The Times’ columnist Rachel Sylvester has an excellent column on the new cold war with China in yesterday’s Times. Called “China is winning this war of the worlds”, you can read it here :
There’s nothing terribly new here but it nicely sums up something I’ve been considering for some time. The growing standoff with China won’t necessarily be a carbon copy of the Cold War but boast its own dynamic. The key will be this concept of technological competition. Sure, the Cold War had its space race (and nuclear arms race) but overall that conflict was primarily an ideological one with a military over lay. It also centred on fears of Soviet expansionism. Bar the South China Sea – and a few valleys in the Himalayas – the China US stand off is different. And as Sylvester rightly says, this will be about who will be first technologically. First to next gen 5G, first to next gen AI, first to land humans on Mars, first to develop any number of technologies.
There is though I think a potential upside to this technological battle. It’ll present huge opportunity for investment and investors. If we’re all honest, we’ve been collectively trying to work out how we can improve productivity in the Western world for at least the last decade. Upskilling workforces takes time and is necessary but in truth we need new ideas, new products and new efficiencies. Technological innovation will produce these and we need something to give new ideas a kick start. That in turn will feed through into productivity upgrades and then greater wealth.
If one side effect of this face off is that both the US and China seriously invest in technology – including renewable technologies in the energy and transport sector – then we may have one way out of a low growth, low returns, frigid future. So, perversely as investors we should maybe quietly enthuse as the two superpowers duke it out over tech.
There is though a catch with this scenario.
In order to develop its technological base, China will probably need to expand its consumer economy – a stated desire of the leadership but as a task much easier said than done. On this score it’s obvious that Covid 19 has taken a wrecking ball to the demand side and the latest data isn’t terrifically positive. Or at least that’s the view of the China based economist Michael Pettis in his latest Global Source Partners report from 29 July 2020. He cites a number of surprisingly weak consumer data points:
- “In June, savings deposits from non-financial institutions were 13.2 percent higher than a year earlier, even though nominal disposable income was only 2.4 percent higher (real disposable income was down 1.3 percent), suggesting that households are cutting back on their shopping even faster than the decline in their income.
- “This explains why retail sales (which tend to overstate real consumption demand) were down by 3.9 percent for the quarter. Not only are households saving more of their income, but there is a great deal of evidence that the decline in real household income was asymmetrically distributed: richer households actually saw an increase in income, whereas for the rest, the poorer, the greater the decline.
- “Anecdotally, talk in the auto industry is that while car sales in China have been way down for the year (although stronger than expected in the second quarter), purchases of luxury cars have soared, perhaps reflecting a one-off response to Covid-19 (less family travel by plane or train, more by private car), while purchases of cheaper cars have plummeted and are unlikely to come back.
- “As bad as the consumption numbers were, I was particularly worried by the fact that investment by private companies fell by 7.3 per cent.”
These poor date points on the demand side are all likely to exacerbate structural challenges which are already evident – and causing problems globally. The supply side in China is arguably over invested and has recovered strongly but it’s resulting in a rising trade surplus. According to Pettis, China’s trade surplus in June was $46.2 billion, for a total of $154.4 trillion in the second quarter. Last month he suggested that China’s second quarter trade surplus would be 4-5 percent of GDP, and sure enough it came in at 4.4 percent. In effect China is intensifying its export of deflation just as the global economy desperately tries to regain momentum.