By Michael Every of Rabobank
The Boxer-Shorts Rebellion
Sadly but truthfully, very few Americans know anything about Chinese history. That includes Wall Street’s ‘China’ teams; DC think-tank ‘experts’; and politicians. Equally, a smaller but still overwhelming majority of Chinese people don’t know much about the shorter-but-nuanced history of the US. Most Americans also don’t know much about American history….and most Chinese people don’t know much about Chinese history either. I’ve been lucky enough to live in nine different countries (10 if you count the US via my father as proxy); and not one of them teaches an honest, no-holds-barred evaluation of its own national history. It’s all edited highlights – a bit like social media we spend all day on rather than learning any history.
This matters because aside from the randomness of day-to-day movement of markets - which yesterday bounced to reverse Wednesday’s slump: long live profit-free tech stocks, apparently - if you don’t learn from history then you are damned to repeat it. The only question is if, like the analysts who repeat Marx repeating Hegel repeating that history repeats itself, first as tragedy and then as farce, this time it is going to be tears, or tears of laughter.
In particular, very important developments may be taking place in China. Western sportswear and clothing retailers such as Nike, Adidas, and H&M have all made recent statements they are “concerned about reports of forced labor” in Xinjiang, or have stopped buying cotton from it completely. The Chinese response has been furious: official rhetoric is withering - “China is not to be messed with,” and those who do “will find that we are force to be reckoned with”; social media is filled with nationalist attacks and open calls from celebrities to boycott these firms; and H&M stores in China have suddenly disappeared from search engine location functions.
Yes, we’ve seen similar Chinese moves against foreign products before. Some Aussie agri exports are currently locked out; South Korean soap operas and Norwegian salmon have been in the past; and back in 2012 there were major anti-Japanese boycotts and protests due to the geopolitical backdrop. Yes, those earlier storms passed: but that was arguably a very different China, at least in the eyes of the West, and according to its own combative rhetoric. Indeed, ‘Wolf Warrior’ diplomacy --in the past few days alone-- has seen massively growing skepticism about China’s direction from Western diplomatic, military, and even businesses elites.
The problem is now on both sides. In China, the 2012 protests were quashed by the government, but this time round the Communist Youth League is actively trolling, and the diplomacy is blaring. The question in the minds of some who have read history is if this a - non-violent - replay of the anti-foreigner Boxer Rebellion rather than just a Boxer-Shorts Rebellion. In the West, the firms involved face a stark choice: stick to their professed social values and lose the China market, or accept China gets to dictate what they worry about - even when it reaches the alleged level of forced labour and genocide…and then try to explain corporate mottos like “Just Do It”. Could this even escalate to the level of the 2022 Olympics so we see the Para- and Parallel games? Probably not – but if it did, China has stated any boycotting countries will be sanctioned, dragging even more firms in. The risk is that this backdrop could accelerate existing moves towards decoupling of the global economy, which had been expected to be focused on semiconductors, but may now be on Lycra, sneakers, and socks and underwear value-packs too.
In short, yet again we see the underlying dynamic of hard choices having to be made by those who don’t want to make them: which we have been flagging as a logically-inevitable risk since 2017.
Markets should really be paying more attention. Not because of the hit to the stock-price of the selection of firms involved now, but because of the patterns one can see in history. True, these very often say nothing at all – unless you are a believer in dialectical materialism, which China’s Politburo officially is. Yet when one sees Hong Kongers who want to leave are being told their new British National Overseas (BNO) passports are not accepted documents allowing holders to make early withdrawal of their MPF retirement savings - hence one has to leave one’s MPF behind if one exits; and that Hong Kong is asking countries not to recognise BNO passports at all; where would one think a *possible* ‘historical dialectic’ could go next in a worst-case scenario? This is no kind of forecast at all: just stressing that rather than tracking headlines like a torch on a dark wall, one needs to look at current developments alongside longer-run trends and historical parallels to try to frame possible tail-risk scenarios.
Which, as noted, the US is not very good at. What is the US realistically aiming at vs. China, some ask? And how does one get there if one doesn’t have a clear vision of it? Well, President Biden just gave his first media press conference, and in it stressed he expects “extreme competition” with China. For Western sportswear firms, this is not what they have in mind with the phrase. Indeed:
Biden repeated former-President Trump’s claim that China’s ambition of becoming the wealthiest and most powerful country in the world is “not going to happen under my watch” --which requires a host of US measures from geopolitics to trade to capital flows (as the SEC pushes ahead with regulations forcing Chinese firms to de-list in the US) to the USD to achieve-- and will naturally be seen as a policy of containment by China;
The US will aim to counter China’s rise by increasing investment in science and research – which necessarily means science, education, tech, and supply-chain decoupling if so; and
The US will continue to call out China in an “unrelenting way” on human rights violations – which we already see will only amplify and accelerate existing decoupling trends, and place other Western countries in the same hot-seat.
So boxing gloves (and shorts) on. Indeed, China has just put sanctions on some British parliamentarians, who join their EU counterparts; Russia and China are cuddling up; so is North Korea; and so is Iran – which just fired a missile that damaged an Israeli ship. (That as Israeli PM Netanyahu narrowly failed to win the parliamentary majority he needed to halt his ongoing criminal trial in a fourth successive election against that legal backdrop, potentially making a risk-averse leader more bellicose.) At least the Suez Canal is already blocked so we don’t have to worry about that.
But I have to end with the Fed. They have enough challenges to deal with now that they face a K-shaped recovery, and are targeting inflation, and unemployment, and social justice: now add a Cold War they can’t afford to lose to that list. Against such a backdrop, they have decided that US banks can start share buybacks again as soon as the end of Q2. Because nothing helps heal a broken society and propel a war economy quite like financialization and a stock market bubble.
I told you Americans don’t read their own history. Happy Friday!