The Revenge Of The Ottoman Empire

Amidst the slew of reports in the Western media about how the Chinese economy is unravelling, Louis-Vincent Gave of Gavekal research, a China focused research outfit has been putting out contrarian arguments. Here’s another piece on how China is holding up with rising trade surplus offsetting the decline with the west with rapid rise in trade with other emerging markets. He references the Ottoman takeover of Constantinople and how that rearranged global trade from the Silk route to the Atlantic, to suggest that globalisation is an unstoppable force and China remains a force to reckon with.

He puts out data that shows Chinese trade surplus ballooning thanks to South-East Asia now accounting for more of its exports than the US.

“China did this by moving up the value chain and exporting decent quality, aggressively-priced capital goods and other higher value-added products. The most visible example of this is how China came from nowhere five years ago to become the world’s largest car exporter. These cars are typically not sold in the US or Europe, but have been snapped up by drivers in Southeast Asia, the Middle East and Latin America. Just as importantly, while the cars have captured the general public’s imagination (hard not to notice Chinese cars when every shopping mall, or airport, one enters in an emerging economy now has very attractive Chinese cars on display), one can draw parallel stories for power plants, earth-moving equipment, tractors, telecom switches, turbines, and machine tools—basically, all the capital goods that are heavily in demand across India, Indonesia, Brazil and Saudi Arabia.”

He reckons that this export boom has kept the Chinese economy afloat despite the real estate crash, something that has crippled far more developed economies in the past.

“How could China withstand both a frontal attack from the US (a country that controls the pipes of global financial flows to an even greater degree than the Ottoman Empire controlled the Eastern Mediterranean), and a real estate slowdown? The answer, as with Columbus and Vasco da Gama, is that necessity is the mother of all discoveries and inventions. Trade will tend to flow, either where it is the most profitable; or alternatively, if walls and barriers are put up, then trade will flow around these walls and find new destinations.”

He shows how trade between emerging markets have soared to keep global trade at an all time high despite noises of deglobalisation.

“Construction of new roads, railways and canals are appearing all across emerging economies because countries across the “Global South” can now:
•            Purchase commodities in their local currencies, from Russia.
•            Purchase capital goods from China, either in their local currency (if they have good relations with China), or, alternatively, in renminbi.

The combination of these two factors is a game changer for emerging economies like Indonesia, India and Brazil, which can now break free from the tyranny of the US dollar funding constraint. This explains why, for the first time in living memory, we have just seen a significant Federal Reserve monetary tightening cycle without a single emerging market going bust. On the contrary, in recent years the US dollar returns offered by most emerging market bonds have trounced those of US treasuries, along with German bunds or Japanese government bonds.

Indeed, for the first time ever, the yield on investment-grade sovereign emerging market debt is now lower in aggregate than that on US treasuries”

It’s worth reading the piece in whole and in general following Gavekal as we need to hear both sides of the argument to get a grip on how geo-political developments are likely to affect the global economy.

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