Investment Strategy - Part 2: China's Enters Adolescence 

investment strategy

China Enters Adolescence 

By

Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Manager


Posted 20 January 20

Lost in the euphoria of the recent Phase I trade deal between the United States and China is the underlying issue that initially led to the trade war; the rising geopolitical and economic power of China, and the corresponding waning influence (and appetite) of the United States. In this instalment of our five-part investment strategy guide preview, we outline why we believe that further conflict between the two nations is inevitable and why it could risk an unwinding of the economic benefits derived from 30 years of globalisation.

Theme 2: China Enters Adolescence 

When China joined the World Trade Organisation (WTO) in 2000 and opened its doors to the global economy, many thought it was the beginning of a modernisation that would see China adopt Western commercial and economic values as its people became wealthier.

“China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom” – Bill Clinton, Former US President, 2000

The belief, as captured by the quote from Bill Clinton above, was that by interacting with Western companies and forming today’s global supply chain, the values of a free and fair economy (read society) would 'seep' into Chinese culture.

Nearly two-decades on from entry into the WTO, as China enters its belligerent adolescence as a global economic power, it is becoming clear that instead of democracy being exported to China, censorship, authoritarianism, militarization and economic controls are being asserted by China.

Whereas the United States purchased Alaska from Russia, and doubled the size of the United States in 1803 with the Louisiana Purchase from France, China’s approach is a combination of stealth (South China Sea), repression (Uigars, Hong Kong), intimidation (Taiwan) and economic power (access to market (e.g. tied trade, One China demands, tied loans, Silk Road persuasion)).

As one of the world’s biggest and fastest growing markets, China is starting to flex its muscles through the value of its consumer base. This trend carries a cluster of risks for investors related to geopolitics, trade, de-globalisation and supply shocks.

Risk: Unwinding of Globalisation 

China’s goal to transition away from its credit-intensive fixed investment to a consumption-led growth model through domestic leadership in key industries (e.g. Technology, Automotive) places it on an inevitable collision course with US interests.

Although the current trade hostilities between the US and China have de-escalated, and we expect this to continue throughout 2020, the underlying issues of a rising superpower and ageing old guard have not. In a worst-case scenario we could start to see a decoupling of the US and China into separate trade hemispheres, the unwinding of global supply chains, and rising inflation in a low growth environment.

In this new global hegemony where bi-lateral rather than multi-lateral rules operate, the free market policies pursued by Australia over the last 35 years risk being marginalised. The recently ratified phase 1 trade agreement between the US and China stipulates China import more goods and services from the US. How this interacts with Australia's relatively Free Trade Agreement with China is yet to be seen, but it does highlight that Australia is awkwardly placed as it sits between these two economic superpowers.

Relative Economic Size, United States vs. China, 1990-2020

Diagram showing Relative Economic Size, United States vs. China, 1990-2020

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Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business. 

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.