China’s demographic issues and financial market challenges are well documented. Opinions and prognostications around China’s demise abound. Nevertheless, ‘President for Life’ Xi Jinping and the CCP are playing the cards they have, determined to ascend to global superpower status. Despite a slow, costly global shift away from China as the ‘factory of the world’, the second largest economy remains the dominant global exporter of antibiotics and medicines, manufactured goods, batteries, solar panels, wind turbines, and other electrical equipment and machinery.
Whenever a nation vies for superpower status, geopolitical uncertainty intensifies vis-à-vis the existing superpower(s).
A rising China obviously threatens U.S. dominance and therefore poses massive implications for the markets and the existing world order. The developments over the past several years make it clear that China is positioning itself as the new superpower on many fronts, from trade and economic arrangements, to technology, to diplomatic and military leadership.
China’s deliberate strategy in pursuit of such aspirations is not new—they’ve been playing the long game. The One Belt and One Road policy (OBOR), underway for decades, is China’s long-term strategy to attain and then leverage deeper economic alliances and expand its geopolitical influence in Eurasia and across the globe. Initially, OBOR reached into Africa and Europe, but more recently China extended the program into South America and the Caribbean.
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OBOR involves direct investment in infrastructure and trade arrangements in foreign nations, often with heavily subsidized Chinese companies at the center of the deals. That investment then provides leverage or strategic advantage over the participating nations or even nearby adversarial nations. For example, China’s government subsidies powered Huawei’s penetration into global markets—constituting more than half of EU country 5G networks. Over the years, many reports of data mining, IP theft, and espionage were leveled at Huawei.
Tik-Tok has become a global social media powerhouse, with over 1 billion users. Like Huawei, TikTok’s penetration is so large it has become a security concern for many countries, companies and government agencies; some have restricted or banned the app.
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China has been deliberate, it seems, in the post-COVID era to initiate a shift in international alliances and trade agreements altering existing global power dynamics. By assuming the lead in dealmaking in the Middle East, China is seeking relevance and elevating its perceived potential as the new global superpower. This has major geopolitical implications, including suggesting a shifting the ‘global world order’ and the potential for replacing the United States as the assumed power broker in the region.
China has bolstered its position within the United Nations as well. It is now the second-largest contributor to both the U.N.’s regular budget and the peacekeeping budget. Chinese nationals head four of the U.N.’s 15 specialized agencies. China provides more personnel to peacekeeping operations than any other permanent member of the Security Council.
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Since the Ukraine war broke out, China has been asserting itself in many diplomatic talks, often at the consternation of Western global leaders, in order to heighten or maintain influence. China recently held a historic diplomatic meeting with Russia—signing many agreements—during which Xi described Russia as an “unlimited partner”. For over 50 years, the United States successfully managed (and profited from) keeping these two powers at odds. A new Russo-Chinese alliance could create bipolar forces that realign the world, pulling and pushing other nations into choosing sides. Recently, Iran, Russia, and China began conducting joint military exercises.
Perhaps the most ominous and potentially unsettling for markets is China’s undeniable militarization of late. In October 2022, President Xi Jinping appointed a war cabinet and a month later reportedly directed the People’s Liberation Army to focus on preparation for war. For years, China has been closing the technology gap with the United States (often by leveraging U.S. technology), improving its military capabilities with:
Recently, China has embarked on more brazen action. In February of this year, China floated multiple spy balloons over strategic locations in the U.S., including missile silos and air bases. Over the past two years, China bought over three hundred and fifty thousand acres of farmland, some in direct proximity to military bases, including a base responsible for America’s most sensitive drone technology.
Meanwhile, the U.S. military is increasingly focused on equity and climate change, while reducing recruiting standards and fitness requirements. The U.S. does not seem convincingly prepared to deal, directly or indirectly, with major global conflicts on two fronts—especially considering the Pentagon admits our munitions stockpiles are severely depleted and our strategic oil reserves (especially sour crude) are at their lowest level since 1984.
A shift from unipolar to multi-polar geopolitical alignments cannot be understated. Most obviously, when there are two opposing forces, conflict becomes more probable over time. Such a dreadful potential outcome is not one that investors may want to consider, but with history as a guide, the probability of some sort of major conflict should not be underestimated.