Morgan Stanley IM: China’s Geopolitical Aspirations and Challenges

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China has a variety of strategic capabilities to blunt the American-made order, but Beijing is beset by internal weaknesses and vulnerabilities, including the demographic effects of its one-child policy, high debt and a stagnating economy, that make the task of challenging the U.S. militarily or financially difficult. Reducing these challenges in the medium term will not be easy. That is bound to put investors, once keen on China, on edge about the country’s trajectory.

Shifting Alliances: China, Russia and the U.S.

Ironically, it was the United States that took the initiative to pull China into greater engagement with the rest of the world. More than half a century ago, U.S. President Richard Nixon, along with Secretary of State Henry Kissinger, secretly traveled to China to meet its ailing leader Mao Zedong in an act of daring that transformed the geopolitical dynamics of the superpower rivalry. Although fellow communists, China and the Soviet Union were on such terrible terms that Mao feared a Soviet invasion. Nixon, the first American president to travel to China, helped end more than two decades of hostility between the two countries. The visit laid the groundwork for Beijing’s opening to the world and full diplomatic relations by 1979. The two countries became tacit allies to confront the Soviet Union until its collapse in 1991, essentially ending after the Cold War.

The nature of the relationship has changed over time. Today, China and the U.S. are firm frenemies. They have complicated diplomatic relations and intertwined economies while engaged in a battle for technological supremacy. Washington has called China “the most serious long-term challenge” to the world order. Perhaps one reason is that China has unleashed hackers to break into and steal secrets from American companies and government agencies. Beijing’s saber rattling over Taiwan’s future, staging military drills in the Taiwan Strait after U.S. House of Representatives Speaker Nancy Pelosi flew to Taipei, is part of the effort to push the U.S. out of the Indo-Pacific region.

China’s foreign policy moves are putting geopolitics in focus for investors. Until recently, Chinese leaders had emphasized the country’s peaceful rise and the economy was humming along nicely. However, President Xi Jinping and his administration advocate a more assertive foreign policy and are determined to counteract the U.S.-led system of rules which underpins the global political, monetary and financial system. Beijing has tried to leverage its economic power through initiatives like the Belt and Road Initiative, forming currency blocs to internationalize its currency and setting up the Asian Infrastructure Investment Bank.

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