With US-China tensions escalating, I looked back at my newsletter on this topic, emailed on 26 Sept 2017, to see what’s changed.
The email is repeated below as it is still relevant, but with technology leadership (especially 5G) now a key focus for both nations.
I’ve brought a co-speaker with me to my Perth 22 May China Angle seminar, sponsored by Deloitte….Tim Cheung, co-founder of a China-focused hedge fund, LSL Partners, who will talk about China’s technology, especially with a tech-consumer angle, and how it will impact on Australia. Details here. (registration $90 plus GST includes networking drinks and canapes afterwards)
Below is my email, sent a few months before the US declared China a ‘strategic competitor’ in its December 2017 National Security Strategy.
Investors are grappling with a new world order where the interplay between democracy, technology & information dissemination has produced less clarity, not more. Key points:
- China supports democracy in the West…because ‘modern’ democracy has weakened the West’s ‘moral law’ – the most important of five factors in the ‘Art of War’ (Sun Tzu), and pertaining to leadership.
- The China/US economic ‘war’ is in full swing but there will be no military conflict between the two. The cavalry charge ended with machine guns. Superpower wars ended with nuclear bombs and mutually assured destruction. There is no Thucydides’ Trap…but lots of ‘white-anting’ amongst vassal states.
- The economic war will cause collateral damage to investors in the wrong markets at the wrong time. Technology break-throughs are the new battlefronts.
- Technology has created ballistic mice- North Korea’s GDP is smaller than Laos, but who has the world on edge? These are the new black swans and grey rhinos for the investment world alongside the FAANG stocks and other disruptive tech unicorns.
- Ballistic mice are also forming as domestic tribes in the West. Left-wing vs right-wing tribes, and special interest groups are becoming more vocal, more disruptive, more ballistic, using technology to amplify their power. Western governments struggle to control the domestic agenda. The elephants are on their toes while the mice play.
- Command and control nations such as China set their own agendas. However, their main risks are ‘self-inflicted wounds’ where policy mistakes can fester for years, whereas capitalist nations such as the US benefit economically from ‘creative destruction’ as reflected by the nation’s rebound from its 2008 financial crisis.
- China is equalising fast with the West by implementing the ‘Singapore model’ of governance, and implementing its own 12 ‘core socialist values’.
Democracy, tribalism and the moral law
The recent growth of Western tribalism (e.g. ‘Not my President’, Yes/No vote to same sex marriage), accentuated by technology-savvy activists disseminating biased information, weakens trust and weakens a nation’s moral law.
The moral law is the first of five ‘constants’ in Sun Tzu’s military treatise, The Art of War. The moral law is the cause which ‘unites the people with their ruler, so they will follow him (her) regardless of their lives, undismayed by any danger.’
The rise of tribalism and the lack of trust amongst the Western populace is due to, and further causes, the weakening of core societal values. To borrow from Sun Tzu again, if you know your enemies and know yourself, you will not be put at risk. The West today is at risk of not knowing itself….more on this in future newsletters.
So expect nearly all Western democracies to have very close elections between political parties, weakening the ‘mandate’ to govern. Russian interference in US (and EU?) elections make sense…their objective is to prevent any one party from having a clear majority…for a nation divided against itself cannot stand.
PS China has already experienced tribalism (warlord-ism in the 1910s-1930s) and a breakdown of trust and core values in recent decades, which it is now seeking to rebuild.
An undeclared economic war
For investors, it means Western governments are unable to effect major policy change and are distracted by domestic ‘mouse’ issues, relative to the bigger issue of an economic war between the US and China.
It’s an undeclared war, because ‘all warfare is based on deception’ (Sun Tzu). I’ve used the word ‘war’ but it’s really competition between nations. A competition that deploys all forms of warfare except combat – e.g. espionage, soft power, propaganda, technological prowess, marshalling of government and corporate resources and supply chains when needed, use of vassal states and alliances, & financial acumen.
For investors, there are collateral impacts. South Korea’s tourism industry has been hit by a de-facto Chinese embargo, with Chinese tourist numbers to SK collapsing after the US Thaad missile system deployment was announced. US-Pakistan relations are now on eggshells as Pakistan is won over by China’s Belt and Road ‘Strategy’ (‘Initiative’ is the official term). Australian companies directly or indirectly dependent on sales to China (that’s about half the nation) are at risk of collateral damage.
Technology changes warfare. North Korea’s nuclear program, Islamic State’s global terrorism capabilities, and (the coming) drone swarm attacks are examples of the new grey rhinos from a military standpoint. But the biggest tech impacts will be in better information systems (for B2B, C2C and B2C deals), robotics, artificial intelligence, and better resource usage such as new energy. Technology breakthroughs are the new economic battlefronts but command and control nations will be better at implementation. (e.g. a decree is issued that XYZ city will now only have driverless cars as a trial).
Command and control
The 50+ year success of ‘Singapore Inc’ is testament to how good governance, rule of (British) law, minimal corruption, and big brother’s guiding hand (e.g. relatively big fines for even minor breaches of the law, and a semi-controlled press)can make its people focus on material well-being instead of human rights. It’s a model that China is emulating but on a scale 250 times larger (by population).
The difference is that China’s in a middle of an economic war with little room for error, and has significant legacy issues to fix such as corruption, weak private debt markets and environmental degradation. Its Belt and Road strategy is to create new markets for itself as well as new sources of supply, away from the influence of the US. Its domestic consumer and services industry has to grow to replace its reduced export-to-the-West capacity, and its financial and environmental weaknesses has to be fixed.
It needs time for its governance standards to improve and time for the Chinese psyche to learn to ‘follow the rules’ as Singapore’s population has done. And it needs luck (and humility) that any policy failures can be identified and corrected before they cause systemic problems.
The next five years under Xi will be the biggest change in China since the Deng Xiaoping’s market reforms 38 years ago. And big changes in China means big changes to the West.