What might many of the risks surrounding Australia, climate change, currencies, global multilateralism, the military race, soft-power reach, the space race and technology have in common?
They are best seen through the prism of China’s clash with the US, according to Vikram Mansharamani, a geopolitical analyst and lecturer at Harvard University.
“The risks of the US versus China are manifesting in different ways,” Mansharamani told the Portfolio Construction Forum Strategies Conference in Sydney on Wednesday.
The US-based analyst said the Washington-Beijing rivalry is buffeting many global economic, military and political relationships and “nowhere in the world is this development more obvious than in Australia”.
Australia is one of the four most valuable naturally endowed parts of the world and possess the ingredients China is seeking to complement its lack of natural endowments, he said. Australasia, along with Canada and the US, Ukraine and parts of Africa, has the water resources, fertile agricultural lands, energy and commodities that China is seeking.
Beijing’s recent establishment of a “strategic partnership” with the pivotally placed but otherwise unimportant Solomon Islands only makes sense as a way to control Australia, he said. “The inconsistent thing that China has recently done is to de-facto colonise the Solomon Islands.
“The Chinese military philosophy has always been about deception and surprise,” said Mansharamani, who studied the subject as an undergraduate. “Of the 36 stratagems, number six is ‘make a sound in the east, then attack in the west’.
“Is it conceivable that China is making sounds around Taiwan but could attack Australia?” he asked, emphasising he is talking about possibilities not probabilities. “China seems to be preparing for war,” while offering that the target could be Japan, the Philippines or South Korea.
Mansharamani said even if Beijing has other targets in sight it’s “likely” China will attack Taiwan anyway in the next three to five years. “It’s more imminent that many of us would like to believe.
“The Chinese economy is plunging. There are 35 million more men than women. There is a disillusioned youth that is a tinderbox for social unrest. One way to blunt the risk of social unrest is to create conflict and a nationalism and says we are suffering but it’s for a bigger cause,” he said.
Mansharamani’s advises Australia to decouple from China. “It would not nearly be as disruptive as any of you probably think.” China, for example, might buy iron ore from Brazil instead of Australia. But then European customers of Brazil would need to do the opposite to Australia’s relief.
In an interview, Mansharamani told Investment Magazine that he is not predicting or placing odds on a Chinese grasp towards Australia, just raising the possibility after “joining the dots”.
He often outlines to investors the risks stemming from global demographic, economic, political and technological themes without offering overt views on asset allocation.
One underplayed investment risk is the possibility of an alternative reserve currency to the US dollar, he told the conference.
The US has weaponised the privilege of issuing the global reserve currency and its enemies are seeking alternatives, he said, noting the BRICS countries this week are discussing this challenge. “For the investment community, probably the biggest incremental risk to think about is the dollar.”
Mansharamani said that nearly all physical gold deliveries are headed to China, Russia and Turkey. “Why? It’s conceivable that before too long, the untrusted BRICS offer a gold-backed currency that over five to 10 years is accepted as an alternative to the greenback. If people start trusting this new currency, what does that do to the dollar?”
The worst outcome would be if the US dollar were to get devalued in a material way. “That would be more disruptive in the short run that anything else (because it would) create massive hyperinflation pressures around the world.”
Mansharamani said the US, if its currency plunged, would have all the preconditions for Weimar Germany-, Venezuelan- and Zimbabwean-style hyperinflation. The other preconditions are high debt and ongoing government deficits.
“If we had that currency devaluation, we would get hyperinflation,” he said. “This is the type of risk (investors) are going to underestimate from a behavioural perspective. But it’s a lot more imminent than people think.”
Climate change is another area of the China-US conflict. “We think the world is aligned around one topic [to reduce emissions]. We are not. The Chinese are using it to their advantage at the expense of the Western world. They are putting up two coal-fired power plants per week while the rest of the world closes its cheap, reliable regular energy. When push comes to shove, the Chinese are being held to zero standards today when it comes to carbon emissions.”
The threat posed by global debt, at about 350 per cent of global GDP, depends on whether or not deflation or inflation is the bigger medium-term risk, he said.
Deflation is more likely because the world’s largest economies are aging and when people move to fixed income they spend less and demand drops, he said. At the same time, technology is boosting productivity, traditional and alternative energy output is rising, and China is slowing. These shifts mean more supply thus lower prices.
“If you have deflationary world at a time of lots of debt, we have a problem,” he said. “This is exactly what happened in the early 1930s. I’m not suggesting this is likely but it’s a situation we must evaluate.”
The eurozone is another worry. “I don’t know of any long-term monetary union that has survived without political union,” he said. “We either need to see the United States of Europe or this project is stymied.
“As we saw in 2010 to 2012, you cannot have countries that are indebted spending money like drunken sailors while other countries that are productive are saving to fund them.”