MARKET PERSPECTIVE

By J Mulraj

Nov 18-24, 2023

Can a weak leader like Biden cope with a strong challenger?

Prior to attending the APEC (Asia-Pacific Economic Cooperation, President Xi of China met with President Biden of USA, the second summit meeting between the two. There wasn’t much Biden had to show for it. Top level military communications had been earlier broken off by Xi, an angry response to the crossing of its red line of avoiding high level official visits between USA and Taiwan.

In Aug 2022, just prior to her stepping down as Speaker of the House, in Nov 2022, Nancy Pelosi visited Taiwan, despite strong opposition by China. China reacted by stopping high level military communications, which are essential to prevent an accidental conflict. It was a high price to pay for Pelosi’s petulant obduracy. Having sent the message, Xi agreed to resume military communication. To me it doesn’t seem like a concession to revert to status quo ante. To Biden it does.

Biden also considers a ‘promise’ made by Xi to reduce the supply of fentanyl precursors, the base that helps manufacture it. In USA 73000 persons died of a fentanyl overdose. So Biden viewed Xi’s promise to curb precursor supply as a win. But it was something a responsible leader should have done, anyways, isn’t it? To counter these ‘concessions’ Biden has lifted a few sanctions. That’s a real giveaway in exchange for promises. Great deal, Joe!

Xi’s real purpose was to meet US business leaders at the APEC meeting, seeking to attract them to invest in China. He met quite a few including Bill Gates, Jamie Dimon and Elon Musk. China recently passed a new espionage law, under which even  normal business inquiries, or market researchers, can result in arrest! In summer, Chinese agencies raided US companies like Bain, Capvision and Mintz group. He will need to work harder to regain trust. In the US there are demands to remove Chinese listed entities from indices such as MSCI; being included in such indices compels funds to add to their holdings in such stocks. This is because fund managers don’t want to ‘underperform’ if these stocks move up sharply, and they have underweighted them.

Weak leadership is not deterring technological advancement, however. The US will soon commission Aurora, the world’s fastest supercomputer, which will have the capacity to process 2 exoflops of data per second. That’s 2 with 18 zeroes!

Such awesome compute capability will help further technological advancement in several areas like transportation (autonomous vehicles require humongous amounts of instant computing power and analysis), energy (faster development of nuclear fusion, which will provide a limitless source of cheap, clean energy, and can propel USA economy far ahead), search for new quantum materials. US department of energy operate the world’s most powerful supercomputers, including Aurora, Frontier and El Capitan.

Ruchir Sharma has written an article titled ‘China’s rise is reversing’ in FT, Nov 22, reproduced in Zerohedge. Ruchir says that China’s share of the global economy, which had grown rapidly from 2% in 1990 to 18.4% in 2021, is now declining. This year it will drop to 17%. As per the article, the global economy will grow by $ 8 trillion in 2023, and USA will contribute 45% of that growth.

China’s demographic profile has turned adverse, thanks to the earlier one child policy. This is reflected in its share of working age population. This has fallen from a peak of 24% to 19%, and, alarmingly, can drop to 10% in the next 35 years.

Given its technological prowess, its military strength, its economic performance and its (immigration dependent) better demographic profile, Biden ought to have been able to project more strength than he did, in his meeting with Xi, and to have been able to extract genuine concessions from Xi, rather than promises. One hopes, for his sake, that Biden does not enter a high stakes poker game!

If not facing China, Joe Biden has shown good skills in negotiating, with the help of Qatar and Egypt, a deal to release 50 (out of 239) hostages held by Hamas, all women and children, in exchange for 150 Palestinians held by Israel and a 4 day cessation of fighting. The cessation would be extended each day, on release of 10 additional hostages. Medical and food supplies to war torn Gaza will be allowed in. Kudos to Biden for sailing through these choppy geopolitical waters.

Last week the BSE Sensex closed at 65970, up 186 points.

During the week, India’s GDP crossed the $4 trillion mark! A wonderful milestone! The Government aims to become a developed economy. It can do so,  but after structural reforms, especially in agriculture and in the judicial system.

Look at the table below, showing the 5 largest economies by GDP. Of these, the share of population in agriculture is 1-3% for USA, Japan and Germany. Notice their per capita incomes.

China has 40% of its population in agriculture, and a per cap income of $ 12600, which is 5 times India’s but lower than the three others.

To become a developed economy, the % of population working in agriculture needs to reduce, as alternate sources of livelihood open up, and as efficiency and productivity improve. For this, agri reform has to be undertaken.

Modi’s Government tried ushering in sensible reforms, a year ago. Farmers protested, not fully understanding the intent of the reform, and egged to protest by myopic political parties who prefer to ask what the country can do for them, (and their wealth) and not what they can do for their country, and the wealth of the citizens.

Unless India’s political class starts to think more about the country and it’s progress, and less about themselves, and their personal aggrandizement, India cannot metamorphise into a developed economy. Political myopia has to be replaced by 20/20 long sighted vision.

Investors should look out for geopolitical events, especially in the Middle East, as well as in USA, where the House is getting ready to impeach President Biden.

Too much uncertainty doesn’t bode well for markets.

Picture Source: https://abcnews.go.com/International/china-bidens-dictator-rhetoric-extremely-wrong-leaders-san/story?id=104936605

Comments welcome, please mail to jmulraj@asiaconverge.com