The new struggle for global supremacy could disrupt financial markets

China’s economic rise threatens US supremacy and the global economic and financial order built up since 1945.

The new struggle for global supremacy could disrupt financial markets

The beginnings of a new Cold War?

The US has been the world’s dominant superpower since the end of the Second World War. However, China’s economic rise threatens to challenge that supremacy, and the COVID-19 pandemic has worked to its advantage. The US has been one of the worst-affected countries, while ironically, given its origins, the virus has wreaked far less damage on China.

Many commentators believe China could overtake the US as the world’s biggest economic power within ten years. Contrasting political systems – China remains a one-party communist state – will likely exacerbate the rivalry between the two countries.

Although outright military conflict between the two nuclear powers appears unlikely, it is possible the world will divide into two increasingly distinct spheres of influence. Meanwhile, the breakdown of the economic and financial systems built up by the US since 1945 could have major implications for investors.

China’s growing challenge

The US’s globally dominant position seemed assured in the early 1990s, following the end of the Cold War and the collapse of the Soviet Union.

But since then, China has undergone a remarkable economic transformation – the country’s economy grew by 4,000 per cent in US dollar terms between 1989 and 2019 – while largely maintaining political stability.

China was the only major economy to have expanded in 2020

The COVID-19 pandemic has helped China close the gap. The US economy shrank by 3.5 per cent in 2020,1 whereas China’s grew by 2.3 per cent.2 Indeed, China was the only major economy to have expanded over the year, even though the virus first emerged there.

The US is trying to restrict the flow of technology to China, restructure global supply chains, and invest in new technologies at home. For its part, China is racing to develop key technologies to reduce its vulnerability to US suppliers.

The world’s reliance on technology was thrown into stark relief by the pandemic, as work, education and shopping were all forced online. With technology widely expected to continue playing an increasing role in people’s daily lives, and given the growing menace of state-sponsored cybercrime, the technological cold war could intensify.

It is increasingly apparent that the US and China are locked in a war over political values, central to which is a struggle for control of the international rule-making bodies erected after the Second World War.

A divided world

If the US’s position as the world’s undisputed heavyweight champion is eroding, predicting what comes next is less straightforward. A survey of global investors by UBS in January 2020 found that 57 per cent expected China to replace the US as the world’s biggest superpower by 2030.3

China and the US will be vying to seduce other nations into their spheres of influence

However, others believe it is more likely that the world will divide into two blocks, which over time will become more distinct, with China and the US vying to seduce other nations into their spheres of influence.

Some believe the pandemic has weakened the US politically, by causing a massive increase in inequality. While millions of Americans were losing their jobs and turning to the government for help, the richest saw their wealth soar.

Such unprecedented levels of inequality have led to deep divisions in American politics, making the country harder to govern. This is undermining its ability to lead on the world stage.

Market implications

If the age of American supremacy is coming to an end, it could have major consequences for financial markets.

US companies and the US government may find it harder to borrow from foreign institutions

For a start, demand for dollar assets, such as US shares, depends heavily on the vast trade and financial system built up by the US following World War II. If that begins to fall apart, US companies and the US government may find it harder to borrow from foreign institutions than they have been accustomed to. That could mean the end of the dollar’s reign as the dominant currency.

Three points to remember

  • China’s economic rise is threatening to end the era of American global dominance, in place since the end of the Second World War.
  • Despite originating in China, the COVID-19 pandemic has boosted the country’s position in the race for world economic leadership.
  • The growing rivalry between the two countries could destabilise financial markets and economies, with considerable implications for investors.

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