China’s Three Traps & Macro Trilemma
For the investor trying to plan ahead for the new year, it’s immensely important to consider the geopolitical situations and relationships around the world and how they could impact their investments. In doing so, we always have China at the top on our radar. China spent a great deal of 2021 rolling out regulations trying to mitigate imbalances – and long-running ones at that – plaguing its economy. However, the country still faces very real “traps” and serious constraints that will continue to force Beijing to tone down geopolitical assertiveness, beyond the rhetorical sphere, and instead focus its actions inward.
While China generally gets a lot of media coverage, most of it tends to be either superficial or partisan. This is why one of my go-to sources for truly insightful perspectives is Marko Papic of the Clocktower Group. Marko is the author of one of my favorite books, “Geopolitical Alpha: An Investment Framework for Predicting the Future” (Go get it here). He is a partner and Chief Strategist at the Clocktower Group, as well as a friend that I often share ideas and publications with.
In his and the Clocktower Group’s recent report, China’s Three Traps & Macro Trilemma, they share some differentiated and nuanced perspectives on China that investors should explore and consider as they look to understand China’s path ahead this decade. Here are some of the key takeaways from the Report:
China is trapped by three factors: geography, demographics, and a decelerating rate of GDP growth that is likely to leave it languishing in a Middle-Income Trap.
The three traps will force China to remain far more addicted to export-led growth and increasingly dependent on foreign capital than is assumed.
To alleviate the pressure from its “traps,” China is pivoting away from the US developmental model and embracing “Rhine capitalism” of Germany.
The German model offers China the hope that it can resolve its traps, boost productivity, and counter the geopolitical challenge of the US.
Sectors we expect to outperform given this new strategic push are Green China Inc., the semiconductor supply chain, and China’s very own Mittelstand (SMEs).
Will China’s pivot to the German model succeed? We don’t know. But we do know that a highly leveraged economy facing a demographic downturn and pivoting to advanced manufacturing is highly unlikely to engage in geopolitical adventurism.
China will remain trapped by its macro trilemma for much of this decade.
Therein lies the irony of investing in China: One must believe that Chinese policymakers will remain constrained from pursuing their geopolitical ambition by domestic factors in order to continue profiting from onshore growth and innovation.
I hope you find the analyses and work that went into the report as intriguing as I did.
Marko Papic is a Partner of the Strategy Team that leads market coverage and macro intelligence for the Clocktower Group. The Clocktower Group is an asset management platform that invests in hedge funds across macro and onshore China-focused strategies. They also invest in early-stage fintech disrupters and in companies & managers tackling climate change.
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