Is a military confrontation between the United States and China possible?

Definitely. In fact, we have dedicated an entire article to the Thucydides trap dimension, more specifically Harvard professor Graham Allison’s observation that historically and statistically speaking, a confrontation between an emerging power (China, in our case) and the dominant one (the United States, in our case) is not just possible but downright likely, having occurred in 75% of such cases throughout history.

However, we have argued that as we come closer to the present, Graham Allison’s approach may very well stop making as much sense because new variables emerge, more specifically the “Mutually Assured Destruction” concept (the idea that in a nuclear war, there can be no winners, only losers) which acted as the number one deterrent when it comes to let’s say direct military confrontation between the US and USSR.

Fast-forward to the present and here at ChinaFund.com, we have coined the term “Mutually Assured Economic Destruction” given the deeply interconnected nature of today’s worldwide economy or if you will, the idea that peace represents the way to go, if only for financial reasons (to conveniently modify a Woody Allen quote).

Possible?

Yes.

Likely?

No.

In a nutshell, these two questions and answers tend to describe the attitude of the ChinaFund.com team with respect to the military confrontation scenario. We consider it quite likely that the US and China can remain adversarial in many respects without there being a need for direct military confrontation and on the contrary, with them even collaborating in certain key instances, when doing so makes sense for both parties involved.

That being stated, we owe it to our readers to at least take the possibility seriously and as such, have also analyzed the military dimension of Sino-American relations by dedicating an entire article to China’s military sector on the one hand and on the other hand, dedicating one to China’s military capabilities. As both articles allude to, despite the fact that impressive progress has been made in China (just like with most other sectors), a hypothetical military confrontation would be rather clearly in “asymmetric warfare” territory for the simple reason that there is a severe difference between the two players when it comes to anything from military capabilities to overall strategies.

Yes, it is true that China:

1. Is now the worldwide leader in terms of total artillery
2. Occupies position two in terms of aircraft fighters, self-propelled artillery, aircraft attack, armored fighting vehicles and combat tanks
3. Occupies position three in terms of total aircraft strength, total helicopter strength and attack helicopters as well as rocket projectors
4. Has the infrastructure dimension going for it, anything from roughly 4 million kilometres in terms of roadway coverage and 86,000 kilometres in terms of railway coverage to 16 major ports and over 500 airports

However, there is more to the military equation than the quantitative dimension and as we move on to the qualitative one (anything from cutting edge technology to geopolitical influence), the US is still in a more than comfortable enough lead for us to state that, again, a hypothetical military confrontation between the two entities would be firmly in “asymmetric warfare” territory.

As such, China’s attitude cannot help but be rather similar to Russia’s in terms of approaches, an attitude that revolves more so around hybrid warfare (conducting cyber attacks, defending itself against cyber attacks, launching informational warfare campaigns such as fake news distribution, basic online propaganda and the list could go on and on) than around a direct military confrontation.

While it is true that both China and Russia are already engaging in various more or less subtle forms of hybrid warfare, it would be a stretch to conclude that one entity or the other is “at war” (hot war, that is) with the United States. At best, a “Cold War 2.0” narrative would make more sense and not because adversarial tendencies are nowhere to be found (on the contrary) but rather due to a combination between geopolitical realism (China as well as Russia realizing that they are nowhere near parity with the United States militarily speaking), Mutually Assured Destruction as well as Mutually Assured Economic Destruction.

This hybrid warfare dynamic once again makes it clear that potential conflicts between the United States and either China or Russia (perhaps both) need to be seen through an asymmetric warfare lens. Even with the impressive progress of China on pretty much all fronts correlated with the fact that the United States has arguably made several steps back on the international scene on the one hand and has its share of endogenous problems on the other (anything from unemployment issues to social unrest), it would be nothing short of ludicrous to paint the picture of parity when comparing the US and China.

As a conclusion, for the reasons outlines throughout this article and many more, the asymmetry between the United States and China tends to be far more pronounced than headline statistics indicate. As such, “asymmetric warfare” is the name of the game when analyzing various scenarios, with the important remark that just like during the Cold War, Thucydides Trap-related arguments may very well once again be invalidated (we certainly hope so, in light of the fact that large-scale conflicts between combatants such as these two entities cannot possibly end well for humanity as a whole, realistically speaking) for reasons pertaining to Mutually Assured Destruction as well as Mutually Assured Economic Destruction.

Few intellectually honest observers would consider the attitude of the WHO perfect, so there’s a quasi-consensus when it comes to that. This changes, however, and leaves ample room for controversy and even conspiracy theories once we move on to analyzing the “reasons” dimension. More specifically, WHY was the World Health Organization wrong?

Broadly speaking, there are two main categories as far as potential answers are concerned:

1. It was wrong for political reasons, in an effort to help China and continue receiving Chinese funding, in other words the WHO experts released information they knew was wrong because they were politically motivated to do so
2. It was wrong simply because this is how the scientific method works when analyzing a virus you don’t have all that much in the way of experience with. There are bound to be errors along the way, especially at the very beginning. It’s what (ironically) makes the scientific method imperfect yet at the same time better than the alternatives, the fact that scientist learn from errors and bounce right back until the truth is discovered

Needless to say, it’s answer #1 which tends to lead to various conspiracy theories about the wealthy China which somehow “bribed” the WHO so as to further its agenda when it comes to on the one hand silencing those who wanted to spread the word about the virus initially and on the other hand, excessively praise China’s handling of the COVID-19 problem later on.

As far as the latter is concerned, it is indeed undeniable that the World Health Organization took things (way) too far when it comes to Beijing, including even terms such as “openness to sharing information” (which are downright ludicrous) used by Director-General Tedros. WHO critics are quick to point out this propaganda-driven intellectual bribery as they see it, whereas WHO defenders claim that in the absence of such flattery, China would have been even more opaque.

At the end of the day, there is no way to “know” with respect to such motives but what we do have more than enough of are money-related numbers which make answer #1 seem downright peculiar. Why? Simply because WHO financing numbers do anything but paint the picture of a World Health Organization that is dependent on China… on the contrary.

If anything, the WHO can be considered ultra-dependent on the United States, with position number one in terms of 2018-2019 financial contributors being occupied by the US (with a grand total of $893 million) and position two being occupied by the US billionaire Bill Gates’ foundation (with a grand total of $531 million).

China is not even in the top 10, with positions 3 to 10 being occupied by the United Kingdom ($435 million), GAVI Alliance ($371 million), Germany ($292 million), Japan ($215 million), UNOCHA ($192 million), Rotary International ($143 million), the World Bank ($133 million) and the European Commission ($131 million).

While it is true that China’s contribution went up over 50% (52%, to be more precise) since 2014, it did so from a less than impressive starting point and as such, China’s 2018-2019 contribution represented a less than impressive $86 million, over ten times less than that of the United States. If anything, this tends to suggest a narrative involving a WHO that would have been incentivized to do the exact opposite, paint China in a negative light so as to please its largest donor by far (the United States) rather than alienate it (which is what ended up happening, with the US deciding to cut World Health Organization funding, a devastating blow which risks representing a humanitarian disaster in light of the fact that the WHO has responsibilities which go well beyond COVID-19, many of which involve some of the world’s most vulnerable nations).

In the aftermath of the United States’ decision to cut WHO funding, it is almost certain that funding from China will improve but there is absolutely no way it can improve to the tune of nine figures yearly. As such, the entire conspiracy falls flat on its face when confronted with the previously mentioned numbers: why on Earth would China conspire against its largest contributor by far in an effort to please a contributor that isn’t even in the top 10?

As a conclusion, it is vital to point out that devastating mistakes are inevitable when dealing with a threat as new and therefore improperly understood as COVID-19, it’s how the scientific method works (learning from mistakes, building on the shoulders of giants, etc.), a scientific method that while imperfect, lead to us having the very Internet and gadgets used by many of today’s uninformed individuals to spread conspiracy theories that are the exact opposite of scientific.

China made significant mistakes, especially early on, and will most definitely end up paying for them. The WHO made its share of mistakes as well, many of which are quite frustrating in nature. But stating that there is some sort of mystical chain of causality which revolves around the WHO making mistakes because China made mistakes that needed to be covered up for propaganda reasons makes absolutely zero sense from the perspective of even basic logic and is therefore an attitude that goes against everything the ChinaFund.com team stands for. As dangerous as it is to be a “China cheerleader” who sees everything coming from Beijing through rose-colored glasses, embracing the exact opposite extreme is certainly not the way to go either.

This perspective is, however, quite short-sighted.

Why?

Primarily because it (conveniently) overlooks what China gave the West in return. More specifically and as ironic as it may seem, many of the Westerners who are complaining about China’s alleged free ride by for example publishing social media posts are doing so from their ultra-affordable phones and/or laptops, technology which wouldn’t have been nearly as accessible to the general public (and certainly not at today’s low costs) in the absence of “spoiled children” such as China.

To put it differently, the idea that the globalization-facilitated arrangement is one-sided, with China perpetually on the receiving end of benefits and the overly generous West on the giving end is childish at best and ignorant at worst.

As a bit of a creativity exercise, let us simplify an economic talking point and try to view things from the perspective of someone who believes the exact opposite, that the West is on the receiving end much more so than China. That person would most likely point out that China is getting a most peculiar deal in light of the fact that it exports actual products, whereas the West exports… well, inflation. In other words, China exports tangible products that make the lives of Westerners easier as well as more pleasant and receives pieces of paper or numbers on a screen in return (fiat currency that can be printed out of thin air or even easier yet, made available after a few clicks by central banks such as the Federal Reserve).

Of course, this perspective is just as short-sighted as that of Westerners who complain about China being the spoiled child of globalization. In reality, these “pieces of paper” and “numbers on a screen” enabled China to escape international isolation and tap into a huge worldwide market. Furthermore, this “worthless fiat currency” (that can indeed be created out of thin air but for which, and therein lies the key to understanding the equation, there is incredible demand) enabled China to invest in its modernization, anything from infrastructure to education and fast-forward to the present, China now has financially potent enough consumers so as to embrace an economic growth model that revolves much more so than in the past around internal consumption.

As many of you most likely suspect, the question which constitutes the title of this article is intentionally misleading and provocative. The answer tends to revolve around the idea that picking a “winner” represents an economic thinking mistake right from the beginning and that in reality, the answer is simple: both. China needs the West and the West needs China, with many choosing to paint an adversarial picture where there isn’t one.

Make no mistake, there will most likely never be an ideological love story between China and the West for the simple reason that political values are light years apart. However, love it or hate it, today’s globalization-facilitated economic interconnectedness is most likely the best scenario we have from a wide range of perspectives, from economic growth to geopolitical stability and ultimately world peace.

As mentioned in other articles as well, “Mutually Assured Economic Destruction” can be just as effective when it comes to conflict prevention as the nuclear weaponry-related “Mutually Assured Destruction” principle that governed the Cold War. In other words, just like the devastating effect of nuclear weapons make it clear to all potential combatants that a nuclear war would result in catastrophic outcomes for all parties involved (there are no “winners” in a Mutually Assured Destruction scenario, as the name makes clear), the effects of moving away from today’s economic interconnectedness would be so game-changingly dire that the parties involved have no choice but to act responsibly.

Yes, depending on the political climate/context, one political actor or another will make a negative statement about globalization every now and then. But the political actors in question have economic consultants and a decent enough basic understanding of Mutually Assured Economic Destruction to ensure that leaving political theatrics aside, there is a survival-related commitment across the board when it comes to maintaining the globalization status quo.

Not because there is a globalization love story one could refer to, because there isn’t, but rather because globalization doesn’t have to be perfect to survive: it simply needs to be better than the alternatives and it would be difficult to envision a workable economic model which revolves around completely abandoning globalization.

Of course, this doesn’t mean there will not be changes along the way. For example, it’s quite likely that after the COVID-19 disaster from a supply chain perspective, governments will be far more eager to encourage completely domestic supply chains when it comes to products that are perceived as relevant to national security (for example masks and medical equipment in the context of pandemics, with the same principle being valid when it comes to other threats) but it is extremely difficult to believe that these changes will threaten globalization at its core.

In conclusion, understanding that China and the West need one another is not a matter of generosity but rather one of self-preservation for all (geo)political actors involved. As such, while concessions will need to be made for political reasons whenever the proper context emerges, few decision-makers are truly committed to embracing models that revolve around abandoning the core pillars of globalization and status quo international relations.

Can the gig economy be considered a “winner” from a strictly economic perspective in the context of the 2020 pandemic?

The sector as a whole most definitely outperformed compare to quite a few other sectors over the past few months but on the other hand, it is imperative to analyze the phenomenon at a more granular level as well before setting a verdict in stone. Let us leave the sector as a whole aside and analyze the gig economy from the perspective of the average individual so as to answer one important question: does it represent the Holy Grail of employment in light of 2020’s developments?

The answer, unfortunately, is a resounding “no” for the simple reason that we get stuck right from the very articulation of the question: what employment, exactly?

The overwhelming majority of gig economy opportunities revolve around the individual being an independent contractor rather than an employee and while things may very well look better when it comes to a strictly revenue-oriented perspective, there is more to a person’s career than revenue, for example:

1. Various benefits such as medical insurance are frequently left to the individual. When things are going well, the fact that one doesn’t have stellar medical insurance may not seem like that significant of a deal-breaker. Many gig economy enthusiasts are more than happy to lock in additional revenue and simply shrug insurance-related concerns off but unfortunately, they risk being only one debilitating accident away from a most unfortunate game-changer
2. Job security being oftentimes precarious and with various moving parts involved. From being banned from one platform or another due to various glitches or growing pains of the company in question to not being able to adapt to gig economy dynamics and standing by as your performance as well as ultimately revenue plummet
3. The situation of many platforms being shaky at best from a legislative perspective and as such, independent contractors (without being the least bit to blame) find themselves one legislative “paradigm shift” away from losing it all. An eloquent example to that effect is represented by ride sharing platforms such as Uber and the constant war they are in with taxi drivers, who were forced to comply with various regulations so as to conduct business and expect independent contractors who work with Uber and other platforms to be on the receiving end of the same treatment
4. Even leaving the legislative volatility dimension aside, “platform security” represents a major factor that generates concern among independent contractors due to the fact that company-specific changes can turn a previously profitable (for the independent contractor) platform into one that is no longer worth it. As such, independent contractors find themselves forced to diversify in many cases (for example switching to newer platforms that entice them with perks such as guaranteed hourly revenue) and while it sounds simple enough in theory, it can turn into a nightmare practically speaking and the overall climate is not necessarily conducive to peace of mind

These are just four examples of aspects that make it clear it is anything but sunshine and rainbows in the gig economy world. On the other hand, it is true that various platforms are trying to make improvements on these fronts by embracing a wide range of solutions, for example offering various deals on necessities such as medical insurance so as to make up for the lack of benefits discussed when mentioning issue #1.

Still, this much is certain: the gig economy is most certainly not for everyone and the limitations of various platforms become more than apparent upon closer reflection. While issues such as the ones we have mentioned are not necessarily deal-breakers for young and flexible individuals, the same cannot be stated about for example someone nearing retirement, someone with pre-existing medical conditions and the list could continue indefinitely.

Is the gig economy scalable?

It depends on how we define “scalable” in the first place.

If the definition is to simply encompass a business model that can end up working for millions upon millions of individuals, the answer is yes. On the other hand, those who state that the gig economy will turn “employment 1.0” into a relic of the past are being over-optimistic… to put it mildly.

This is especially obvious in countries with stark divides between social classes such as China, where there is a world of difference between highly-educated urban citizens who are both willing and able to adapt to the needs of the gig economy on the one hand and on the other hand, an equally significant segment of the population that is barely literate or even functionally illiterate and as such, does not possess the minimum skill set required for gig economy-related opportunities to make sense.

Is the gig economy an excellent option in China as well as elsewhere?

For a certain segment of the population, most definitely but certainly not for everyone due to reasons such as the ones outlined throughout this article and… at the end of the say, simple logic and common sense.

When it comes to losers, unfortunately, there are more than a few, from “the usual suspects” in terms of businesses such as airlines and restaurants to even cities themselves, for example New York City. Why cities themselves? Primarily because mega-trends such as the one which constitutes the topic of this article wreaked havoc on the very principles that kept them sustainable.

If people work from home, why should they continue paying exorbitant rent prices instead of simply moving somewhere more affordable? What happens to landlords in this “paradigm shift” situation and what about the various contractors and third parties that are also included in the equation?

On the lifestyle front, with optional as well as government/state-enforced social distancing measures, what happens to habits such as eating out and enjoying a complex social life, which yet again represented a major selling point of urban areas?

These two simple examples make it clear that… well, things are actually anything but simple because as great as mega-trends such as working from home may sound, our system wasn’t exactly built for this significant of a paradigm shift. Look no further than commercial real estate to understand that entire industries would crumble if in our case working from home would become a permanent rather than temporary endeavor.

Why would it become permanent?

Because things are never straightforward in the world of economics and even once the pandemic ends, it would be naïve to assume all negative consequences will go away, primarily because “negative” is in the eye of the beholder and something that represents a toxic trend for industries such as commercial real estate or cities such as New York City might represent a blessing for other businesses and individuals.

For example, there are already studies coming out which illustrate that when working from home, not only does productivity not plummet when it comes to quite a few occupations, it actually goes up. Furthermore, when working from home, there is no need for the oftentimes-complex infrastructure of an office workplace: no rental costs for the employer, no maintenance costs and the list could go on and on.

To put it differently, quite a few employers are now have compelling evidence (both studies and empirical evidence when it comes to their own work from home experiments with their own employees) that this approach enables them to both save money and increase productivity… a combination one doesn’t exactly come across often In the business world.

At the end of the day, we are forced to use a term so popular in the tech landscape that it ended up in cliché territory: disruption.

Love it or hate it, the work from home mega-trend is poised to disrupt entire industries and, of course, China won’t exactly represent an exception. As such, it makes sense to think about this trend from the perspective of the Chinese economy and there are basically two very important perspectives that stand out:

1. The situation as far as China’s more developed regions are concerned does not look all that gloomy, with hyper-technologization already a given when it comes to anything from smartphone use to digital payments (with China, believe it or not, being among the leaders rather than followers when it comes to this trend) and with many sectors of the economy more than able to adapt or even facilitate the transition to a more heavily work from home-oriented paradigm. As an example, we have dedicated an entire article to the gig economy from a Chinese perspective and yet again, it’s quite remarkable in how many surprising areas China leads
2. When it comes to the less-developed regions of China, things tend to get a bit tricky in terms of anything from infrastructure (with China still having regions in which even the very basics by Western standards are lacking) to flexibility… let’s just say that for example remote education in a pandemic context is easier to implement in Shanghai than in one of China’s more rural regions. To put it differently, the work from home mega-trend represents yet another element which will make the significant gap between developed and under-developed regions more than clear

Of course, there are also issues that pertain to China as a whole, leaving the “developed vs. under-developed” gap aside, with commercial real estate and real estate in general representing a textbook example to that effect. In a “work from home” world, it will become even more obvious than it already is that a fair bit of malinvestment took place when it comes to pretty much everything real estate-related in China. As it was, China has proven to be over-zealous with respect to anything from creating new office spaces to building residential real estate and even in the absence of post-2020 trends, this isn’t exactly something that can be overlooked. The potentially reduced mobility and almost certainly reduced demand for office space would inevitably exacerbate and already systemic problem, so let’s just say the adaptability skills of the authorities will be put to the test.

All in all, it is fairly safe to conclude that in China as well as pretty much elsewhere, the previously mentioned “disruption” term is in the spotlight. It remains to be seen which countries will fare better in the long run if mega-trends such as the work from home one prove to be more than fleeting occurrences and as always, the ChinaFund.com team will keep readers and especially clients informed.

Are we in a “new paradigm” which involves inflation being a relic of the past?

Most likely not.

We are simply in a context where monetary base inflation did not lead to consumer price inflation but rather asset price inflation at best, with many economists making the mistake (in our view, at least) of viewing things through the lens of predictability and expecting linear developments. Just like a chef adds a little bit of seasoning until the taste is just perfect, it is expected that central banks will keep expanding the monetary base until “just the right amount” of inflation manifests itself.

In the opinion of the ChinaFund.com team, this perspective is nothing short of delusional. When referring to markets, expecting manic-depressive behavior rather than extreme predictability is always recommended, with pretty much any longer-term asset price chart representing an eloquent example to that effect.

To put it differently, while nobody can predict when we transition from a deflationary to an inflationary environment, we strongly believe the process will be anything but smooth and predictable. On the contrary, we expect “chaos” to be the operative word and for the now-unthinkable to occur: a significant loss of confidence in even the strongest Western currencies, including… of course, the dollar.

Where does that leave China and the renminbi?

Time and time again, we try to make it clear that just because China and the proverbial West are let’s say economic adversaries who are fighting for relevance and influence, it doesn’t mean that whenever the West loses, China wins, especially not as far as short-term perspectives are concerned. On the contrary, given the extreme economic interconnectedness which represents the norm in 2020 (despite a massive build-up of frustration, but that goes beyond the scope of this article), China is actually likely to not only catch the proverbial cold from the West but develop worse symptoms.

Let us not forget that the number one holder of dollar reserves is none other than… drum roll, please… China. As such, it would be short-sighted at best and naïve at worse to assume that China would be greedily rubbing its hands when the dollar loses value. On the contrary, the Chinese renminbi would most likely be in even worse shape at that point in time.

Why?

Simply because whether one analyst or another agrees with this, the United States still represents the world’s number one safe haven destination (the destination frightened investors flock toward during risk-off episodes), whereas China doesn’t even represent a safe haven destination at this point, with Chinese assets firmly in risk-on territory.

Yes, it is true that in just one year of post-Great-Recession easing, the Federal Reserve added more to the monetary base than had existed from 1913 up until the Great Recession. But it is just as true that since then, demand for US dollars has gone up rather than down. While it is correct that the euro has had a good run over the past couple of months, it is still considerably lower relative to its US counterpart than it was prior to the Great Recession.

Let’s just say that until the market grants China its much-desired safe haven status, it would be premature to state that China celebrates weakness in “competing” currencies and on the contrary, it is likely to be worried by them because unlike the Federal Reserve and the European Central Bank since the Great Recession, their Chinese counterpart (the PBOC) also has to worry about inflation every now and then. To put it differently, inflation is (even if not always and even if it isn’t exactly the norm) a CURRENT rather than potential PBOC concern and as such, it would be unwise to believe China is longing for a more inflationary environment.

Finally, there are also those who noticed that China has been adding gold reserves over the years and therefore believe it isn’t as worried about inflation when it comes to Western currencies as we have stated. But in terms of (and this is very important) orders of magnitude, China is nowhere near protected enough by its gold holdings to sleep tight at night while the West were to battle inflation, not by a long shot.

A few important conclusions therefore arise:

1. The demand for dollars should not be underestimated because no matter how aggressively the Federal Reserve eases, there will be no runaway inflation unless and until dollar demand takes a significant hit. Until now, that hasn’t happened but, of course, past performance does not guarantee future results
2. China is not yet considered a safe haven destination by the market and until that happens, not only would is it vulnerable should weakness manifest itself when it comes to Western currencies, the renminbi is also likely to fare considerably worse than the currencies in question
3. While there have been measures taken by China to distance itself from the dollar (from the previously mentioned gold reserves to negotiating renminbi oil deals and establishing renminbi ties to other economies), a fair case can be made that it is still considerably (over-)exposed to the dollar
4. However, conclusions #1 to #3 are not set in stone in terms of the (very) long-term picture and on the contrary, it is anything but impossible for game-changers to occur

Therefore, as borderline delusional as it may be to believe globalization will disappear completely from the international landscape, it would be borderline ignorant to assume the status quo can persist indefinitely or to put it differently, the idea that globalization will remain unchanged is not exactly something the ChinaFund.com team agrees with.

Why?

Simple game theory.

There is more to life than economics and aspects such as political implications need to therefore be taken into consideration as well so as to reach realistic conclusions. As an extremely eloquent example to that effect, many economists expressed grave concern with respect to the Treaty of Versailles and the stipulations pertaining to the reparations Germany was forced to pay. Thinkers including John Maynard Keynes himself made it clear that despite the fact that things were “watered down” (with a significant part of those 132 billion gold marks being nothing more than let’s call them accounting fabrications) compared to some of the more aggressive expectations among victors, the reparations in question were still devastating enough to essentially bring Germany to its knees and lead to a buildup of anything from frustration to socio-political movements that ultimately disrupted the (vulnerable) European peace status.

However, game theory kicks in and the general public in victorious nations wanted Germany to pay, both literally and figuratively. As such, stipulations perceived as too timid would have come with significant negative political consequences back home and as such, many politicians were essentially “mandated” to be more aggressive than economic common sense would have dictated. Not for economic reasons, not for historical reasons but simply for political ones. As it was, the Treaty was hardly generating enthusiasm in victorious and revenge-seeking countries such as France, with politicians most likely feeling that toning it down even a notch further would have been politically unacceptable.

The same principle is valid in 2020 and beyond.

Once again, any economist worth his salt is most likely more than eager to point out that throwing globalization into the dust bin of history and paving the way for fragmentation or even (for the more utopic of citizens) some form of autarky would be extremely counter-intuitive, to the point of yet again jeopardizing the climate of peace between at least major economic superpowers.

In a nutshell, globalization currently contributes to the “Mutually Assured Economic Destruction” conflict deterrent dimension, just like the “Mutually Assured (Nuclear) Destruction” concept acted as a major direct military conflict deterrent during the Cold War. To be more precise, given the ultra-interconnected nature of worldwide economies in a globalization framework, pretty much any even remotely knowledgeable market participant can and will state that something along the lines of a military confrontation would result in lose-lose situations that are simply unacceptable.

Once again, these are anything but controversial thoughts.

At the same time, however, politics can and will also get in the way, for the simple reason that globalization is certainly not perfect. Therefore, just like there have been (many) winners, there are also losers. For example, a relatively low-skilled United States worker who used to have impressive job security during the let’s say fifties and earned enough to support a large family on just one income now most likely finds himself in a climate he neither understands nor likes. Job security is hardly a given these days and on the contrary, chances are that many such individuals are currently switching from one low-paying service sector job to another in a manner that inevitably leads to a massive build-up of frustration.

“Why have so many jobs left the United States?”

“Why should I suffer just so that multinational corporations can enjoy massive profits?”

“Why should my life be turned upside-down by all this insecurity compared to the days when my father and grandfather worked at the same factory throughout their entire careers?”

These are just three questions that millions upon millions of people in the United States alone are asking themselves, individuals who are anything but happy with the status quo and more than eager to find a third party to blame, with the usual suspect being… you’ve guessed it, China. As mentioned at the very beginning of this post, the idea that China can keep thriving as the proverbial spoiled child of globalization is optimistic at best for political rather than economic reasons… citizens in more developed nations are simply no longer willing to silently tolerate this phenomenon.

This represents yet another reason why China has embraced a “new paradigm” in terms of economic growth, one that revolves around accepting lower and definitely single-digit yearly GDP growth rates on the one hand and on the other hand, one which revolves to a much more significant degree on internal consumption. Fortunately for them, as explained in another article, a stronger and stronger middle class has proven to be ready to take over and the transition to this new system has started quite a while ago, for reasons that revolve around more than simply “globalization fatigue” for lack of a better term.

As a conclusion, no, China cannot keep thriving in a “globalization 1.0” framework and while globalization itself is most definitely not going anywhere, “globalization 2.0” is likely to involve a fair bit more fragmentation than its predecessor.

Land doesn’t “disrupt” and there aren’t exactly all that many fancy buzz word-laden presentations involving this asset class, so it seemed that land investments had lost their luster in China and beyond. Fast-forward to the hash realities revealed by the 2020 pandemic-generated economic as well as financial crisis and it has become apparent that from many perspectives, the proverbial emperor had no clothes.

Never before had so much time passed between recessions as after the Great Recession and until the 2020 economic crisis (with a recession pretty much inevitable, with some observers even using the term “depression” due to the aggressive GDP contraction and unemployment combination in certain jurisdictions, including the United States) and as such, decision-makers from all around the world were continuously suggesting that the world was in a “new paradigm” situation, with all of the problems which had made the Great Recession possible in the first place fixed and society ready to move on to its glorious future, a future involving anything from autonomous electric vehicles to space travel.

If anything, 2020 has proven that it might be wise to tone our perception of reality down a notch or two because as all intellectually honest market observers were able to find out, the COVID-19 pandemic revealed that the world’s most developed nations (which were on the front line in light of being densely populated and representing major travel hubs, for obvious reasons) ended up failing miserably on the medical front not due to Earth-shattering high-tech issues but rather due to a severe shortage of the most basic supplies: masks, medical gowns and even essential medicine.

Again, most likely the number one “the emperor has no clothes” moment of the 21st century in terms of severity and needless to say, these developments made investors second-guess many other assumptions that were considered quasi-axiomatic. If the world’s most highly-developed medical systems were caught completely off-guard by the COVID-19 pandemic and so many issues were caused due to shortages which could have easily been avoided, what else is it about society as we know it that we thought ran very smoothly but actually doesn’t?

As such, it was only a matter of time until the economy in general and especially the financial system in particular entered the spotlight. All of a sudden, it seemed that many of the companies which were perceived as being on a surefire way to success no longer looked all that glamorous and the same way, especially in light of the unprecedented monetary as well as fiscal stimulus measures that were taken, asset classes which seemed to have lost their luster all of a sudden became interesting again.

Among them… of course, land.

As trillions upon trillions of dollars were injected into the financial systems as well as “real” economies of country after country, market participants came to a realization that is ultimately a matter of common sense, yet had been all but ignored for years: while central banks can print unlimited quantities of fiat currency, there is no such thing as an entity that can “print” millions of acres of land, for example. Therefore, investor after investor ended up realizing that perhaps gaining at the very least a bit of exposure to this asset class might not be the worst idea in the world.

This, however, is a very slow process.

Expecting land prices to soar after these realizations would be nothing short of naïve, especially given the severely deflationary forces that are in play in light of the fact that economies were forced to essentially shut down for unprecedentedly long periods of time. If anything, threats pertaining to the risk that existing land investors end up being forced to liquidate to cover various expenses outweigh threats pertaining to the risk that there will be a sudden rush to buy land… that is most definitely not how things work.

No matter how logical a certain investment option may seem given a certain context, in our example land in the context of unprecedented monetary as well as fiscal stimulus, it oftentimes takes a fair bit of time until the market catches up. A textbook recent example to that effect was represented by precious metal prices in the immediate aftermath of the Great Recession. Initially, despite the fact that all of the conditions necessary for precious metals to thrive seemed there, prices initially corrected right alongside stock prices until finally heading north, with all-time highs being reached back in 2011.

Why?

Simply because immediately after a financial panic, the market enters full-on survival or deleveraging mode and as such, cash becomes king for a while, with most of the other assets seemingly correlated, as investors are forced to liquidate in a desperate attempt to seek refuge in cash positions. As time passes and the dust settles, with the world gradually wrapping its head around what happened and what the longer-term implications are, things change.

We believe the exact same principle will be valid when it comes to land prices and as such, there is no time like the present to position yourself accordingly by deciding what kind of exposure to this asset class it makes sense to seek and putting together a battle plan. While the ChinaFund.com team specializes in Chinese assets and primarily caters to the needs of clients in this direction, we will happily help with pretty much anything else pertaining to wealth management and should you be in need of assistance, we are only an email or a message away.

1. The fact that China’s education system is still far from optimal, despite the fact that impressive progress has been made. In many regions of China, there are still issues with basic literacy and as such, expecting the average Chinese saver to properly understand today’s ultra-complex realities would be unrealistic. For more information about China’s education system and how it compares to various Western counterparts, we would recommend reading the article we have dedicated to this topic by clicking HERE
2. The fact that various dimensions of China’s financial system tend to have an above-average percentage involvement of so-called “retail” investors compared to professionals, with the Chinese stock market being a relevant example in that direction. Once again, we have dedicated an entire article to this topic, one which can be found HERE
3. The fact that the average Chinese citizen doesn’t exactly have as much access to let’s call it “less than curated” investment information. Say what you will about Western financial media outlets but compared to the information level of the average Chinese investor, Westerners seem light years ahead. While it is true that gaining access to the “real” Web by for example bypassing the Great Chinese Firewall is hardly impossible, it is fairly safe to assume that Chinese savers are at a disadvantage compared to their Western counterparts
4. The fact that from a cultural perspective, there is hardly anything in the way of tradition that has been reinforced historically speaking. To put it differently, older generations have been far too “busy” with subsistence to care all that much about being wise savers, with them hardly having enough wealth at their disposal for dedicating a lot of time to such endeavors to make sense

The list could continue indefinitely but the bottom line is this: Chinese savers can, at this point in time at least, be considered at a disadvantage compared to their Western counterparts. However, make no mistake, this most definitely does not mean that Western savers have it easy. On the contrary, as discussed in other articles as well, savers in general have been systematically punished all over the world due to “paradox of thrift” implications: simply put, the worldwide economic system needs perpetual debt-fueled consumerism to sustain itself and savers stand in the way. This, however, is a topic that goes beyond the scope of our article.

Suffice it to say that the current status quo revolves around governments and central banks from all over the world (with China not representing an exception) engaging in currency debasement one can consider unprecedented in terms of sheer contagion (to use a term more and more common in 2020). To put it differently, one cannot exactly seek refuge in Country B’s currency if Country A is in full-on debasement mode for the simple reason that the Country B’s of the world are engaging in precisely the same behavior. As such, even for sophisticated savers, protecting their purchasing power at the very least and especially enhancing their wealth becomes a problematic goal, with many of them feeling as if they have absolutely nowhere to hide.

Fortunately, this is not true. In fact, we have dedicated a fair number of article to explaining, from A to Z, what savers from all over the world can and should do to protect themselves, with many more articles on the way. Unfortunately, doing so is anything but easy and from the perspective of an unsophisticated Chinese saver who is looking for a “quick fix” solution, the entire equation seems unbelievably confusing.

The end result is therefore likely to involve an extremely large transfer of wealth from those who are not properly prepared/hedged to those who are. Historically speaking, the average citizen is usually on the losing end of such transfers of wealth and the less sophisticated they are, the more affected they are likely to be.

The implications of this reality should be more than obvious: the fact that the proverbial Chinese dream may end up being under siege. Long gone are the pre-2010 days of what seemed to be sustainable double-digit GDP growth, with straightforward international trade dynamics and much-needed domestic infrastructure spending. Fast-forward to the 2020 framework and we have even the Communist Party of China admitting that double-digit growth represents an unrealistic goal, major trade tensions between China and many trading partners that are so frustrated with the trade deficits their countries keep experiencing that they consider China the spoiled child of globalization and infrastructure-driven growth which can only take you so far… an amazingly complicated equation.

To state that the average Chinese saver feels overwhelmed would be a severe understatement and if history is to be any indicator, more or less obvious forms of civil unrest become pretty much unavoidable. As it was, many citizens were frustrated with the various inequality problems that sprung up in the aftermath of China’s economic growth story and while more recent administrations such as the Hu Jintao and nowadays Xi Jinping ones have done more than past administrations to tackle this issue, it becomes abundantly clear that innovative solutions are required in order to preserve the “socialism with Chinese characteristics” status quo. Because, make no mistake, a hefty price will need to be paid if the average Chinese saver becomes discontent with the status quo in a manner that leads to frustrations piling up, one the current Chinese administration can most likely not afford, especially given the “tricky” international context that dominates public discourse pretty much all over the world.

We will pay especially close attention to the “paper wealth” dimension because the proverbial West has had to learn the hard way that no, money cannot buy anything. The problem with the West’s handling of the COVID-19 pandemic was most definitely not one of improper financing. On the contrary, wealthy entities such as the United States and European Union countries had all of the “fiat currency” in the world at their disposal and have manifested a clear desire to throw as much money as necessary at the problem. What they didn’t have was masks, medical equipment and other “real world” goods that all of a sudden became unavailable.

Money buys everything… until it doesn’t.

Until enough of a game-changer occurs for major supply chain disruptions to occur, to put it differently.

In our case, these disruptions involved exporters of much-needed medical equipment such as China and India deciding to disallow exports temporarily for national security reasons (in order to satisfy their internal needs) and once exports were eventually allowed, it was too late on the one hand (with the peak being close in many Western nations) and on the other hand, bottleneck issues emerged as soon as exports were back on the table (too much demand, not enough supply nor adequate enough scaling options).

The COVID-19 situation was enough to expose the many fundamental weaknesses of our economic status quo: supply chain complexity issues, inadequate resilience and, we might add, an improper understanding of what “wealth” truly means. In our increasingly complex economic and financial landscape, the basics tend to be buried under ever-increasing layers of complex products.

To illustrate this, let us assume that we have a Chinese factory that produces precisely what we have discussed: medical equipment. This can be considered let’s say a primary form of wealth: a company that has the ability to produce essential equipment.

Things are going reasonably well and it gets listed on a US exchange, with US investors buying shares because they believe in the business model of the company in question. There we have it, a new form of wealth is created on top of primary wealth, let’s call these shares a form of secondary wealth.

It does not end here, however. US investors are not content with simply buying and selling these shares in traditional fashion. As such, ultra-complex derivatives are created on top of these shares, through which “investors” essentially bet on a wide range of different outcomes, with options being the most obvious examples.

Once again, however… there’s more.

We also have hedging requirements, with even more sophisticated investors being interested in “insurance policies” that are created on top of tertiary wealth, insurance options through which they can hedge accordingly. We will, of course, call this quaternary wealth.

As can be seen and as crazy as it may seem, a LOT of let us call it “paper wealth” has been created on top of the “real world” Chinese factory we have mentioned and when times are good, all stakeholders seem content. The factory in question is chugging along nicely, shareholders are happy, derivatives speculators are also content with the wide range of options they have at their disposal and sophisticated hedging enthusiasts share their excitement.

Then a crisis such as the COVID-19 one comes along and all parties involved end up understanding all too well that there is a deep disconnect between primary wealth and the various other forms of wealth that exist. To put it differently, what would US shareholders have done when exports were disallowed in China so as to get much-needed equipment to the US? What about those who traded options associated with the shares in question or hedging enthusiasts?

The short answer is this: absolutely nothing.

The same principle is valid when it comes to other examples of primary wealth, anything from arable land to commodities.

This brings us to the elephant in the room in terms of questions: are those who have their net worth tied up exclusively in secondary wealth actually… well, wealthy? What about tertiary or quaternary wealth holders?

In our view, the key to tackling these questions lies in a meaningful understanding of “realized” as opposed to “unrealized” gains. Imagine that you are currently holding a trading position, for example longing Asset X. The position in question may currently be very profitable but until you close it and book profits, the numbers you see on the screen can be misleading. For example, Asset X can be only one crash away from wiping out all of your unrealized gains.

The same principle is valid when it comes to our discussion surrounding the many different forms of wealth. As such, the ChinaFund.com team would strongly recommend never forgetting the importance of also acquiring primary wealth every now and then, even if only in an effort to “book” profits or if you will, transition from “paper” wealth to “real world” wealth.

No matter what your investing or trading strategies may be and no matter which asset(s) you specialize in, it ultimately all boils down to one word time and time again: diversification. Therein lies the essence of the conclusion we are trying to articulate: please do not make the mistake of considering primary wealth too “old school” for your strategy because we can all but assure you that you will end up regretting the attitude in question down the road. By all means, take advantage of all the other forms of wealth that are available to the best of your ability but never underestimate the importance of “booking” profits in terms of primary wealth. The ChinaFund.com team will, of course, gladly provide assistance with just that.