Monday’s optimism was briefly AWOL yesterday. The market performance was a good indicator as what to expect in coming months until the Covid vaccine becomes widely available. It is short-term concerns versus medium-term optimism. Yesterday it was the turn of the former. There are still numerous details to be thrashed out about the making, the distribution, and the administering of the inoculation and in the meantime infection rates are growing exponentially in several parts of the world. Equities retreated from Monday’s record levels helped by weak US retail sales and the major indices lost 0.5% on the day. It is, however, notable that the settlement was well off the day’s lows.
Oil chose the same path as equities. Monday’s performance-improving drug that pushed oil prices higher was temporarily withdrawn. Growing hopes that the OPEC+ group would not ease on production constraints suffered a minor setback. The producer group’s Joint Ministerial Monitoring Committee ended its virtual meeting emphasizing the importance of high compliance but failed to make any recommendations that could alter the underlying output deal. The Saudi energy minister encouraged participating nations to be flexible in responding to changes in the oil market whilst his Russian counterpart said his country would stick to the OPEC deal without elaborating. The general view still is that an increase in the group’s output level from next year would be ill-timed and implausible hence the impressive intra-day rally from the morning retracement.
Oil prices are shaking off the unexpectedly large, 4.2 million bbls build in US crude oil inventories as reported by the API last night after the settlement. The dismal crude data was countered by the 5 million bbls drawdown in distillate stocks whilst gasoline inventories built a tad.
Cold War II
The main feature of the outgoing US administration was its unpredictability and acting on a whim but its relationship with China was consistent; consistently fragile. President Trump promised during the 2016 campaign to make narrowing the Chinese trade deficit his priority. Although he has failed to meaningfully do so he has done everything in his power to eliminate what he described “unfair trading practices” by introducing tariffs on Chinese exports and thus claim to support US manufacturers. As a matter of fact, China was the only area where Republicans and Democrats managed to form a consensus. President-elect Joe Biden said of the Chinese leader, Xi Jinping that “he does not have a democratic – with a small d – bone in his body” and promised to counter Chinese influence on global affairs. Other Western nations are also watching with increasing anxiety the growing Chinese economic and political manoeuvring all over the world. These are valid concerns.
Economy: The country’s economic growth over the past 20 years is nothing short of spectacular when compared to developed countries. In 2000, just before it joined the WTO, the size of the Chinese economy was just over 11% of the US and 3% of the global economy. By 2019 the combined value of goods and services reached 67% that of the US and 11% of the world. This share is forecast to grow to 89% and 20% respectively by 2025. It seems to be the question of 10-15 years that China overtakes the US as the biggest economic power in the world. No wonder, that the United States is growing increasingly uncomfortable with the Chinese expansion.
Whilst the current US administration alienated every traditional political and economic partner China expanded its economic might. It launched its Belt and Road Initiative in 2013 with the aim of connecting Asia with Africa and Europe via land and maritime networks to improve regional integration and stimulate economic growth. Last weekend fifteen Asia-Pacific nations formed the largest free trade alliance in the world called the Regional Comprehensive Economic Partnership (RCEP). The move forms a stronger relationship between China and US’s regional allies like Japan and South Korea and comes as a blow to the United States. The country, where the coronavirus originated, has handled the health crisis better than its Western counterparts. Life has gone back to normal and it is one of the few nations whose economy will not suffer from contraction this year.
Politics: the Chinese economic expansion is coupled with marked changes in politics – both domestic and foreign. President Xi Jinping issued a directive in 2017 that religions in China must be “Chinese in orientation”. The crackdown on the Muslim Uighur minority began. The government has reportedly detained a million Uighurs in the last few years and sent them to “re-education camps”. In Hong Kong the introduction of the new security law earlier this year is an attempt by the communist party to reduce the city’s independence and has been labelled by critics as the end of Hong Kong. Although Taiwan used to be considered by the international community as an independent country China always regarded the island as a breakaway province and the raising of the issue of independence always provokes an angry response from the mainland.
China is using its military power to protect what it thinks is its regional interest and duty. The country now has more ships than the US navy and is more than happy to demonstrate its ever-increasing military capabilities either by conducting exercises near Taiwan or holding military drills in the disputed South China Sea that is responsible for one-third of the global maritime trade.
The fight for global dominancy is truly under way. In this war the US and an increasing number of Western nations are moving to block the expansion of Chinese companies – just think of Huawei or TikTok. This will not deter China to expand globally. The competition will lead to a new polarized world order, this time China and its friends against the US and its allies. The incoming new US administration will change the rhetoric with China but is unlikely to alter the US stance. In Cold War II the winner of Cold War I takes on a rising superpower.