Index > Briefing
Thursday, February 25, 2021
Geopolitics as Driver of World Capital

The global financial market today is not merely determined by market factors, as it stands it is also greatly influenced by geopolitical factors.

Just a few years ago, it was the "golden era" of economic development. That was a time when the development of globalization was progressing smoothly, where the stock market, bond market, foreign exchange market, commodity investment, trade and other links were closely linked together. That was the era where free capital flow, trade liberalization, and multilateralism dominated the global market. Whenever there was a dispute, countries could negotiate, and organizations and mechanisms like WTO would mediate such negotiations. Geopolitics and other emergencies did interfere with the capital market, but on the whole, the capital market was still one that was governed by the global market system and rules. The effects of geopolitical events would be limited to stimulating the market in the form of emergencies and would only ever trigger short-term fluctuations.

However, the current situation is fundamentally different from that of the past. The era of globalization has given way to anti-globalization and the financial market which was under market economy rules has now begun to be influenced by long term geopolitical factors. Geopolitical factors that were variables have now become components that exert constant influence in market development. If the current national economic policy or corporate investment decision-making does not take geopolitical background into account, misjudgments and decision-making errors are bound to occur.

The influences of geopolitical factors on the market are ubiquitous and manifested at all levels. At the real economy level, the sanctions and restrictions imposed by the United States on many Chinese companies have caused geopolitical distortions in the industrial division of labor and supply chain systems. At the level of the capital market, increasing geopolitical factors have also formed new interventions, especially the various “long-arm jurisdiction” financial sanctions and access restrictions under the pretext of “national security” initiated by the Trump administration. This has impacted global capital, where non-market interventions have been added to the market.

Businesses have been increasingly entrapped in geopolitical factors. The British bank HSBC, which has roots in Hong Kong and Shanghai for instance, has its business focus in Hong Kong and its headquarters based in London. Now, the bank has been caught in geopolitical troubles in Hong Kong in recent years. On the one hand, it was identified as having been involved in the Huawei CFO Meng Wanzhou incident by providing unfavorable evidence of China to the United States, and HSBC will certainly be treated differently than how it was before this in the Chinese market and by the Chinese society. On the other hand, HSBC has been boycotted by Western countries such as the United States and the UK due to its support for the National Security Act in Hong Kong. Recently, the UK court has ruled that HSBC does not need to provide documents to Meng Wanzhou's team of lawyers, and HSBC could avoid getting into more troubles. As Tom Standage, the deputy editor of The Economist pointed out in the World Economic Forum, many companies have become proxy battlefields for geopolitical conflicts, and this trend will stay.

Another important manifestation of the influence that geopolitics has on the capital market is that Wall Street, which dominates the capital market, is gradually losing its foothold. In the current information age, the rise of Bitcoin is nothing short of an astonishing feat. It once rose to more than USD 50,000, which not only caused Wall Street institutions to lower their positions to approve investments in Bitcoin, but also caused the U.S. Department of Treasury and the Federal Reserve to scrutinize and criticize Bitcoin in that it may result in potential money laundering. The previous "retail investor revolution" showed that in the U.S. capital market, organized individual investors’ stock trading through Reddit was capable of overturning institutions and creating a Wall Street trend, which was previously always dominated by Wall Street institutional investment. These phenomena confirmed the past judgment of ANBOUND’s founder Chan Kung that the era of financiers on Wall Street is gradually losing its appeal and the era where capitalists have the final say is over as the world is now dominated by politics and geopolitics.

The increase of geopolitical impacts and the weakening of Wall Street's influence have also caused politicians to start paying more attention on the effects that geopolitics could have on the economy. We have noticed that Robert Blackwill, a national-security aide during the Bush administration and a senior researcher at the U.S. think tank Council on Foreign Relations (CFR), recently suggested that the U.S. government should create a sort of reliable geo-economic deterrence in maintaining its military capability when analyzing the situation in the Taiwan Strait. He believes that the United States should join forces with Japan and other allies to make it clear that if Mainland China does attack Taiwan; it will be expelled from the dollar-based financial and trading system. In case China intends to launch a war, he hopes that economic policymakers will specify that there would be a price to pay. This statement means that American think tanks and policy departments have realized that geo-economy has become an important political tool.

In fact, policy actions have already been initiated. On February 24, U.S. President Joe Biden signed an executive order requiring U.S. federal government agencies to complete risk assessments and submit a policy recommendation report within 100 days on the supply chain of four key products such as semiconductors, drugs and pharmaceutical ingredients, key minerals such as rare earths, and high-capacity batteries. The executive order also requires that the risk assessment of the supply chain of six key industries in the United States be completed within one year, including defense, public health, information and communication technology, energy, transportation, and agricultural and food production industries. It is believed that after assessing the supply chain risks, the United States will take a series of measures in related industrial fields such as, national or regional cooperation, restructuring of supply chains, and technology transfer. What is certain is that the new supply chain relationship will exclude Mainland China and become a "de-Sinicized" supply chain system. This means that the above-mentioned adjustments will have a strong geographical implication and are genuine geo-economic measures.

Although the world has not escalated into the "Cold War" era where military confrontation was the mainstay, it has already developed strong geopolitical implications. As stated by Chan Kung, geopolitics has become the dominant force in world capital and markets. As the United States has strategically ranked China as a long-term competitor, geopolitics will become a long-term factor which will affect China's development. What we want to emphasize is that in an era of increasing geopolitical influence, China needs to rethink the significance of the geopolitical era and respond to the arrival of the "geo-economic" era. It should be emphasized that if major countries that engage in geo-economics, they will have greater influence. If the geo-economy prevails, it will be very detrimental to China as a whole. In terms of specific actions, although the U.S. government in the Biden era will not be as simple and crude as during the Trump era, its meticulous policies which focuses on practical results may have more lasting effects on China.

Final analysis conclusion:

The world has now entered the geopolitical era. Developed Western countries headed by the United States will realistically compete for geo-economic interests. As an important stakeholder, China will be greatly affected.

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