Speaking at the RIAA Conference in Sydney on Wednesday, a senior investment executive and a former Australian foreign minister both highlighted concerns around escalating tensions with China, among a number of geopolitical risks for investors to consider.
Joachim Klement, head of strategy, accounting and sustainability at investment bank Liberum, sees the risk not only in increasing tensions between China and the US but also in China’s broader conflicts with the West, warning of significant economic repercussions if the situation escalates too much.
While assuring that there’s “very low likelihood” of armed conflict, Klement said there is a developing scenario between China and the West which suggest “mutually assured economic destruction”.
“Both sides can force an economic meltdown on the other, should things get too hard, which is why a Trump 2 presidency – which I would call the revenge presidency – is so scary, because that might really lead to an escalation that leads to significant economic hardship on both sides,” he explained.
He specifically highlighted concerns regarding graphite supply, noting that China is the dominant supplier of natural and synthetic graphite globally.
Namely, recent data from China’s customs revealed total exports of flake graphite stood at 3,236 tonnes in the first two months of 2024, down by 77.66 per cent from 14,483 tonnes in the same period in 2023.
“My favourite example that rarely anybody knows is that, in order to produce batteries at current technologies, we use graphite in every single battery, and China controls not only 80 percent of graphite mining, but 100 per cent of all graphite refining capacity in the world,” Klement explained.
“On the other hand, when it comes to lithium, copper, cobalt, that is controlled by Western companies and Western countries, and we can force China to pay a heavy price on that, so it’s a constant balance.”
Addressing questions regarding the potential use of rare earth metals and minerals as geopolitical weapons, he suggested that lesser-known “bottlenecks” exist where China could inflict significant harm without relying on rare earth metals.
Also at the conference, Gareth Evans, former Australian foreign minister and president emeritus of the International Crisis Group, agreed that the idea of outright war with China is “greatly exaggerated”.
However, he acknowledged the presence of “obvious” flashpoints, citing the South China Sea and the Taiwan issue as examples.
“There is that real risk of China’s overreach, and history teaches us that without very deft diplomacy, handling quite small incidents can rapidly escalate into a full-blown crisis,” he explained.
Investors are facing increased complexity due to the AUKUS trilateral security partnership between Australia, the United Kingdom, and the United States, which aims to bolster security and defence interests, enhance information and technology sharing, and deepen integration across defence-related sectors, including science, technology, industry, supply chains, and security.
Evans suggests that Australian investors will face consequences due to their alliance with the United States, as the AUKUS arrangement is expected to lead to a new level of “unhappy” dependence that could be challenging.
He explained: “The risk is that we’ll be drawn into a war not of our own making, with an accompanying impact on our economic relations with China, by far our biggest economic partner, that will make the boycotts of recent years pale into insignificance.”
The impact of a Trump re-election in November is also a concern in this context, Evans elaborated.
“The prospect, God help us, of the second Trump presidency, likely to be incapable of anything resembling death of diplomacy, with a long track record of treating allies as encumbrances rather than assets and absolutely determined to wage trade war on China, and indeed the European Union, and anyone else with whom the United States runs a deficit – all this adds a whole new element of uncertainty for the China–US challenge,” he said.
“For Australian investors wrestling with this uncertainty, I do think that panicky disengagement from all things Chinese would, for now, make very little sense but diversification strategies certainly have to be on your agenda.”
Earlier this year, Andrew Swan, portfolio manager of the Man GLG Asia Opportunities Fund, highlighted the critical importance of the upcoming US election in the context of Asian markets.
Particularly, he said: “There are some experts who feel that Donald Trump, if he gets back in, will do a deal with China and with Taiwan,” he said.
“He just wants the problem gone [and] does see himself as a deal maker.”
Looking back, Swan highlighted lessons from the behaviour exhibited by global markets when Trump was first elected in 2016. Namely, Asian markets had just recovered from a deflation scare in China the year prior.
“Going into 2017, the economies were actually very strong. Then what you started to see is markets started to de-rate, the multiples started contracting despite very good earnings,” he said.
“The thing is that, almost to the day, the market started de-rating in Asia in early 2017 when Trump started talking about trade wars, and despite the economies continuing to be very strong, company fundamentals in Asia started to underperform.”
Also in early 2017, the US withdrew from the Trans-Pacific Partnership, affecting trade dynamics in the region, before later imposing tariffs on a wide range of Chinese goods.
Fluctuations were observed in currencies, stock prices, and commodity markets across Asia.
