Views

The world must prepare for Xi’s dynasty and the Chinese century

10th November 2017

by Liad Meidar, Managing Partner and Chief Investment Officer

Many years from now, we may look back at January 2017 as the time when the “superpower baton” was definitively handed over from the US to China.

The contrast could not have been more severe. In the same week that President Xi Jinping spoke at Davos in favour of globalisation, free trade, and the need to combat climate change, President Donald Trump proclaimed that “protection will lead to great prosperity and strength” in his inaugural address in Washington.

As the US retreats further into itself, pulling out of the Trans-Pacific Partnership and the Paris Climate Change Agreement, China has taken bold steps to establish itself as a global hegemon. Over the next decade, China is poised to become the world’s largest trading nation – and possibly the world’s largest economy.

China has demonstrated its drive to become a global leader in many sectors, accounting for 20 per cent of global research and development activity in 2016, only second to the US at 27 per cent.

This investment is now bearing fruit, with a surge in Chinese tech and tech-related IPOs in the US, creating the newest cohort of Chinese billionaires.

Furthermore, China’s Belt and Road Initiative, which aims to create a China-centric trade network involving over 60 countries, demonstrates the nation’s long term ambitions to influence geopolitics around the world.

Make no mistake, China still faces many challenges – from paring back corporate debt levels, to restraining capital outflows, improving air quality, ensuring food safety, and clamping down on corruption.

With this in mind, China has made the necessary political adjustments to enable change.

At October’s Communist Party Congress in Beijing, Xi firmly cemented his authority, becoming the only Chinese ruler since Mao Zedong to have his name written into the Party’s constitution. While the west decries this as an illiberal power grab, the move has clearly positioned Xi to take decisive action and implement fundamental reforms.

This stands in stark contrast to the situation in Washington, where legislative gridlock compounded by Trump-fuelled chaos leaves little hope for progress.
The US faces its own set of long term challenges: government debt-to-GDP at over 100 per cent, rising inequality, a broken healthcare system, and persistent skills gaps. Political divisions in America will not make these challenges easy to overcome.

This shift in China’s position on the world stage will not come without large-scale risks.

According to academics at Harvard’s Belfer Center, in the last 500 years there have been 16 cases in which a major rising power has displaced an incumbent ruling power. In 12 of these cases, the rise of a new superpower resulted in catastrophic war.

It is incumbent upon western politicians to avoid this fate, by accepting China’s ascent and the new world order which comes with it.

Similarly, investors must adjust their thinking to this new reality. China is no longer simply an “emerging market” – it is in a class of its own.
Domestic markets have been gradually opened to foreign investors, first with the Hong Kong-Shenzhen Stock Connect, and more recently with a similar scheme for bonds. Importantly, China has been recently added to MSCI equity benchmarks and, we expect, will be added to other equity indexes and to global fixed income benchmarks as well over time.

The effects of this new paradigm – for investors and financial markets – should not be underestimated. In the words of a Goldman Sachs equity analyst, China is going from a “nice-to-have” to a “have-to-have” market.

It is time to start thinking of China as a global superpower.

It may have jumped into the race recently, and will certainly see some bumps on the course, but China’s charge now looks unstoppable.

As published on City A.M.