Geopolitics & the Day After
Geopolitics & the Day After
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Author : Rachel Poole
Date : October 6, 2022
We have decided to experiment with the idea of merging our Geopolitical Challenges and The Day After & the Era of Transformation publications, instead of rotating them every other week. We hope you will enjoy this edition of Geopolitics & the Day After.
This week we are zeroing in on the Day After for China, the UK, and Ukraine. As China’s property market – which was once celebrated as an engine of economic growth – crashes, we are seeing China enter into what some are calling “a slow-motion financial crisis” that could completely transform the Chinese economy. Adding pressure to China’s financial system is the rise in the US dollar which is also burdening other foreign markets as governments scramble to cushion the blow to their currencies. As chaos ensues in global financial markets, disorder in the domestic politics of both China and the UK is compounding the effects of economic and financial stress and is completely reshaping the Day After for both countries. Finally, a look at Hein Goeman’s theoretical perspective on how wars end gives us deeper insight on the war in Ukraine.
China’s Property Crash: ‘a slow-motion financial crisis’
James Kynge, Sun Yu, and Thomas Hale, Financial Times
The Chinese property crisis has uncomfortable global ramifications. For the first time since 1990, Chinese economic output will trail behind the rest of Asia. Compounding China’s woes, a rapidly-aging population threatens to worsen the country’s economy in the medium term. Controversial zero-COVID policies, the debt crisis, and halting consumer spending in the Chinese economy makes foreign investors pessimistic about operations in China. Experts say China can no longer take foreign investment for granted. While Beijing has unveiled policies designed to respond to the crisis, their responses look more like crisis management than solutions. Xi Jinping’s regime seems to give more weight to security and control rather than economic growth. The crisis illustrates that the Chinese government and the broader global community need to adapt to a potentially long-term change in the Chinese economy.
Experts are sounding the alarm on China’s property market. The market, which constitutes one-fourth of China’s GDP, has slowed over the last decade with a decline in sales and an increase in developer debt defaults. Local government financing vehicles (LGFVs), which drove China’s investment-driven growth since the 2008 financial crisis, are in dire straits. In 2020, government officials restricted developers in their capacity to add to the high national debt and prevented them from finishing properties they had already presold. The next stage of the property crisis is the transfer of losses from developers to China’s financial system. Local governments depended on land purchases from developers to drive growth and repay debt. As developers lose income, these income sources for local governments have dried up. Some experts blame ineffective state-run institutions – LGFVs were seen as a solution to the 2008 crisis, but their excesses today threaten the economy.
The Unstoppable Dollar is Wreaking Havoc Everywhere But America
Liz McCormick, Michael Mackenzie, and Christopher Condon, Bloomberg
Yuan Retreat Shows China Can’t Crush a Market This Big
Daniel Moss, Bloomberg
The rising strength of the US dollar, which is hurting foreign currencies, isn’t showing any signs of abating. The situation is reminiscent of the 1980s when the dollar’s strength caused enough chaos to force world officials to coordinate and impose a solution on the markets. Today, the US administration is rejecting coordinated market action, and the Federal Reserve is focused on fighting domestic inflation by hiking interest rates. In some cases, a weakening currency is welcomed due to the boon it provides in increasing exports and encouraging domestic spending. In foreign markets today, however, weakening currencies increase inflationary pressure on their respective economies. Foreign officials are intervening directly in their markets, attempting to cushion the blow to their depreciating currencies. Central banks worldwide are being driven to increase their interest rates, risking pushing their economies into recession. As long as foreign market chaos doesn’t reach the US economy, the Fed is likely to stay the course of increasing interest rates. A downturn in foreign markets may even help the Fed achieve its goals by slowing growth in the US, potentially reducing inflationary pressure.
China, the world’s second-largest economy, is not exempt from the woes that a strong dollar creates. The yuan hit a 14-year low at the end of September, and the Chinese central bank is racing to intervene in the market to protect its economy. As the Chinese financial system has become more integrated into the global economy, the Chinese economy acts more in line with other markets. The Chinese have more to worry about – a shrinking labor force, a looming housing crisis, and political pressure also complicate their dilemma.
China: Back to Authoritarianism
Ian Johnson, The New York Review of Books
Xi Jinping, who is set to assume an unprecedented third term as leader of China, has reverted away from institutional trends since the end of the Deng Xiaoping era. While the trend of stable leadership and a peaceful transition of power had endured for nearly two decades, Xi has emerged as a reversion back to the leadership politics characteristic of both Mao Zedong and Deng Xiaoping. According to author Victor C. Shih in his work Coalitions of the Weak, all three eliminated their political enemies and fostered a cadre of weak leadership so as to exert maximum control over the country, while minimizing political risk for the Chinese strongmen. They accomplished this feat through purges or elimination of prior leadership: from Mao’s Cultural Revolution, which eliminated the old Communist guard; to Deng’s elimination of Hua Guofeng, Mao’s successor, after the collapse of Mao’s “Gang of Four”; and ultimately to Xi’s use of corruption as a pretext to detain more than one-hundred thousand people, including powerful members of the prior premier’s rule. As a result, Xi is stuck in the position of fostering weak leadership moving forwards either in the form of seasoned but elderly officials or young and inexperienced ones, indicating a potential future characterized by an unstable transition of power and dominated by strong men surrounded by weak leaders
How Brexit and Boris Broke Britain
Leslie Vinjamuri, Foreign Affairs
Tim Hartford, Financial Times
Boris Johnson’s handling of Brexit has weakened Great Britain both domestically and internationally, and Liz Truss’ premiership threatens to continue the trend. In leaving the European Union (EU), former prime minister Boris Johnson’s government conjured a host of political and economic problems from domestic political division along Remainer-Brexiter fault lines; a Northern Ireland Protocol that threatens to put the Good Friday Agreement at risk; deteriorating relations with many of its partners, including in the EU; an overall diminished role in the world; and high inflation now with low growth projected into 2023. The United Kingdom (UK) has stepped up in terms of defense, signing the AUKUS deal and enthusiastically supporting Ukraine. That being said, this trend alone is insufficient, as the UK has begun losing its influence broadly and even with its major ally, the US, particularly as the US pivots to Brussels where London no longer has a vote, nor seat at the table. Upon taking the premiership, Liz Truss correctly assessed that, in order to begin fixing the UK, fixing the economy must come first. Prosperous, growing nations breed a well-off and prosperous citizenry; however, the UK at present is at risk of backsliding economically and therefore is at risk of diminishing further. Unfortunately to date, Prime Minister Liz Truss has shown no ability to apply the correct policy prescriptions, which might move the UK in the right direction. As Truss continues to move in contradiction of market forces, towards a parochial dislike on imports of cheese, in contravention of free market principles and price caps on energy, policy wonks agree that some combination of reforms to housebuilding, infrastructure, education, and opening the economy to regional markets could prove a much better fix. It remains to be seen whether Prime Minister Truss will turn the ship around economically and spark a British rebound or carry Johnson’s torch of a declining Great Britain forwards.
How the War in Ukraine Might End
Keith Gesse, The New Yorker
Hein Goemans and his colleagues have taken the road less traveled and ventured into the study of how wars end. Most war theorists would say the primary cause for a war’s end had to do with some form of informational symmetry: one or both sides overestimated their own strength relative to their opponent. While informational asymmetry has an undeniable influence on the breakdown of a war, Goemans and his colleagues have brought two other primary factors to light that have been ignored by war literature. The first is what Goeman calls “credible commitment”. In part due to a lack of an international enforcement mechanism for peace deals, one reason a war might not end quickly is that one or both sides cannot trust each other to uphold any sort of ceasefire agreement or peace deal. Another factor that has traditionally been ignored is domestic politics. Goeman’s research found that leaders who were neither democrats nor dictators – repressive but not repressive enough – were the most dangerous because they would “gamble for resurrection”, dragging on wars because “anything short of victory could mean their own exile or death.”
What does Goeman’s theoretical perspective tell us about Ukraine? For one, Putin’s miscalculation that he could squash Ukraine in a matter of days is a classic example of informational asymmetry. Second, there is a credible commitment problem as Russia claims it cannot trust Ukraine to not become a NATO state and Ukraine has no reason to trust Russia which has repeatedly broken its promises and invaded with provocation. Third, Goeman argues Putin is the kind of leader he warned about because, as repressive as he may be, he does not have total control of his country. Because these three factors are present but remain unresolved, Goeman predicts it will be a long, drawn-out conflict. Even with the escalation seen in the last couple of weeks, Goeman continues to hold this perspective and believes the nuclear option is unlikely. However, Putin could deploy such a high-risk strategy as using a tactical nuclear weapon – similar to when Germany unleashed its secret weapon, the U-boat – and significantly shake things up, perhaps leading to US involvement or, in Putin’s best-case scenario, Russian victory.
