What’s the outlook for Aus-China business & investment in 2018?
It depends on the US-China ‘great power competition’ that will escalate this year.
The US National Security Strategy, released Dec 2017 pulled no punches in declaring China as a ‘strategic competitor’ and ‘revisionist power’…. ‘wanting to shape a world antithetical to US values and interests.’ (see excerpts relating to China from the NSS document here.)
So what action will the US take to contain China?
Expect much higher US interest rates (and therefore world interest rates) and a trade war.
The US can afford to take these actions now, with its economy and financial markets strong, significant tax cuts being implemented, multinationals announcing major plans to invest in the US, additional stimulus from US business deregulation, and a proposed $1 trillion infrastructure spend.
Higher interest rates are the last thing China needs as it seeks to curtail leverage in its economy. Financial risk is the top risk identified by the Chinese government late last year, and news in late December of yet another giant Ponzi scheme (Qbao), gives credence to concerns about China’s financial markets.
I’ve covered these concerns previously (June 28 2017), noting that China was managing these risks at that time.
But now, the X-factor is US actions aimed at beating its great power competitor.
Financial power is the US’s most potent weapon. US dominance in political power, economic power, technology power, soft power and military power have lessened…relative to China.
But USA’s financial power, strengthened and refined over decades of financial turmoil, remains globally preeminent.
As noted earlier, China’s weakest pillar is its financial markets. Like the 1929 financial crisis, it can lead to catastrophe.
Yes, China has US$1.2 trillion in US Treasuries, but selling them will hurt China more than it will hurt the US (as it will result in even higher world interest rates and global turmoil which will damage China’s over-leveraged and softer economy more than US’s now stronger economy).
Trump sees it’s now or never to contain China. His re-election chances in three years’ time looks slim on current polls. Therefore, like his past business deals, he is willing to take significant calculated risks …that his strategy will ‘make America great again’ and boost his re-election prospects then.
So what does one do in this scenario? Stay tuned for my newsletter next month, but in summary, there will always be opportunities in a market as large and diverse as China.
Meanwhile, I am again supporting Lefand Group’s annual Building and Property Summit, 2nd March, Sydney. Panelists include Brian White (Ray White Group), Iwan Sunito (Crown Group) and two TV celebrities. Last year, there were around 400 attendees and Philip Iacovou, Director of Lefand is expecting 700 this year. Details here
I’ve taken excerpts from the 56 page NSS report relating to how the US perceives China.
China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favour
Competition does not always mean hostility, nor does it inevitably lead to conflict—although none should doubt our commitment to defend our interest
For decades, U.S. policy was rooted in the belief that support for China’s rise and for its integration into the post-war international order would liberalize China. Contrary to our hopes, China expanded its power at the expense of the sovereignty of others.
China gathers and exploits data on an unrivalled scale and spreads features of its authoritarian system, including corruption and the use of surveillance. …. Part of China’s military modernization and economic expansion is due to its access to the U.S. innovation economy, including America’s world-class universities.
To prevail, we must integrate all elements of America’s national power—political, economic, and military. Our allies and partners must also contribute the capabilities, and demonstrate the will, to confront shared threats. Experience suggests that the willingness of rivals to abandon or forgo aggression depends on their perception of U.S. strength and the vitality of our alliances.
….adversaries* and competitors (have become) adept at operating below the threshold of open military conflict and at the edges of international law….They are patient and content to accrue strategic gains over time—making it harder for the United States and our allies to respond. Such actions are calculated to achieve maximum effect without provoking a direct military response from the United States. And as these incremental gains are realized, over time, a new status quo emerges. (*note adversaries are North Korea, Iran, & terrorists organisations….while competitors are China and Russia)
The United States must prepare for this type of competition. China, Russia, and other state and non-state actors recognize that the United States often views the world in binary terms, with states being either “at peace” or “at war,” when it is actually an arena of continuous competition.
The United States will seek areas of cooperation with competitors from a position of strength, foremost by ensuring our military power is second to none and fully integrated with our allies and all of our instruments of power.
A geopolitical competition between free and repressive visions of world order is taking place in the Indo-Pacific region.
Although the United States seeks to continue to cooperate with China, China is using economic inducements and penalties, influence operations, and implied military threats to persuade other states to heed its political and security agenda.
China’s infrastructure investments and trade strategies reinforce its geopolitical aspirations. Its efforts to build and militarize outposts in the South China Sea endanger the free flow of trade, threaten the sovereignty of other nations, and undermine regional stability. China has mounted a rapid military modernization campaign designed to limit U.S. access to the region and provide China a freer hand there. China presents its ambitions as mutually beneficial, but Chinese dominance risks diminishing the sovereignty of many states in the Indo-Pacific.
U.S. allies are critical to ….preserving our mutual interests in the Indo-Pacific region…. Australia has fought alongside us in every significant conflict since World War I, and continues to reinforce economic and security arrangements that support our shared interests and safeguard democratic values across the region