Last week historian Niall Ferguson published an alarming article, both in its scope and in its depressing errors:
- A Taiwan conflict could be the equivalent of the Suez crisis for the British Empire when it was exposed as a paper tiger.
- When Britain failed to take it back there was a run on the pound.
- The US probably wouldn’t fight the Taiwan war. It would probably fail to rally boycotts.
- It would confirm Chinese hegemony in Asia, breach the first island chain and hand semiconductor production to the CCP.
- It would trigger a run on US treasuries and US dollar, ending the US empire.
If you’ll pardon me, this is pretty melodramatic stuff from our Niall. Perhaps he’s been spending too much time reading Hugh White.
- In 1956, the UK was an irrelevant 6% of global GDP. Today the US is a still dominant one-quarter of it and well over half of global equity.
- Sure, US public debt is approaching similar levels to post-war UK but there is no servicing issue and it is not on its Pat Malone which matters to forex.
- Any time that China invades Taiwan over the next decade it will be shockingly outmatched in blue water naval capacity anywhere more than few kilometers from the Taiwan coast. How, exactly, is the Chinese empire going to police its own commodity and trade supply chains?
- The first thing that the US will do if China blockades Taiwan is to counter-blockade Chinese maritime trade routes.
- If China invades, the second thing that the US will do is bomb TSMC out of existence just as Churchill sank the French fleet at Mers-el-Kébir when France fell to the Nazis. Why do we think that Intel, TSMC and Samsung are currently planning $80bn in new semiconductor factories on the US mainland?
Basically, Niall Ferguson has engaged in some kind of black fantasy exercise.
The real question here is what will the wider world do when China threatens it? You know, the free world. In 1956, humanity was embarking on a surge of post-colonial liberalisation that could not wait to break the shackles of the British and European imaginations.
Today that freedom exists entirely under the guarantee of the US liberal empire. Will the free peoples of the earth throw that aside to head under the skirts of the tyrannical Chinese illiberal empire? Would you?
If I were the US, I would not fight the war openly, either. It’s a proxy war.
What it will do instead is blockade China everywhere else including access to debt and equity markets via Wall Street. Moreover, it will demand that all allies do the same, including Europe. And, if they balk, it will deliver the friendly message in person on one or two of its 21 aircraft carriers to remind the dissolute Europeans (or Australians) that freedom is not, actually, entirely free.
It’s certainly not likely to work in its entirety. But it will still be a giant hammer blow to the Chinese economy.
As this conflict developed, the US dollar would rise parabolically and Treasury yields crater as a safe-haven bid the likes of which we have never seen took hold of markets.
Which brings me to the point of this post. From UBS:
Index provider FTSE Russell on Monday confirmed the inclusion of Chinese government bonds (CGBs) in its flagship bond index. The inclusion was long expected following conditional approval last September and similar decisions with the JPMorgan and Bloomberg Barclays indexes. The move is the latest illustration of the increasing maturity of China’sfinancial markets. But many global investors are significantly under allocated to China relative to its weight in global benchmarks, whether because of insufficient understanding of the investment opportunity and market complexity, or other factors. We see a number of reasons why investors should consider their exposure to China:1. China has become too big and distinct for global investors to ignore. Over the past 20 years, China’s economy has grown fivefold, and it now accounts for approximately 20% of total global economic output and 30% of annual global GDP growth. Meanwhile, its equity market capitalization is 25 times larger, and is now close to 11% of the world’s equity market cap. The nation is also becoming a leader in technology, innovation, and sustainability. China has set the goal of achieving carbon neutrality by 2060, enabled by smarter infrastructure and leadership in battery cell technology for electric vehicles. China is also leading in the digital disruption of the retail and financial industries, accounting for 57%of the global e-commerce market. Some sectors exposed to China’s digital economy offer a 20–40% compound annual growth rate over the medium term, in our view.
True, if exaggerated. But there is still one very good reason why you should be very careful about loading up on Chinese bonds, unless you have direct personal access to Xi Jinping’s personal timetable for the annexation of Taiwan, and it is this.
When the war commences, there will be an ungodly run on Chinese debt and the yuan.
