Russia is the storm; China is climate change

Published: Nov 2022

The global economy is struggling with volatile financial markets and a dangerous geopolitical backdrop. The Russian invasion of the Ukraine and mounting tensions between China and the West show that purely rational economic analyses alone are not sufficient to gauge the actions of countries and market movements.

Max Weber (1864-1920) coined the term the disenchantment of the world. In this disenchanted world, magical thinking has had to make way for science and the world has become a computable machine in which technical means, models and economic thinking dominate. In addition, the idea that if people’s most fundamental necessities of life are amply met, they will be satisfied, is challenged.

Francis Fukuyama built on Weber’s thinking with his famous 1989 The End of History where he writes about the victory of liberalism over communism and fascism:

“The end of history will be a very sad time…daring, courage, imagination, and idealism will be replaced by economic calculation, the endless solving of technical problems, environmental concerns, and the satisfaction of sophisticated consumer demands.”

It was a great essay, but it also showed scant awareness of humanity’s place on the timescale of the world. Research shows that the average mammal on earth exists for one million years on average. The philosopher William MacAskill puts this nicely into perspective by arguing that for every human alive today, ten lived and died before him; and that in an average mammalian existence, every human alive today will be followed by a thousand more.

In any case, it is odd, to say the least, to assume that humanity has already reached the end of its history in its teenage phase at the very mostand is meandering towards the end from there. This will therefore not happen because history is once again vigorously foisted upon us with a very heavily armed nuclear power that is on the warpath, and the most populous country in the world that is increasingly clashing with the richest and (still) strongest superpower.

Although Russia and its war in the Ukraine have been drawing most of the attention in Western media since February, relations between the US and China are very likely to be far more decisive for the further course of this decade and possibly this century. Germany’s intelligence service chief referred to Russia as the storm, while comparing China to climate change.

From Chinese high-flyer to lowflyer

China is generally seen as the major challenger of America, and many expect China to surpass the US. However, some (modern) historical awareness will not hurt. In the late 1980s and early 1990s, many ‘experts’ were convinced that Japan would dethrone America. Even after the enormous Japanese stock market crash Democratic Senator and presidential candidate Paul Tsongas claimed: “The cold war is over, and the Japanese won.”

So, we cannot just blindly assume it is only a matter of time before Beijing overtakes Washington. The more so since China’s strong growth trajectory is facing heavy headwinds in any event. The economy used to grow by roughly 10% annually. According to most forecasts, however, growth is unlikely to exceed 3% this year.

Several factors are pointing to persistent lower growth for China:

  • In the longer-term, economic growth is achieved by more labour working with more capital and using this more efficiently (productivity). However, the number of employed persons is already declining and productivity growth is weakening.
  • Capital investments are yielding less and less for China. At this point, the country must invest $8 to increase GDP by $1.
  • The investments that China is currently making are not pointing in the right direction either: they are mainly aimed at sectors in which the government has a very big finger in the pie.
  • China’s total debt (government, companies and households) is now a staggering 275%. Moreover, most of this debt is in property loans, and this sector is very unstable.
  • Under Xi Jinping, the autocratic reins have been tightened far more. This impedes the exchange of ideas and undermines creativity and progress.
  • Under Xi’s three predecessors, more space was created between party and state, while under Xi, the state and party are joined at the hip once again.
  • Following on from this, more and more restrictions have been imposed on the private sector under Xi.
  • The cult of personality created around Xi is stifling in the sense that everyone is walking on eggshells so as not to offend the great leader.

China has long been a threat to the outside world due to its heady economic rise, but now the danger may well come from China’s rapid weakening, bearing in mind the phrase ‘desperate needs lead to desperate deeds’.

We must not exaggerate China’s weakening, as the country is, and will remain, a superpower, which, in addition to an economic mark, is leaving an ever greater political and military mark on the world. For example, China currently has more embassies abroad than America: 280 compared to 275. China’s military power is also steadily growing.

American vulnerabilities

The power and strength of a country can only be properly assessed if you compare it with other states – in this case, the US, of course. America has enough problems of its own.

Joe Biden has been president for nearly two years, but one in five US ambassador positions are still vacant. And we are talking about (fairly) significant countries, including Brazil, Italy, Colombia, Russia and India. Moreover, the State Department is also understaffed in other areas and spending on diplomacy and development cooperation has stagnated for about a decade. Furthermore, for many years, little or no progress has been made when it comes to concluding major trade deals.

The US is facing more problems that are undermining the superpower’s position:

  • During the Gulf War of 1990/1991, America managed to rally a very broad coalition of democratic and autocratic countries. In recent decades, these coalitions have declined considerably in new conflicts.
  • Domestically, the US has always been bolstered by several fundamentals that made the country dynamic, stable and robust, but which are now eroding – including the rule of law, orderly transitions of power, the ability to attract and retain talented immigrants on a large scale, and socioeconomic mobility.
  • Because the US has turned more inward and because of the mistrust of everything that is Chinese in particular, the US is becoming less attractive to foreign students and scientists.
  • As Richard Haass wrote in Foreign Affairs: “The fact that it is impossible to predict who will occupy the Oval Office in the future is nothing new; what is new is that it is impossible to assume much about how that person will approach the United States’ relationship with the world.” This means that potential partners are more likely to go it alone or enter other partnerships.
  • The Great Financial Crisis, which largely originated in the US, undermined confidence in America as the guardian and foundation of the international financial system. And the Fed’s gross underestimation of inflationary forces in recent years has not improved this picture.

A more unpredictable world

China’s economic growth prospects are therefore not great. However, the country has become an economic, military and political superpower, and Xi Jinping will not hesitate to use these foundations of power in the coming years to strengthen and maintain his domestic position. This increasing assertiveness is clashing with a more uncertain but still immensely strong America. Meanwhile, the EU and countries such as Brazil, India and Japan are increasingly keen to play a role in geopolitics.

Renewed and increasing competition and tensions between super- and great powers will make international cooperation more complex. This will widen the gap between global challenges and the possibilities to address them jointly (see, for example, the weakening of international organisations such as the WTO and arms control treaties). Moreover, mounting geopolitical tensions can induce states to accept an increased risk to the world and themselves if they believe the gamble is justified in view of their national security interests. Companies must include this in their risk analyses and increase the focus on diversification of supply lines, for example.

With this more uncertain geopolitical climate, many more political-economic scenarios become possible. Moreover, those scenarios diverge far more than in the past few decades. This means that investors and companies will have to hedge against more risks and, even more than before, they will have to engage in scenario planning. This hedging will increase production costs. This, in turn, will contribute to persistent high inflation in the longer term.

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