Red Dragons and Bald Eagles…

The range of conflicts and confrontations between the US and the PRC seems ever present in the news headlines, with reaction following action in what seems like an endless loop. Of course, Russian revanchism; machinations on the Korean peninsula; and the various potential “flashpoints” in and around the Middle East add further layers of distraction.

However, the tensions between the US and the PRC amount to rather more than headlines, “sound bites” and political posturing- it is all much more serious than that, as the US, a constitutional democracy, is dealing with an unconstrained autocracy, which does not even subscribe to the rule of law.

A contest is clearly under way between the world’s two largest economies for supremacy over whatever global power structure they wish to create, or allow to exist. After World War II, the former Soviet Union and its satellites clearly lost a prior battle with the US, no matter what President Putin and his sycophants and fellow travelers may think, during a period when the PRC was first walled-off from the wider world and then internally-focused on re-building its industrial base and infrastructure. Until quite recently, the PRC had adhered to the approach formulated by Deng Xiaping of “keeping a cool head and maintaining a low profile”; and even the PRC’s current President (and now paramount leader) Xi Jinping would state that the PRC was no threat to anyone.

Now, in a scenario exacerbated by the “zero-sum” approach to international relations adopted by the current Administration, the PRC’s leadership is starting to push back, seemingly confident that it has the support of its vast population (over which it is re-exerting ever more control); knowing that the entangled supply chains and expansion plans of many US businesses lead back to the PRC; and relishing the fact that, through its treatment of them, the US seems now to go out of its way to weaken the support of its supposed allies.

Of course, this is not to say that a direct “kinetic” confrontation is inevitable; nor that the PRC seeks an outright “trade war” with the US (which any rational person realizes benefits neither party, nor the wider world economy). Nevertheless, the tone has changed, with both sides increasingly testing and probing the other to understand how far a particular course can be followed before provoking a reaction. A prime example of this is the increasing “fact” that the South China Sea is now a maritime buffer zone for the PRC, which clearly intends to force the US’s Pacific Fleet out of being able to control the area in the event of war (say, provoked by a PRC decision finally to “incorporate” Taiwan into the Middle Kingdom). No doubt, many interesting war games are being conducted by the general staffs of both the PRC and the US.

The optimistic scenario would have the US and the PRC realizing that co-operation is better than confrontation, particularly given how intertwined their economies truly are. A more pessimistic one would be the PRC’s leadership taking the view (not unreasonably) that its own population is far better conditioned to bear pain, than that of the US, and at some point no longer seeking compromise in the face of what it might consider provocations, or the attempted humiliation by one great power of another. So, the real question becomes: at what point does either party believe that it has the ability to “win” an outright confrontation, and what means will it choose to do so? A direct military confrontation is possible (as there is an increasing range of “flashpoints”); but a more likely scenario is a combination of economic “warfare”, cyber-confrontation, and proxy wars of the sort fought between the US and the former Soviet Union.

At some point, we are likely to find out.

Naturally, the Awbury team maintains a close watch on geo-politics and economic factors in order to assess how they may impinge on the risks we have or may choose to accept within our portfolio and to ensure that, at all times, the ratio of risk to reward remains acceptable.

The Awbury Team

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