The fall of Kabul to the Taliban on Aug. 15 was a shock to the world, as were images of U.S. cargo planes lumbering off the runway in “defeat” at the hands of the Taliban. Yet, there was no real Taliban defeat of America, which at its core is the idea of freedom. An idea can never be defeated.
And, America continues to be the most powerful nation in the world, both economically and militarily. The Taliban will struggle to feed themselves over the coming months, and America will probably end up helping them do so. For better or worse, that’s the kind of people we are.
Rather than experiencing defeat in Afghanistan, America is pivoting to its newest, greatest threat: China. After 20 years of defeating the Taliban, and keeping down other terrorists on their own home turf, it is time to accept that the democracy we sought for Afghans has not come to pass. It’s time to move on and demonstrate the power and opportunity of democracy elsewhere.
Yet, Beijing, which supported Pakistan and their Taliban proxies throughout the war, is trying to go further and present the fall of Kabul as evidence of not only an American defeat, but of a longer-term American decline. This couldn’t be further from the truth, at least for the moment.
Look at the last decade of stock performance to see that not only is America roundly beating China, but America is beating Europe as well. Together, America and Europe are leaving China in the dust, because the Chinese Communist Party’s communism, regulatory and tax takings, and erratic governance, are scaring off smart money.
It is true that since the fall of Kabul on Aug. 15, the Shanghai Stock Exchange (SSE) index outperformed America’s S&P 500 by about 1 percent. And, the pandemic hit American stocks harder than Chinese stocks.
But take the longer view. Since 2011, the S&P rose 260 percent, beating the SSE’s 27 percent rise by a multiple of over nine times. And by August 2020, the S&P had entirely recovered from the pandemic slump and was back to America-sized growth.
Chinese equities are bringing down emerging market (EM) indexes, which also include India, Brazil, Turkey, and South Africa. These markets trail U.S. equities, which have the advantage of existing in a mature rule of law system that respects property. People want to put their money where it is safe and can be used, and it is safer in capitalist countries with a history of wealth accumulation, than in communist countries with a history of taking capitalists hostage.
International investors only benefit when they can freely withdraw their earnings, which is not the case in communist countries like China and Venezuela. Capital controls in those countries make investments forever, or nearly so, which make them more of a donation or foot in the door than an investment. Profits typically can’t be repatriated easily from communist countries.
According to the Financial Times, U.S. stocks have returned 356 percent over the last 10 years, beating European returns of 188 percent, and the emerging market’s (MSCI EM index) 66 percent. That makes the last 10 years a lost decade for emerging markets, and in particular, for investors in China.
“After starting 2021 on a bright note as investors bet on a global economic renaissance and commodity prices rushed higher, EM equities were thrown back into reverse by China’s regulatory clampdown on industries from financial technology to education,” according to the Times. “As a result, the MSCI EM index has slipped another 1.4 per cent this year, even as most other markets have soared.”
The Times continues, “Beijing’s crackdown [on technology and education companies, for example] has sent the Hong Kong stock market down more than 10 per cent since the beginning of July and the onshore CSI 300 index has slipped 6.4 per cent.”
The CSI 300 replicates the capitalization-weighted performance of the SSE and Shenzhen Stock Exchange’s top-300 stocks.
Conversely, vaccines in the United States and Europe are allowing for economic opening and growth, possibly closing the prior gap of China’s GDP growth outpacing that of the West. Governments are increasingly concerned about allowing investment and trade with China due to its relative lack of accounting standards, as well as environmental, social, and governance (ESG) lapses. China scores badly on these metrics, to which conscientious investors increasingly pay attention.
Many investors also fear more anti-capitalist crackdowns are coming from Beijing, making Chinese equities uninvestable, and leading its already-invested cheerleaders to wake up and give a few half-hearted cheers for China.
China optimists at Goldman Sachs, Standard Chartered Bank, and BlackRock, who do plenty of business with China and so may be just a tiny bit biased on the matter, keep pumping the totalitarian country.
“There are pockets of opportunities now,” Goldman’s Peter Oppenheimer told the Times. “Given how emerging markets have derated, if concerns about the Delta variant moderate a little bit and we don’t get more significant anti-market interventions in China, I think there will be a reasonable rebound.”
Goldman is one of the top-20 U.S. investors in China, at approximately $17.4 billion according to a 2021 government document, so it’s not surprising that its analysts would be pumping the value of their own investment.
Eric Robertson of Standard Chartered said in a note, “We believe this growth pessimism is overdone and that EM assets look attractive. The timing might still be premature, but we are looking for that entry point.”
Yet as recently as Aug. 24, Standard Chartered Wealth Management’s chief information officer said they preferred U.S. and European markets to emerging markets, and within emerging markets, preferred India to China.
On Aug. 17, BlackRock’s Wei Li told the Times that “China is under-represented in global investors’ portfolios but also, in our view, in global benchmarks.” Her BlackRock Investment Institute recommended doubling or tripling allocation to Chinese assets in diversified global portfolios. In the MSCI All-World index, that would mean increasing the weighting from its current 4.2 percent, to about 10 percent.
That’s a lot of money given the totality of U.S. investments in China.
The largest American institutional investors, including private equity firms and state pensions, already have $2.3 trillion invested in China, according to the government data. Tripling that would increase American capital at risk in China to almost $7 trillion.
The more money the banks have invested in China, the more pressure they will put on Washington to go easy on the totalitarian country. Going easy means China keeps pushing its territorial boundaries against our allies, we do and say nothing, and we keep slapping China’s wrist for up to $600 billion in IP theft annually.
BlackRock is America’s biggest investor in China, according to the government data cited previously, with approximately $155 billion in the country. Could that capital at risk have something to do with BlackRock’s support for other investors doubling or tripling investment in the country? It would sure make for a smooth unwinding of its position.
Already in 2021, investors have plowed $81 billion into emerging market equity funds. That’s setting up 2021 to be the biggest for EM equities since 2010.
What these investors and big banks aren’t accounting for is the macro-political risk at the end of it all. Once China is pumped up economically through American investment and technology, their military will be stronger than the U.S. military, and at that point, China will be in a position to gradually erode American influence globally.
Democracy, freedom, and capitalism, could become a thing of the past. All those billions that the big banks thought they made from China will then belong to China. Communism will have won, and there will be no more American bankers, and no more bank accounts stuffed with their Chinese earnings.
America will have sold China the rope with which they hang us, and which will be the end of democracy and freedom.
But, I’m not sure that American bankers can see past the next few financial quarters, or coordinate sufficiently through government controls on investments in China, to act strategically and avoid that sorry eventuality.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.