I, like many people, tend to easily resort to scary words when we describe the rapidly deteriorating US / China relationship or should I say The West versus China. The slippery slope starts with increased competition, then moves to a new cold war containment and ends with potential military conflict possibly via a Taiwanese excursion! On this downwards spiral we’ll also have lots of internal interference with China throwing its weight around. Typical of this is an amazing story doing the rounds this week around the Fox Hunt saga in New Jersey. Hat tip to the wonderful Bill Bishop and his Sincocism newsletter. You can see the outline of the case here – Eight Individuals Charged With Conspiring to Act as Illegal Agents of the People’s Republic of China | OPA | Department of Justice
Here’s the outline of the extraordinary case……
“In April 2017, defendants Zhu Feng, Hu Ji, Li Minjun, Hongru Jin, Zhu Yong, and Michael McMahon, together with others, including the PRC Officials, allegedly participated in a scheme to bring John Doe-1’s elderly father from the PRC to the United States against the father’s will and to use the surprise arrival of his elderly father to threaten and attempt to coerce John Doe-1’s return to the PRC. Zhu Feng, Hu Ji, and Zhu Yong worked with Michael McMahon, a private investigator, to gather intelligence about and locate John Doe-1 and his wife in the United States. PRC Officials coerced the father of John Doe-1 to travel from the PRC to the New York area in the company of Li Minjun, a doctor, who traveled with the elderly father from the PRC to the New York area. Hongru Jin assisted with logistics of the operation when Zhu Feng, Li Minjun, John Doe-1’s elderly father, and other PRC officials arrived in the U.S…
Between May 2017 and July 2018, Rong Jing and several co-conspirators allegedly targeted John Doe-1’s adult daughter for surveillance and online harassment. Specifically, Rong Jing attempted to hire a private investigator to locate John Doe-1’s adult daughter in order to photograph and video record the daughter as part of a campaign to exert pressure on John Doe-1. Around the same time, an unidentified co-conspirator sent harassing messages over social media to John Doe-1’s daughter and her friends related to the PRC’s interest in repatriating John Doe-1.”
The complaint, in PDF:
It’s quite easy seeing these stories, reading about universities shutting Confucius Institutes and China ramping up rhetoric about invading Taiwan, to default into tin hat alarmism. And there is of course plenty to be alarmed about but overall, I think history teaches us that great ruptures of the global order are few and far between and for most of the time competition stays within defined boundaries.
And arguably as the Fifth Plenum meets in Beijing, another scenario emerges into view. Competitive tension. Two superpowers keep tensions just underneath aggression but struggle economically for dominance. This could in turn spark a huge technological battle between China and the West which will have huge spillover (positive) effects on productivity and economic growth. The Ant Financial IPO is a reminder that at scale the Chinese are now absolute pioneers in areas such as fintech and increasingly life sciences.
This superpower tech race, as I said, could be invigorating if scary and dangerous but the competitive tension might just stay at that level – and hopefully, China will not invade Taiwan.
This more benign scenario is I think a default position and is mapped out very clearly in a recent paper called Forecast 2025: China Adjusts Course from an outfit called the Macro Polo team based out of the Paulson Institute. I have not run into the latter before, but its blurb says “the Paulson Institute is a non-partisan, independent, privately funded “think and do tank” not supported by or connected to any government. It is dedicated to fostering a US-China relationship that serves to maintain global order in a rapidly evolving world. MacroPolo is the in-house think tank of the Paulson Institute in Chicago. We decode China’s economic arrival with our incisive, market-relevant analysis, and creative research products.”
The report maps out what I think is a very likely scenario based around a number of key macro assumptions, notably:
- China’s political economy will remain largely what it is today, ruled by a strong Chinese Communist Party (CCP) led by General Secretary Xi Jinping.
- Direct US-China military confrontation is unlikely, but competitive dynamics and tensions will become more explicit and play out across all major geographies.
- Globalization will likely continue to stall as countries turn more inward and regionalism becomes more prominent
The report also lists some key factors which influence their forecast:
- Stronger center, weaker localities: from dealing with debt and growth to executing on reforms and environmental initiatives, local governments are being kept on a much shorter leash and are less able to freelance relative to just five years ago. The main manifestation of this dynamic will be Beijing’s continued fiscal hawkishness and increased actions to induce local compliance with central mandates.
- Global power under global scrutiny: Beijing faces its toughest external environment in about a generation, cantered on US-China tensions. China likely can no longer count on a relatively stable external environment, one of the key ingredients that have facilitated its economic success to date. Its conduct and intent, both domestic and foreign, will be put under a global spotlight, forcing it to respond.
Here’s the reports base cases, all fairly optimistic …From an investor’s point of view they’re all food for thought, forcing us to figure out how we engage with local businesses.
Eluding the Middle Income Trap / Economy
- By 2025, Beijing will have had little choice but to reform its way out of challenges that result in a Chinese economy that will likely become more open, balanced, and efficient.
- China faces one of the most daunting external environments in decades, which ironically will likely push Beijing to further embrace foreign direct investment (FDI) and improve the business environment.
- On the domestic front, China’s “internal circulation” agenda will be less about self-reliance but focus on improving productivity and inducing more local competition, while keeping a lid on financial risk.
- The pursuit of reform priorities means that at the end of the 14th Five-Year Plan (FYP, 2020-2025), China will likely have eluded the “middle-income trap” and become a near-majority middle-class country.
Stronger as Xi Goes / Politics
- In 2025, Xi Jinping will remain General Secretary of the Chinese Communist Party (CCP), Chair of the Central Military Commission, and President of the People’s Republic of China. He will likely emerge the strongest he has ever been after the 20th Party Congress in 2022.
- It’s unlikely that a clear successor will emerge from the 2022 political transition, to avoid diluting Xi’s authority as the CCP focuses on executing his domestic reform agenda.
- Xi will likely focus his power on “the politics of execution” in his third term, as the 14th FYP begins his strategy to transform China into a superpower by 2035. This program will strengthen governance, discipline, and ideology to enhance Beijing’s ability to transmit policy through central agencies and local governments.
- A strengthening focus on domestic priorities will involve some trade-oﬀs, so Xi is unlikely to announce any major new foreign policy initiatives in the next five years
Fragile Tech Superpower / Technology
- By 2025, China’s technology ecosystem will have matured and be on par with Silicon Valley in terms of dynamism, innovation, and competitiveness.
- That dynamism will increasingly take the form of industrial applications of information technology, as the locus of Chinese innovation shifts from the consumer internet to the industrial internet.
- China will largely succeed in deploying highly capable “new infrastructure”—cloud computing, 5G networks, smart cites, and surveillance networks, among others—to facilitate this transition to the industrial internet.
- US export controls on semiconductors will act as a modest brake on China’s new infrastructure rollout. But expanding restrictions on semiconductor manufacturing equipment will mean that China remains vulnerable to future interruptions to its supply chain for advanced chips.
Setting Course for Peak Emissions / Energy
- By 2025, China will be close to achieving peak emissions as a result of more ambitious actions to bolster renewables, pivot toward market mechanisms, and enhanced energy efficiency measures.
- Renewables will benefit from cost competitiveness relative to coal even in the absence of subsidies.
- Power sector reforms announced in 2015 will see meaningful progress to better support Beijing’s decarbonization eﬀorts.
- These factors will mean that non-fossil energy sources such as nuclear, wind, and solar will be the major beneficiaries relative to coal over the medium term.