation came about and why it was waged in such a primitive way. More importantly, we examine the tensions building between China and India and how the skirmish could cause them to spiral out of control. We also outline how things could develop from here and the likely ramifications for investors.