Blood on the horizon

The January issue of Zero Hour Alert went out last week. It’s all about how China is amping up its navy, and the risks this poses to financial markets as China looks to control financial markets.

While the expansion of the Chinese navy may seem totally removed from the world of stocks, bonds and investment trends, they are actually closely linked.

China is expanding its navy to control international shipping lanes, and give it a stranglehold on global trade. By controlling global trade, you can influence the global economy, and that influence, if exercised, can dramatically effect stock, bond, and commodity prices.

Japan, for example, imports the majority of its energy by sea. If China controls the shipping lanes, it can shut off Japan’s energy to exert pressure on the country as Cold War II intensifies. With energy, a critical input to the economic machine, no longer part of the equation, the Japanese economy and thus Japanese stocks would be in for a hard time.

Control over shipping lanes also allows for the state-directed expansion of trade into other countries, linking their economy to yours, and expanding your influence, or “economic territory”.

China is effectively following the rulebook of the British Empire, which leveraged this strategy to control an area the size of the moon at its peak in the 1920s. It’s for this reason that I titled the issue “Red moon rising”.

Coincidentally, the very next day after the issue was published, The Economist came out with the exact same headline on the front cover. Though its article was about the rise of China in the medical space, it seems both of us see blood on the horizon.

You’ll need to read the issue to discover just how close the naval situation is to turning critical, but today I’d like to highlight another Chinese imperial conquest.

In the information age, a new ocean has been created with its own shipping lanes which hold similar strategic importance. That ocean is the internet, across which digital “goods” (data) are “traded” across “shipping lanes” (through telecoms providers).

Just as control over the shipping lanes of the ocean grants nations great influence, so too does control over the shipping lanes of the internet. Control over telecoms providers means the ability to monitor, manipulate, or block streams of data that are sent across the internet. The strategic value of this is not lost on China, who has encouraged Chinese telecoms companies (like Huawei and ZTE) to set up the 5G internet infrastructure of foreign countries – effectively giving China control of these digital shipping lanes.

The arrest of a Huawei executive in Canada at the behest of the US, and the blocking of 5G upgrades from Huawei in the US, Australia and New Zealand are battles in this struggle for control over the digital ocean. These battles come with consequences. We detailed the bruising investors got in Canadian fashion brand Canada Goose ($GOOS) in December, as Chinese consumers boycotted Canadian brands following the arrest. The recent death sentence delivered to a Canadian national convicted of drug smuggling is likely also “collateral damage” in this war over digital control.

A while ago in this letter I questioned who the UK would side with in Cold War II, pondering whether the UK government would side with China and betray the US due to the insidious political and immense economic leverage China wields in London.

The answer currently forthcoming is “certainly not yet”. The Royal Navy conducted joint exercises with the US Navy in China’s back yard (the South China Sea) last week for the first time since 2010, in direct confrontation which China’s increasingly territorial navy I mentioned earlier.

This will have consequences for the UK – I expect China to react in kind in the near future, drawing us closer to the action in Cold War II. Companies like BT, which heavily rely on Huawei for cheap equipment, are in deep trouble if the UK government decides that it won’t yield its digital shipping lanes to China.

Interestingly, the giant military contractor Raytheon ($RTN) released this ad for its 5G technology amidst the Huawei furore. Perhaps its defence companies who stand to benefit from conflict over digital territory – just as they do from physical conflict – as governments become ever less trusting in foreign companies and the agendas that may be driving their expansion.

Until next time,

Boaz Shoshan
Editor, Capital & Conflict

Category: Geopolitics

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