The world is heading into winter in more ways than one. As economic considerations increasingly take a backseat to social and political priorities in China, the flow of goods, capital, and ideas will likely become more and more constrained – perhaps ending a long summer of freer and more globalized trade and markets. That period began in earnest after the fall of the Berlin Wall, which led to more open technology transfer and integration of the global economy. These trends lifted living standards for hundreds of millions of people globally, and especially those in emerging countries.
Geopolitically, the fusion of government with autocratic leadership — most evident currently in Russia, China, and Iran — is likely to have widespread consequences. While benign autocracies do exist, like Lee Kuan Yew’s highly successful reign in Singapore, how does one push out more malignant autocrats, or just bad actors when they become so entrenched? The Russia-Ukraine conflict is the most recent example of how one-man rule combined with military power and mal-intent can go wrong in seemingly irreversible ways.
With the National Congress of the Chinese Communist Party (CCP) concluded, President Xi Jinping has cemented his grip on China’s leadership by dismantling the checks and balances put in place by Deng Xiaoping, which had intended to preempt another autocratic era like Chairman Mao’s erratic reign. Meanwhile, President Xi continues to strengthen his alliance with Russia, while asserting territorial rights disputed by most international bodies.
This consolidation of power portends more centralized economic decision-making, assertiveness in foreign affairs, and a new inward economic focus, emphasizing self- reliance. The Chinese economy is incredibly large, more sophisticated, and currently more integrated into the global system than any of the centrally directed economies of the 20th century. Setting the ground rules for such a sprawling economy is one thing; directing every aspect of it is something else. Greater state supervision is likely to continue disincentivizing China’s private sector, thereby slowing the country’s growth and economic dynamism, yet Xi appears firmly committed to the tradeoff. It boosts the odds that he, along with the CCP, never loses control.
In a sense, the world is now likely witnessing the rise of 21st century versions of the Berlin Wall. No longer physical barriers, these new walls are philosophical, ideological, and often electronic encirclements that isolate nations and people. This new world structure has very real costs, as evidenced by the massive write-offs by multinational corporations driven to abandon their businesses and investments in Russia after the invasion of Ukraine. Businesses and their investors will be wary of venturing into areas where the ground rules can too easily be changed.
For investors, this new world means greater uncertainty, slower growth, constrained productivity, and elevated odds of military conflict. After a long summer, many are feeling the chill.
This excerpt is sourced from the document "Investment Strategy Insights", by Michael J. Kelly and the global investmen teams, PineBridge Investments, November 2022.
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