By Todd Royal
Gui Congyou, China’s ambassador to Sweden, where China has successful investments recently said: “We treat our friends with fine wine, but for our enemies we have shotguns.” This self-defeating behavior from Beijing is now the norm, and contributes to “rapidly deteriorating reputations” globally for Chinese investment opportunities and economic recovery.
Using “wolf diplomacy” that brushes aside established diplomatic protocols has ratcheted up geopolitical tensions in Pakistan, Hong Kong, India, Japan, and the U.S. Chinese escalations are why all investors should question any global investments where China has influence. Beijing’s escalating moves are curtailing their chances for becoming the global investment leader.
That China still takes issue with bearing culpability for the COVID-19 pandemic decimating trillions and itself slowly recovering from the coronavirus is puzzling behavior. Chinese nationalism and polarizing actions from the Chinese Communist Party should bring pause to any investor(s), country, nation, or continent seeking closer financial ties with China.
During today’s tumultuous times, geopolitics determines economics and should be understood. The Chinese governance model in Pakistan using its Belt and Road Initiative (BRI) via the China Pakistan Economic Corridor (CPEK) theoretically, combines economic growth with global diplomacy, but is fraught with problems. As an example, over two-thirds of the projects are electrical generation projects that have focused on the dirtiest forms of coal-fired power plants; instead of the high efficiency low emission (HELE) ultra-supercritical plants currently being built in “China, Japan, India, and elsewhere.”
The value chain had promises from BRI to expand Pakistan into a “higher-value manufacturing hub,” joining together special economic zones (SEZs) of information and communication technology. An overabundance of empty office buildings and limited economic gains have been the results. Minus growth, the Chinese model of “procrustean rule” permeates a Pakistani society sliding into authoritarian governance leaving democracy behind; making investment opportunities agonizingly adrift and slow.
Regarding Hong Kong, China passed a national security law fraught with investor pitfalls, essentially barring democratic freedoms for Hong Kong citizenry under Beijing’s jurisdiction. Political, fiscal, and monetary stability was squashed; “violating internationally agreed-upon commitments.” Former governing authorities – the British – stepped in and offered a path to British citizenship for over 3 million Hong Kong residents. Singapore will likely gain when Hong Kong financial firms flee to safer quarters.
Owning Huawei will take a hit – certainly as long as 5G networks are the agreed upon standard for cell phone networks. The Hong Kong decision upset the British enough to cancel Huawei’s entry into building any type of 5G networks throughout their country. Costing the company and investors billions of dollars. The Trump administration backed British actions, and rescinded Hong Kong’s special economic status with the U.S. Markets need solidity, and these politically destabilizing actions are what turn global markets inward and away from recovery.
Former Indian National Security Advisor Shivshankar Menon remarked in July over Chinese aggression and lost investment opportunities: “It is hard to think of a time since the Cultural Revolution when China’s international prestige and reputation have been lower.” June 2020 was the month international and domestic investors should have begun to reassess Chinese intentions when the Chinese People’s Liberation Army (PLA) crossed the Line of Actual Control and initiated a deadly border standoff, killing 20 Indian soldiers.
This led to one of the most important technology markets for China beginning the process of banning 59 Chinese apps such as TikTok and WeChat. Now domestic political pressure is forcing New Delhi to consider denying major infrastructure contracts to Chinese firms while boycotting Chinese products.
Beijing possesses incredible advantages being the largest economy in the world now that COVID-19 has wiped away U.S. wealth, but short-term thinking, which is not a Chinese characteristic is hurting the country’s standing with India. Mainly, these actions have grown the U.S. and India closer together financially, militarily, and diplomatically.
Japan has now intertwined itself with Taiwan, Australia, and possibly faraway Holland to use realist balancing against China. What this does to investors and markets is anyone’s guess? Tokyo declared “Chinese coast-guard vessels have sailed near the Senkaku Islands every day since April (2020).” This coincides with Taiwanese Foreign Minister Joseph Wu reporting ““unprecedented” number(s) of sea and air exercises near the island (Taiwan), and the Chinese air force this month (July) conducted live-fire drills in the South China Sea.” When the Dutch benignly changed the name of their trade office in Taiwan to the Netherlands Office Taipei, China threatened to withhold medical supplies and investments; and boycott Dutch products. Australia felt threatened enough to move tax revenue from their clean energy transition to announcing $190 billion in new defense spending for the next ten years. High-tech programs are the main focus to thwart Chinese expertise.
Added together, Japanese Prime Minister Shinzo Abe “established a $2.2 billion fund to help manufacturers shift production out of China.” Tokyo no longer hears domestic or international cries when it strengthens its military budget and forward-projecting posture against China. All types of manufacturing plants and products in this supply chain should be reconsidered and evaluated to protect short, and long-term cash flows and stable financial statements. Japanese yen once put in place to promote domestic markets will now be switched-over to military armaments.
The U.S. essentially declared in 2018 a second Cold War when Vice President Pence “unloaded on China,” and is the “portent” for future confrontations. U.S. Secretary of State Mike Pompeo has even “reprimanded” China over their Indian border conflict and human rights abuses against their Muslim ethnic minority living in China within the Xinjiang region. The Trump administration in recent months has closed Chinese diplomatic consulates, and pushed back formally over Beijing’s maritime and territorial claims in the South China Sea.
Geopolitical dynamics aside, China is pulling out the global pandemic-related recession faster than the west. Its military is growing stronger each year, allowing Beijing the ability to protect its BRI investments. Economic malaise in the U.S. and western-aligned countries – including most NATO signatories – still make Chinese capital and markets more important than ever. China may believe the future is ripe for their banks, investment organizations, energy firms, and technology, but the savvy investor and company will weigh the geopolitical leading to financial risks against Chinese policy that has left an economic vacuum no one is filling.
China is a global leader whether it wants the title or not, and fractious western democracies will still be investor havens if Beijing cannot move aside aberrations in war-making behavior towards market stabilization. Otherwise a Chinese economic prologue could be in the offering for years ahead stifling economies recovering from COVID-19.
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