When our successors study global history, 2017 may well be one of those years when they say “that was a significant turning point”. Such events seldom appear out of nowhere. More usually there has been a prolonged build up and, while, at the time, nothing earth-shattering appears to have happened, hindsight recognises its importance.
This year was the very first occasion a Chinese president Xi Jinping made an appearance at the World Economic Forum in Davos, espousing the benefits of globalisation, the need for free trade and climate control.
The Americans were notably absent, allowing China to steal the show – a communist country, the most populous nation on earth and a one-party state. But while the US policy of isolationism has accelerated under President Trump, notably with regard to trade and climate control, the seeds of US foreign policy retrenchment were well-sown in President Obama’s era.
All this is relevant today because the five-yearly National Congress of the Communist Party of China concluded in October. In building on the achievements of his predecessors, President Xi has laid out China’s strategic development plan for the next 20 years: a combination of domestic reform, economic stimulus and a comprehensive plan to extend its global influence way beyond its borders, largely through the funding of infrastructure projects and the generous extension of credit.
There is a clear path to becoming not only a global superpower to rival the US, but to exceed it in all aspects – economically, socially, politically, militarily and through foreign policy.
No Western democracy can emulate China’s capacity and ambition. Indeed, arguably, the West is in disarray: America is becoming more introverted and has no coherent foreign policy. Europe is so utterly preoccupied, on the
one hand with trying to hold itself together and on the other with trying to integrate further that it seemingly has little time for anything else. Arguably, China is methodically exploiting the fault lines.
Less settling, it is also clear President Xi’s personal grip on the CPC – and, by extension, China itself – is now absolute. Proclaimed as China’s “Core Leader”, with his moral and political doctrines included in the Party Manual, and having appointed himself in sole charge of the military, China is now firmly an autocracy.
That has not happened since Mao and, under the CPC constitution, was not supposed to be allowed to happen again. It is difficult to know how it will play out in the long term.
Equally unsettling was the warning from the chairman of the People’s Bank of China that the massive accumulation of debt on the state balance sheet poses a serious risk to its entire financial system. Many Western commentators have pointed this out before but it is noteworthy this is the Chinese central banker pointing it out about China. All of which adds up to investors having to constantly reassess risk as the geopolitical tectonic plates shift and global economic circumstances change.
Elsewhere in markets: Too little, too late from BoE?
A couple of months ago, with UK inflation approaching 3 per cent again, Bank of England governor Mark Carney indicated it would “ease its foot off the accelerator”. This was somewhat ironic, given the UK economy was already showing signs of decelerating without any help from the Bank. Despite this, we believe that raising interest rates is the correct course of action, if only to provide some headroom in the future to be able to cut rates again if the UK economy needs a boost.
Interest rates are the most important weapon in any central banker’s armoury and, at 0.25 per cent, Carney’s sword was looking decidedly blunt. Even with interest rates now at 0.5 per cent, they are only back to the same level they were before the Brexit referendum. Indeed, the same as they were from as far back as March 2009 when the economy was on its knees and banks were going bust.
Arguably, interest rates should have been rising around 2013-2015, when the economy looked relatively strong and growth was accelerating. But that particular ship has now sailed. Still, for better or worse and however painful, it had to be done now to ease the burden of interest rates substantially below the level of inflation.
John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team