We present these as stories because stories are memorable in a way dry facts cannot be—and thereby aid in imagining and planning for the future.
Under each theme we highlight what we believe to be the 'base case' which represents the scenario we believe most has most probability of occurring. From this base case are two other scenarios which we believe investors should consider.
China continues to evolve away from an investment-led to a sustainable consumption-led economy, with the pandemic providing an incentive for more reform. The debt stock stabilises via bankruptcies, supply-side reforms and prudent regulation. The Chinese consumer becomes the engine of the world economy and significantly reorients trade and investment patterns across Eurasia.
‘Made in China 2025’ allows China to develop advanced semiconductors, which contributes to technological self-sufficiency. China projects strength in its neighbourhood.
The dollar becomes less important as Chinese-led payment systems bypass SWIFT. The US economy turns inward under successively nationalist administrations and, with growing energy self sufficiency, feels less need to project power abroad. The “liberal order” becomes a historical description of a bygone era, like the League of Nations.
Chimerica continues in circumscribed form despite the tensions of the 2010s. The Chinese economy stumbles in the context of trade tensions, while its debt clean-up reduces growth rates and slows real wage growth. China’s economy has become the largest in the world, but its financial system remains trapped under the weight of its unsustainable growth model. However, China continues to generate real income growth per capita—as did Japan, keeping political stability intact.
The US economy continues its below-trend growth without seeing productivity pick up. It continues to elect leaders that make suboptimal domestic and foreign policy decisions, while continuing to be occupied by the domestic ferment in its politics.
Technology sectors in the US and China decouple, and perhaps vital healthcare products, but few other sectors do. Both cooperation and conflict co-exist amid uneasy but growing economic ties. The liberal order continues to fray as the US and Europe diverge.
Chinese regulators finally bite the bullet in resolving China’s high credit growth and debt stock, but this causes a domestic loss of confidence. The centralisation of power under Xi Jinping is acknowledged as a mistake by the next guard as a series of policy errors in addressing black swans calls attention to China’s fragile governance.
The property market does not stabilise but begins a long decline, underpinned by a demographic bust. The RMB goes above 10 to the dollar, causing a severe recession in Asia.
Meanwhile, the US elects a progrowth, pro-stability president who begins to resolve political polarisation in a way that commands the confidence of business. Growth, productivity and wages begin to rise.
The “liberal order” gives way to a less euphoric affirmation of key European and US policy goals to one more tempered by realism. It is joined by India and Japan and decarbonisation, fiscal policy and the growth-inequality trade-off are addressed.