This week we examine how markets are holding up despite debt ceiling uncertainty and recessionary fears. We then look ahead to China’s prospects in cooperating with established global institutions as well as the risks that China will soon face due to its rapidly aging population. Also related to demographics, we examine Africa’s prospects and challenges as it will likely be one of the last continents with the explosive population growth necessary to drive the world economy. Finally, we discuss how the green energy transition is shaping the geopolitical landscape as demand for key minerals skyrockets.

Markets Hedging Against Potential Downturn

Market Brief: Is the Stock Market Expensive?

Sandy Ward & Jakir Hossain, Morningstar

Hedge Funds’ Ultra-Bearish Oil Bets Signal US Recession Angst

Devika Krishna Kumar & Chunzi Xu, Bloomberg

The stock market is holding up in the face of macroeconomic uncertainty. A potential recession and still-high inflation – factors that usually weigh on the market – seem to be having little effect. Big tech stocks, buoyed on emerging artificial intelligence technologies and expectations that the Federal Reserve’s hiking of interest rates is soon coming to an end, are driving much of the growth. Institutional investors seem to be using these companies’ stocks as a defensive measure against a potential downturn.

At the same time, money managers that trade derivatives linked to oil and fuel prices are the most bearish they’ve been since 2011, signaling worries about a recession that could cause those contracts to fall. A multitude of outside factors contribute to this behavior: worries that the Fed could induce a recession, China’s sluggish recovery from Covid-19 policies, and the threat of a US default if Washington doesn’t come together to raise the debt ceiling. While market leaders still expect a contraction, the date for a potential recession is being pushed back as the labor market’s numbers look strong, boosting Americans’ spending power.

China’s Rise: Opportunities and Risks

China’s Status Anxiety

Rohan Mukherjee, Foreign Affairs

China’s $23 Trillion Local Debt Mess Is About to Get Worse

Bloomberg News, Bloomberg

China is increasingly challenging the US as it grows its power on the international stage, setting the stage for a Thucydides’ Trap, where a rising power (China) ends in a hot conflict with the current dominant power (US). Yet, the crux of the trap stems from a desire by China to maintain an eminent and coequal status to the US on the world stage, and certain policy prescriptions can avoid conflict altogether. Specifically, by affording China room at the table to operate as a coequal across the various multilateral institutions, China would be afforded the space it needs to rise peacefully. While some institutions, such as the G20 and the United Nations Security Council, already give China a coequal role, others such as the International Monetary Fund do not, and by allowing increasing Chinese participation in that institution, among others, China can grow its status while operating cooperatively with the US and US allies.

Still, instability, too, breeds conflict, and China is facing a growing debt crisis among its local municipalities and cities. Hegang, in Northeastern China by the Chinese border with Russia, for instance, recently was forced into restructuring its ballooning debt, which has caused everything from delayed salaries to public workers and benefits cuts. The city may be a harbinger of things to come; Goldman Sachs analysts estimate that Chinese debt stands at $23 trillion and analysts at MacroPolo expect that two-thirds of localities holding debt will ultimately be unable to pay it back. Big cities, such as Shanghai, likely will not be spared either, as civil servants reportedly experience pay cuts. While Beijing has sought to manage the debt problem for years, China’s aging and shrinking population may ultimately lead to an economic crisis, which would not only bring China’s great power aspirations on the world stage in doubt but also roil the global economy, which could generate conflict in the end.

The Global Economy’s Future Depends on Africa

Jack A. Goldstone & John F. May, Foreign Affairs

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As countries like China, which contributed up to 40% of global growth after the Great Financial Crisis, begin to experience a slowdown due to a rapidly aging population, the world economy must look to Africa to provide such growth. Recent UN estimates project that Africa’s current population of around 1.4 billion will swell to 2.5 billion by 2050, attributing the growth to falling mortality and high fertility nearly unseen elsewhere in the world. Fertility in Africa is double that of the rest of the world – a rate largely believed to be driven by low rates of secondary education for women. African countries will increase their working-age population by 400 million workers in the next two decades.

African countries like Nigeria and Ethiopia have experienced incredible growth since 2000, and if other African countries can follow their example, the continent would contribute to a global boom. The world economy will need that in the coming population slowdown outside of the continent, but the world will also need Africa’s rise to be greener. African leaders are already recognizing this, with regional organizations such as the African Union propagating initiatives for a green energy transition. These African leaders will need a similar clear vision to propel their people’s interests in the day after.

The U.S. Needs Minerals for Electric Cars. Everyone Else Wants Them Too.

Ana Swanson, The New York Times

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Control over the materials needed for green energy is on the global agenda. As demand for green energy minerals is set to skyrocket, with lithium demand set to increase by as much as 42 times within the next 20-30 years, a surge of resource nationalism has taken hold. Countries are seeking to shore up energy security and exploit their advantage within the market. Currently, China dominates the global processing of green minerals, controlling as much as 80% of the market; a fact of concern at the recent G7 meeting in Hiroshima, Japan. In response, G7 nations have recently begun increasing subsidies for the processing and extraction of minerals to reduce reliance on China, while simultaneously seeking to strengthen trade ties between allies. For instance, the US is actively seeking to work more closely with Australia, which has significant reserves of lithium. Yet, analysts warn that the US limiting itself to Australian mineral reserves will ultimately prove insufficient and that African and Asian countries with proven reserves will need to be a part of the equation as well, even if labor and environmental standards are lower. Understanding their strength in the market, countries such as Indonesia have begun to require that nickel, of which the country has vast reserves, be processed in-country prior to export. Indonesia has likewise tested the idea of a mineral OPEC-style cartel, a notion echoed by other countries like Chile within the context of lithium mineral extraction.