Thursday, March 26, 2020

Can China take over the West peacefully?

In the U.S., the initial unemployment claims were filed by 3.283 million people last week, obviously an all-time record. That's slightly up from 250-450 thousand that you get during a mundane hurricane such as Katrina. The shutdown is equivalent to a Katrina that takes place in every state and in every week. I expect the reading published next week to be even worse.

In spite of that troublesome figure, the Dow Jones continues its rises of this week and goes up by 4.5% today. It's a bit fishy. Maybe some whale is buying? Can a country like China, the strongest non-Western power, exploit the trouble that has moved from China to the West and peacefully overtake the Western companies and countries?

Many people have suggested that China has been downplaying the death figures. Because some 21 cell phone numbers disappeared, surely there is a mass grave with 21 million Chinese people, someone said. ;-) I am afraid of the opposite thing – that China was inflating the figures and it never really had any significant epidemics. It just invented the story and sent the virus to the West.

Just to be sure, I still believe it would be extremely unwise for China to invade Western countries militarily now. The reaction would be about the same as it would be months ago – unless the bosses of the Pentagon have already classified the pressing of the nuclear buttons as unhygienic, of course. ;-)

If and when some governments default, it may be an entirely different thing. A war of the weakened West against China would probably be messy. It wouldn't be a nice story for us to watch and, assuming some mercy of the Chinese gods and anti-gods, many of us wouldn't have to watch it for too long. But China, while a non-democratic country, is remarkably rational and sort of peaceful these days. Can it acquire most of the Western economies?

First, China had the GDP of some $14 trillion, below 20% of the world GDP. What may be more interesting are Forex reserves. China is of course number 1 in the world, with $3.1 trillion in reserves, mocking Japan, the number 2 that has less than one-half of it. Most of the trillions are U.S. government bonds, right?

I think it would be a good opportunity for China to completely convert these reserves to equity now. The bonds are up, the stocks are down, and the bonds may be made irrelevant. What could China buy for $3.1 trillion?

Not much. Three trillions is still just something like two Microsofts or Apples or Amazons before the viral collapse. The total value of the five-hundred companies in the broad S&P500 U.S. stock index was $28.1 trillion at the end of 2019 and they're still a small fraction of the "total wealth on the U.S. territory". You may imagine Europe has a similar amount of capitalization stored in a similar bunch of companies. Clearly, for $3.1 trillion, you can only buy a small portion, about 1/10, of the S&P500 portfolio. But China could buy 51% shares in 1/5 of the S&P500 companies. Well, they're not cheaper than $28.1 trillion now – but China would have to drive the prices up if it wanted to buy a lot.

OK, the possibility could be to pick the right companies, 1/5 of S&P500, that may survive, acquire a majority share, get rid of all the bonds. That would drive the U.S. government interest rates up a lot. China may basically decide whether the U.S. government could keep on borrowing and it would say No. The U.S. government would default and it would become incapable to fund any standard government activities. The U.S. dollar would probably cease to be a credible currency, too. Assuming some shutdowns in the West, China doesn't have to weaken its currency because it's not facing any Western competitors. The priorities are completely different in the era of shutdowns.

The 1/5 of the companies would probably be chosen in such a way that they don't depend on the U.S. government's existence per se. The remaining 4/5 of the S&P500 companies could be encouraged to die along with the U.S. government. China could revive its companies on the U.S. territory. For example, it may send Chinese workers if the U.S. workers want to hide in the basements.

From my perspective, such ideas would be a complete science-fiction – or mad stories to invent after many beers in the pub – just a month ago. But the situation got more extreme. It seems plausible that China could leverage its influence massively. But maybe they don't have the creative brains that would really prepare such a plan (I am not volunteering). Also, I don't really understand the Chinese psyche so I don't even know whether they would want such a thing at all.

If I were Chinese and a patriot of a similar type that I am, I would find it attractive, however. Turn the Western countries into some government-less colonies and gradually overtake the economic infrastructure of these colonies. Can those things happen? Could the lives of us, the Westerners, be still decent in such protectorates controlled by China?

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