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The Silver Standard

It is sometimes forgotten that the defeat of the Kuomintang (KMT) Nationalist Government of China, under Chiang Kai-shek in 1949, by the Communists under Mao, was due as much to the hyperinflation and corruption of KMT officials, as to the military success of the Maoists.  The origins of China’s hyperinflation can be traced to the US Silver Purchase Act of 1934, which led directly to China going off the silver standard in 1935, as the price of silver rose from US$0.24 to US$1.29.

The new Communist government had learned a lesson from the previous decade of battling the Japanese, and then the Civil War, that you cannot finance a war with paper money and unsold debt issues.  One of their first priorities then, was to restore stability to the currency – now the Renminbi or Yuan — which they achieved by 1951. 

The last 70 years of Communist Party administration has been partly dominated by this historic fear of hyperinflation among the Chinese people, which was shared by the German people after the 1923 Weimar hyperinflation.  Moreover, there was austerity in the PRC government and Army ranks which contrasted with the previous KMT corruption.

In recent decades, a sudden flare up in inflation in China — notably in 1989 when it jumped 28% — has always alarmed the Chinese authorities because of this abiding memory.  It was, therefore, interesting to note that in 2020, when the US government increased its money supply by 26% in a matter of months — the fastest ever — China did the opposite.  There were few bailouts or transfer payments to the population.  The PBOC, or Central Bank, held the line.  Interest rates remained at 3% (on 10-year bonds), not zero.  And the RMB strengthened against the Dollar. 

So, back to the present day:  China remains conservative in its monetary policy and cautious in its foreign policy, though it is true to say that Xi Jinping, who has been behind the famous “One Belt One Road” policy (and has also taken a harder line on Taiwan), is also, like Vladimir Putin, effectively president for life, so the possibility of grandiose strategic errors is higher than in a “term limits” presidency.

The only 3 economies that experienced positive economic growth in 2020 were Taiwan, China and Vietnam.  Taiwan had the highest growth of 3%, with an excellent record on Covid (only 919 cases and 9 deaths) and a strong export record on semiconductors, where they have become, de facto, global leaders.

The Indian Budget was presented on February 1st and has further stimulated the share market with a focus on privatization, a higher fiscal deficit (9% of GDP) and more spending on infrastructure.  Nominal GDP growth will be over 14% in the coming year — the highest in the world, certainly for a major economy.  India is also increasing its spending on healthcare (manufacturing vaccines, especially), which is still only 1.5% of GDP.  We believe Pharma, as well as private banks and property companies, will benefit.  The apparent overvaluation of the Bombay Sensex may be undercounting the corporate profits surge, which we anticipate in 2021-22 to be over 40% year-on-year.  India may also open its bond market further to foreign investors and emulate China’s success in attracting foreign capital.  It is fair to say that nearly all major international investors are underweight India, which still has the best growth prospects in Asia in the decade ahead. 

Climate Change

In his new book, How to Avoid a Climate Disaster, Bill Gates explains that we have until 2050 (just about 28 years) to reach “net zero” carbon emissions — a difficult target.  He also mentions, in passing, that China achieved its goal of lifting most of its people out of poverty in the past 30 years by building many coal-fired plants very cheaply (75% less), which they are now exporting to Pakistan, Indonesia, Vietnam, and many African nations.  “If these countries opt for coal plants, as China did, it will be a disaster for the climate,” Gates comments. 

In fact, a direct correlation can be traced since 1980, between the industrialization of China (70% powered by coal), and the warming of the global climate, due to more CO2 emissions.  Europe and the USA have been flat in their emissions for decades:  the incremental change in pollution has been entirely due to China, and now to India and other developing nations.

To be fair, China is now making a huge effort in solar, wind, hydro, nuclear, and electric vehicles.  Some of our best investment opportunities have been found in these alternative energy sectors, with China’s competitive efficiency driving down prices in solar panels by 90%, and also in wind turbines, so much so that it is challenging to find players with profit growth.

Outlook for 2021

According to JP Morgan, we are about to have one of the strongest economic rebounds ever recorded, except for post-war periods.  The world economy will grow over 7% this year, led by India (14%), China (9%), and USA (6.5%).  The massive increase in liquidity, engineered by Western Central Banks, will lead to strong equity markets, especially in Asia and Emerging Markets. 

Stanley Druckenmiller, in a recent interview, said the difference between the USA and China, indeed Asia, is that “they haven’t borrowed from their future,” and therefore have a healthier, less indebted macro-economic and stock market outlook.

However, there is one interesting difference — the UK, Israel and the USA are leading the world in vaccinations today.  While Asia has, broadly speaking, very few Covid cases, they have been slow on vaccinations.  This may mean that places, like Hong Kong and Singapore may take a few months longer to open up their economies.

In summary, we expect that the US Dollar will remain weak, and commodities will enter a “super cycle” of strength in metals, energy, and food.  The stock market will remain in an uptrend, at least until we hit 5% inflation at the end of 2021 or early 2022, which will be a testing year for the global financial system.  Asian currencies should remain strong against the Dollar.  We must, perhaps, ask the question whether Bitcoin, and the rise of cryptocurrencies, is signaling a new world order in which the USA, and the Dollar will play a less important role.

Hong Kong

2 March 2021


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