Dear Reader,
Chinese aggression and the allied response have inevitably triggered questions about the potential for war between China and the US and its allies. This risk was described in the bestselling book Destined for War: Can America and China Escape Thucydides’ Trap? by Graham Allison. Allison discusses the Thucydides’ Trap, named after the ancient Greek historian of the Peloponnesian War.
Thucydides viewed the Peloponnesian War as an almost inevitable conflict between a long-established military power, Sparta, and a new rising power, Athens. Allison’s thesis is that the established power and the rising power will have many competing interests and eventually come into conflict to see which could emerge as the sole hegemon.
Allison identified 16 cases of the Thucydides’ Trap in the past 500 years. 12 of those cases (75%) resulted in war. That’s not an encouraging track record regarding the potential for a US-China conflict.
An even more sobering analysis comes from political scientists Hal Brands of SAIS, and Michael Beckley, of Tufts, in a recent article called ‘China Is a Declining Power — and That’s the Problem’ in the journal Foreign Policy. Their thesis turns the Thucydides’ Trap on its head.
Brands and Beckley make the point that a rising power should be in no hurry for war. If you’re the rising power, why not wait until your power grows even greater? The stronger you become, the greater your prospects for winning a war. If you become strong enough, you may even be able to dictate geopolitical outcomes without war.
But what if you are not getting more powerful? What if your power has peaked and your prospects are for diminished power on a relative basis? This can be encapsulated in the phrase ‘peak China’.
The dangers of ‘peak China’
Brands and Beckley’s article points to the growth of German power between German unification in 1870 and 1914 and the growth of Japanese power between the Meiji Restoration of 1868 and 1941. Both empires realised that their power had peaked, and they had little chance of gaining further against the British Empire (in the case of Germany) or the US (in the case of Japan).
Germany started the First World War in 1914 and Japan attacked Pearl Harbor in 1941 not because they were getting stronger, but because they were as strong as they were going to get — given natural resource constraints, geographic realities, and the still growing power of their adversaries.
This is exactly the position China finds itself in today. It has grown enormously powerful since 1994. The US seems to be at one of its interim low points under the hapless leadership of Joe Biden. Still, China realises it may be at peak power and will be economically and socially diminished in the years ahead.
If that’s the case, and if China wants to dominate its region, then the best time to start a war is now. It’s not that China has all the power it wants. It’s that China has all the relative power it’s going to get. This creates a now-or-never dynamic that could lead straight to war.
Investor advice? Get out of China, now
A new Cold War between China and the US began in the early 2000s and was plain to the most astute analysts by the global financial crisis in 2008. The global policy elites are just waking up to this reality today.
The New Cold War is already being fought in the arenas of cyberspace, outer space, intellectual property theft, trade wars, and currency wars. If Brands and Beckley are correct (and in my view, they are), then the peak China dynamic could become a shooting war that would turn the New Cold War into a Third World War.
China’s best case is slowing growth, debt defaults, financial panic, and a diminished role in world affairs, as Western powers finally push back against Chinese aggression. The worst case is collapse and disorder inside China as the result of a shooting war, or as the result of Chairman Xi’s lost Mandate of Heaven and regime change.
China’s stock market and its currency have yet to reflect the country’s deteriorating prospects. US Treasury debt, gold, silver, land, fine art, and cash in dollars will be safe havens that investors should look at.
For a speculative bet against China’s stock market and currency, you may consider a small portfolio allocation to the Direxion China Bear ETF [NYSE:CHAD]. It’s an inverse ETF. CHAD returns the inverse of the daily performance of the CSI 300 Index of Chinese stocks and would rise sharply during a China bust. CHAD is a bet against Chinese A-share stocks, which will be on shaky ground.
Investors cannot say they have not been warned. There is still time to get your capital out of China, but don’t wait. Peak China is real. Matters are coming to a head quickly. We will not have to wait long to find out how this story ends.
All the best,
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Jim Rickards,
Strategist, Strategic Intelligence Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.
