Uncertainty and new opportunities continue to drive the geopolitical landscape. In this week’s edition of Geopolitics & the Day After, we explore a wide range of topics, from China’s precarious economic outlook to hopeful predictions of emerging economics. We then move to the threats of climate change, the new technologies trying to combat it, and the geopolitical ramifications of the green energy transition. We end with a discussion of what will be necessary for the Day After for Ukraine’s reconstruction.

Chinese Growth Concerns

China’s Rebound Hits a Wall, and There Is ‘No Quick Fix’ to Revive It

Keith Bradsher, Daisuke Wakabayashi, & Claire Fu, The New York Times

These Businesses Are Getting Hit Hard by China’s Faltering Economic Recovery

Cai Li, The Wall Street Journal

Why China’s economic recovery is hanging in the balance

Joe Leahy, Thomas Hale, & Andy Lin, Financial Times

Investor expectations for a strong Chinese economic recovery spurred by the country’s exit from Covid-19 lockdown have soured as headwinds begin to take shape. The Chinese property sector, which accounts for as much as 30% of economic output, has proven weaker than expected due to consumer distrust in the industry. Exports, another pillar of the Chinese economy, have likewise proven feeble, even at a time when the Chinese renminbi has weakened relative to the US dollar. Weakness in both areas of the economy threatens to spill over into industrial production, furthering hampering China’s economic outlook. Meanwhile, small-medium enterprises (SMEs) are showing increasing signs of sluggishness as indebtedness bites and demand slows. Any downturn in SMEs would flow into the wider economy, as SMEs employ as many as 233 million workers.

In response, China has already employed measures to spur wider growth, including tax breaks for small businesses, a reduction in interest rates on bank deposits to encourage spending, and lower interest rates for corporate loans and home mortgages. Still, these measures have proven insufficient. Consequently, expectations are widespread for a Chinese stimulus package, which is expected to include infrastructure spending and loosened regulations for the property sector – both of which China’s growth has depended on for the last two decades. Economists believe that for Beijing to succeed, it will need to resort to infrastructure for growth. Ultimately, while economic forecasts for Chinese growth in 2023 have been reduced by a range of financial actors such as JPMorgan, Bank of America, and Standard Chartered, expectations still remain in place for China to achieve above Beijing’s 5% target growth rate.

Frontier markets forecast to thrive as investors avoid US-China rivalry

Brooke Masters, Financial Times

Mercer’s Chief Investment Strategist, Rich Nuzum, is of the view that emerging and frontier markets are set to reap the benefits of geopolitical competition between the US and China, as investors seek to avoid the consequences of the economic rivalry. Boycotts, sanctions, and other economic measures are of particular concern, especially in the wake of Western sanctions against Russia following Russia’s incursion into Ukraine. The result is that, rather than parking money in a Western bank, investors such as Mr. Nuzum feel more secure putting their money to work in frontier markets, especially in non-aligned countries. The thinking goes that non-aligned countries that do business with both sides are less likely to suffer economic consequences from either, making investment in projects and companies there a safer bet. Countries with high population growth and strong legal protections will, especially, see the upside as those characteristics portend to greater opportunity and security for investors. While places like Singapore and Dubai are already seeing the benefit, Mr. Nuzum believes that big inflows will not start until the US Federal Reserve finishes its tightening cycle and expansionary monetary policy kicks in.

Climate Change Hits the American West as Green Initiatives Continue

Removing Carbon From the Air Enters Its Awkward Teen Years

Brian Kahn, Bloomberg

The American West faces a new frontier: Climate change

Corine Lesnes, Le Monde

US-led minerals partnership shortlists projects for green energy shift

Attracta Mooney, Financial Times

The American West is suffering the volatile weather effects of climate change. Drought-stricken California has, in the span of months, seen a shift to flood warnings. A lake that hasn’t existed since the ‘80s has reappeared, representing the surreal experience of ‘whiplash weather’. Arizona is suffering through extreme water rationing due to the over-pumping and the effects of climate change on the Colorado River. Utah’s Great Salt Lake is similarly facing shortage challenges, which threaten to destroy its ecosystem should it lose too much water. The return of El Niño, the weather system that originates in the South Pacific that brings extreme weather conditions to the American West, further threatens the region.

Green energy technologies are trying to help fight such extreme climate change effects. Direct air capture (DAC), a process that draws carbon out of the atmosphere and traps it in stone, is an emerging technology that has the potential to become a trillion-dollar industry. There are capital issues, however: drawing carbon from the atmosphere is expensive, and the science to decrease costs while scaling up operations isn’t there yet. On the geopolitical level, the Mineral Security Partnership, a US group of 12 countries and the EU, has shortlisted 15 large critical-minerals projects to develop by the end of 2023. The move has been made to shore up the West’s supply lines in fear of China weaponizing their dominant role in the mineral trade, minerals which fuel the transition to green technologies. The minerals partnership focuses on higher environmental, social, and governance standards than have previously been applied to such projects. The group theorizes that if given the choice, minerals-producing countries will choose the partnership over countries like China, especially amid concerns about child labor and environmental degradation. 

Preparing for Ukraine’s Reconstruction

Anders Åslund, Project Syndicate  

With Ukraine’s postwar recovery cost estimated at hundreds of billions of dollars, the West must develop a cohesive reconstruction plan. The plan should, ideally, according to Anders Aslund, involve a multilateral organization that includes participation from all donor countries, private enterprises, the Ukrainian government, and the country’s civil society. Such an organization must also ensure transparency and auditing mechanisms to deter theft. In addition to this structure, Russia must pay reparations for the damage it caused. While this is next to impossible while Vladimir Putin is still in power, Russian central bank funds that have been frozen could be seized and used to finance Ukraine’s construction. This would follow the precedent established after Iraq’s invasion of Kuwait, which resulted in Iraq paying $52 billion to Kuwait in reparations. In the end, the responsibility will lie with Kyiv to fight corruption, protect property rights, and pursue privatization and deregulation in order to fund its reconstruction and build sustainable growth.