Towards a Multipolar World

The United States took over from the United Kingdom as the world’s most powerful nation in the early 20th century. Not only politically and militarily, but also culturally. In retrospect, the Cold War between Russia and the United States was a long period of stability and oversight. Thanks to mutually assured nuclear annihilation, they held each other in a vice-like grip. It seemed a bipolar world, but the communists were constantly seen as the second world (and the emerging markets as the third world), especially since the end of World War II, the United States has been the most powerful nation.

With Nixon and Kissinger’s first visit to China, the relationship between China and the Soviet Union changed. With China’s rapprochement with the United States, the Soviet Union was now on its own, which eventually led to the end of the Soviet Union and the fall of the wall. In the following years, the peace dividend was cashed in on the financial markets. There was no serious ideological or political challenger. The interwar period lasted until the September 11, 2001 attacks, with unsuccessful wars in Iraq and Afghanistan. During the same period, China’s economy grew strongly. Since the arrival of Xi Jinping and Trump’s presidency, there has been a clear anti-Chinese policy from the United States. Now, this is sometimes compared to a new Cold War, but that is unjustified. The United States and China are much more intertwined economically than the Soviet Union and the United States ever were. There is some talk of Chimerica, where US platform companies have outsourced manufacturing to China.

Since the Great Financial Crisis, China has wanted to be less dependent on the United States and the US dollar. The Chinese were spooked by the impact of a systemic crisis in the United States on the Chinese economy. Several programmes emerged through which China wanted to become less dependent on the United States. Probably the best known is Made in China 2025. Besides more emphasis on self-sufficiency, China also wants to rebalance the economy from a typical Asian export-led growth model to a more self-sufficient consumer-oriented growth model. China aspires to have the largest possible middle class in the world with an olive-shaped income distribution: few rich and few poor, but with a large broad middle class. The Chinese fear the instability and populism created in the rest of the world by the disappearance of that same middle class. On a purchasing power parity basis, the Chinese economy is now 20 percent larger than the US economy and will eventually be larger in dollar terms than the US economy in the coming years. At almost the same time (2027), the economy of India, will overtake the economies of Japan and Germany, becoming the third-largest economy (in purchasing power parity, even the second) in the world. The centre of gravity of the global economy will then definitely be in Asia.

The rapprochement between China and Russia is rapidly strengthening China’s dominance. Russia has everything China needs and vice versa. Moreover, trade between China and Russia is no longer in US dollars, but in Chinese renminbi. For other countries, this great power bloc is an increasingly attractive alternative to the United States, as was evident, who voted in favour of the UN resolution on Ukraine. In favour was 1.5 billion of the world’s population, the remaining 6 billion abstained. Because the Americans (including Europe, Switzerland, Japan etc.) have used their currency as a weapon against the Russians, those currencies are acutely unpopular with the Russians, but now also with the Arabs and the Chinese. This weekend came news that the Qatari are reviewing their investments in London, after London’s public transport banned Qatari advertisements. Probably the Qatari do not have these problems in Asia. More and more wealthy Russians, Arabs, and Chinese are no longer buying homes in London, Paris, or Vancouver. Surely, the protection of the rule of law does not seem as strong as they first thought, and Dubai and Singapore are the ideal alternatives. Consider further that the West is saving less and less and consuming more, while parts of the world in which more is saved will focus primarily on Asian financial markets.

The rise of Asian financial markets is reinforced by the fact that in the West, monetary madness has broken out since the Great Financial Crisis. As a result, inflation ended up rising sharply here, while in large parts of Asia inflation is under control or even moderately rising inflation is seen as desirable. Ultimate exhaust is currency development. Just as the British pound lost much of its value due to the dollar’s hegemony, the dollar will now lose ground to the renminbi. Moreover, China’s central bank is much more like the Bundesbank than the Federal Reserve or even the ECB. In China, no quantitative easing or negative interest rates. In times of inflation, this can make for significant differences. See, for example, the 1970s. In the late 1960s, 4 D-Mark went into a dollar; in the early 1980s, it was 1.5 D-Mark. During the same period, interest rates in Germany had fallen from above US rates to below them. It looks like the renminbi will follow this same path in the coming years. The US dollar is currently extremely overvalued. The renminbi is still highly competitive given China’s substantial trade surplus. Moreover, the Chinese renminbi bond market is much more stable than the high-volatility bond markets in the West. Thus, this makes the renminbi an ideal haven for investors in the future.

In the short term, the renminbi’s performance depends on the strength of the Chinese economy. Corona measures, more specifically the zero-covid policy, and property market developments are putting pressure on China’s economic growth. However, the market is counting on too low a growth rate going forward. Instead of around 2.5 percent, the Chinese economy is more likely to grow at around 5 percent. However, China’s corona rate has now risen to an all-time high and the measures appear increasingly unsustainable. As Chinese leaders do concern themselves with their popularity, the revolts against the zero-covid policy bring its end closer. Meanwhile, the Chinese government has also done a lot of work in the real estate sector to revive it. Over the course of next year, this will ensure that on top of the 5 percent growth, another catch-up effect will be visible with the result that the renminbi can benefit from that stronger economic growth. Then, like the Americans before, the Chinese too can argue that the renminbi is their currency but our problem.