Not a Peo­ple’s Re­pub­lic - an Em­pire

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

We of­ten say that money man­agers are not paid to forecast, but to adapt. The chal­lenge, of course, is know­ing what to adapt to. For ex­am­ple, an in­vestor pick­ing up a copy of the will be left scratch­ing his head over the im­por­tance of the Greek cri­sis to the fu­ture of the eu­ro­zone, the likely im­pact of com­ing US Fed­eral Re­serve rate hikes, and how the deep­en­ing oil sup­ply glut will af­fect global mar­kets.

In our latest Quar­terly Strat­egy Chart­book, we elected to by­pass all these hoary old ques­tions to fo­cus solely on what we be­lieve to be the sin­gle most im­por­tant macro-trend of our time: China’s at­tempt to trans­form it­self from a typ­i­cal (if large) emerg­ing mar­ket into an em­pire.

In his must-read book East And West, Cyril North­cote Parkin­son re­counted the rise and fall of em­pires across the Eurasian land­mass since the be­gin­ning of civil­i­sa­tion, and pro­posed that “one of the strong­est mo­tives for hu­man in­ter­fer­ence [in another coun­try’s af­fairs] is the spec­ta­cle of fum­bling in­ep­ti­tude. ‘ Oh, for heaven’s sake,’ we burst out, ‘I’ll do it for you!’ ” Of course, one can ar­gue these words, writ­ten in 1963, re­flect the au­thor’s cul­tural up­bring­ing, no doubt loaded with a hefty dose of Rud­yard Ki­pling’s “white man’s bur­den”. For, at the end of the day, the main driv­ing force be­hind em­pire­build­ing is usu­ally an at­tempt by the cen­ter to source com­modi­ties ever more cheaply, and in turn to churn out man­u­fac­tured goods for sale ever more prof­itably to the pe­riph­ery.

In this re­spect, there is lit­tle about China’s grow­ing em­pire that is orig­i­nal. Bei­jing’s “Belt and Road” plan, its “Silk Road Fund”, the rail­ways it is build­ing in Cen­tral Asia, and the ports around the In­dian Ocean, are all rem­i­nis­cent of a say­ing ev­ery West­erner learnt as a child: “All roads lead to Rome”. In Asia, in the 21st cen­tury, all roads will lead to Bei­jing.

Of course, em­pires through history have found that build­ing the roads (or rail­ways or ports) was the easy bit. Main­tain­ing se­cu­rity along those roads, and get­ting along with the lo­cals, proved more chal­leng­ing. This is why main­tain­ing an em­pire is an ex­tremely costly (and ul­ti­mately tem­po­rary) ex­er­cise. And it is why em­pires have al­ways needed their own cur­ren­cies (whether ster­ling for the Bri­tish Em­pire, the US dol­lar for the post-war Amer­i­can era, or the euro for the 1980-2010 at­tempt to build a Euro­pean em­pire). Sim­ply put, build­ing an em­pire on some­body else’s dime is a non-starter, which is why, given its geopo­lit­i­cal am­bi­tions, China to­day has lit­tle choice but to em­brace in­ter­na­tion­al­i­sa­tion of the ren­minbi.

Now the in­ter­est­ing bit for in­vestors is that grow­ing em­pires usu­ally breed strong cur­ren­cies. As the em­pire ex­pands, more trade gets de­nom­i­nated in the em­pire’s cur­rency, more com­pa­nies need work­ing cap­i­tal in the em­pire’s cur­rency, and more in­di­vid­u­als be­gin to save in the cur­rency of the em­pire. At the same time, wealthcre­ators at the em­pire’s fringes buy as­sets at the seat of the em­pire’s power, and real es­tate at the cen­ter of the em­pire ap­pre­ci­ates dis­pro­por­tion­ately. A clear ex­am­ple over re­cent decades, has been the grow­ing use of the euro as a store of value, a unit of ac­count, and a cur­rency of ex­change. As the “Euro­pean em­pire” ex­panded to the east, the de­mand for eu­ros kept grow­ing and the euro was, for a cou­ple of decades a “struc­turally strong” cur­rency.

To­day, as China starts to roll out its own im­pe­rial pro­ject, should we not ex­pect use of the ren­minbi to grow, not only across Asia, but per­haps also as far afield as Europe and Africa?

And won’t this new struc­tural de­mand for ren­minbi help to keep Chi­nese in­ter­est rates low, and the cur­rency strong, at least while the Em­pire is ex­pand­ing?

This does not mean China will nec­es­sar­ily be suc­cess­ful in its at­tempt to build an em­pire. For a start, Bei­jing lacks a gen­uinely

the ef­fi­cient diplo­matic his­tor­i­cally has been peace­ful ex­pan­sion.

As Parkin­son ob­served, “the mere as­cen­dancy of the one civil­i­sa­tion… must even­tu­ally cre­ate an at­mos­phere of re­sent­ment. Nor is the hos­til­ity di­rected against tyran­ni­cal rulers as such. Ha­tred springs rather from be­ing treated, how­ever kindly, as in­fe­ri­ors”. Al­ready, in most of its im­pe­rial bridge­heads (An­gola, Sri Lanka, Myan­mar) China is ex­pe­ri­enc­ing mount­ing po­lit­i­cal re­sis­tance, caused by the heavy­handed treat­ment of lo­cals by Chi­nese busi­nesses (which, to use Parkin­son’s words, are of­ten not shy of treat­ing the lo­cal pop­u­la­tion as “in­fe­rior”).

Nev­er­the­less, the geopo­lit­i­cal re­al­ity re­mains that—at a time when the Euro­pean em­pire has vis­i­bly stalled, the Amer­i­can em­pire seems to have lost its ap­petite for for­eign en­tan­gle­ments (look at the mess it has left be­hind in the Mid­dle East), and the Rus­sian em­pire is fight­ing a rear-guard ac­tion for global in­flu­ence—the Chi­nese em­pire is lay­ing rail­road tracks across Eura­sia, push­ing roads into In­dochina, and build­ing pipe­lines through Pak­istan. If all else is equal, this at the very least ar­gues for a stronger ren­minbi go­ing for­ward, and lower Chi­nese in­ter­est rates as more peo­ple, com­pa­nies and gov­ern­ments start to save in­creas­ing amounts in ren­minbi.

a ser­vice, which pre­req­ui­site for

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.