It is inaccurate to refer to rising US-China tension as a “new Cold War,” according to a former permanent secretary of Singapore’s Foreign Ministry, as both countries are “vital and irreplaceable components of a single system” with supply chains that are unprecedented in their density, complexity and scope.

In a discussion about the future of capitalism and how the West can adapt to a rising Asia, Bilahari Kausikan, now chair of the Middle East Institute at the National University of Singapore, said the US and China will most likely continue to compete fiercely for advantages while trying not to disrupt the system too much.

Kausikan worked in Singapore’s Foreign Ministry for 37 years in a variety of appointments including ambassador to the Russian Federation, permanent representative to the UN in New York, and permanent secretary to the Ministry.

Speaking with Amanda White, director, international at Conexus Financial, at Conexus’ Fiduciary Investors Symposium held in Singapore, Kausikan began with an anecdote about former Chinese leader Deng Xiaoping–who pioneered China’s opening up to world markets after the devastating era of the Cultural Revolution–meeting Indian Prime Minister Rajiv Gandhi in 1988, when speculation had begun about the 21st Century being the Asian Century. 

Deng said he didn’t believe it, according to Kausikan’s description of notes from the meeting. It could only be the Asian Century if India and China get along and grow together, he reportedly said, before naming a range of other important countries, not all of them in Asia.

“China is rising, but it is not rising in a vacuum,” Kausikan said. “It is rising and becoming increasingly important component of the global economy, and cannot be separated from the global economy.”

The global economy is under stress but Kausikan said he does not think it will fragment or break, despite the world returning to “a relatively normal period of contested order.”

The so-called “rules-based order” has always been contested, and sometimes violently, throughout history, and the period from the Berlin Wall falling in 1989 through to the Financial Crisis in 2008 was a “short, abnormal period…when the overwhelming dominance of the United States made it seem as if its conceptual order was the only possible conception of order.”

The war in Ukraine is likely to be a long war, he said–continuing for several more years at least–but it is a “second order issue” when the first order issue is US-China relations.

He said he gets irritated every time he hears talk of a “new Cold War.” “That’s a very intellectually lazy trope that fundamentally misrepresents the nature of this competition,” Kausikan said. “The US and the former Soviet Union each led two seperate systems which were connected only at their margins. Their main common interest was to avoid mutually assured nuclear destruction.

“By contrast, the US and China are both vital, irreplaceable components of a single system, and they are connected to each other, and the rest of us, by a historically new phenomenon. That phenomenon is supply chains, of a density and complexity and scope never before seen in history.”

While there will be bifurcation in certain domains, particularly high-tech domains with national security implications, this complex web can never bifurcate completely into two seperate systems, he said.

The US and its allies, for example, hold all the crucial nodes in the semi-conductor supply chain. But China is 40% of the global semiconductor market, and “you cannot possibly cut off your own companies and those of your friends and partners from 40% of the market without doing them grievous damage,” Kausikan said.

The US will therefore need to be discriminating in how it applies legislation that limits the transfer of technological goods to China, he said.

And China may be keen to rely more on domestic consumption to drive growth, but “that’s easier said than done, so for the foreseeable future they will have to compete within the same system,” he said.

Both sides will, therefore, be keen to gain advantage over the other competitor “without disrupting the system too much.”

He also said he did not believe China was “eager to use force to re-unify Taiwan.” China “simply doesn’t have the capability either in hardware or software,” he said. It will eventually acquire this ability, but will still be aware that amphibious operations are extremely difficult, and the only country with great experience in these operations is the United States.

An invasion of Taiwan would be “a tremendous gamble for the CCP,” he said. If it failed, Chinese leader Xi Jinping would be unlikely to survive in power, and the foundation of the legitimacy of the Chinese Communist Party would be shaken. 

Some of the biggest tailwinds of recent decades are now turning against global economies, forcing funds to find new ways to adapt, according to a panel of investment heads of sovereign and pension funds. 

Speaking at Conexus Financial’s Fiduciary Investors Symposium held in Singapore, leaders from sovereign wealth funds in Singapore and Malaysia, along with United States pension giant CalSTRS, discussed how investors are viewing global macro risks and opportunities, and strategies they are considering to future-proof their portfolios.

Bernard Wee (pictured), group head of markets and investment at the Monetary Authority of Singapore – one of Singapore’s three sovereign wealth funds – said that in the last 30 to 40 years, the global economy had benefited from “three very big tail winds,” all of which are now turning into headwinds. 

In the 1980s it was demographics, but population growth is now slowing. After reaching a global population of 8 billion last year, the next billionth person on Earth will take longer to arrive than the last billionth, for the first time in history, Wee said.

In the 1990s there was the peace dividend after the Berlin Wall came down, but now geopolitical tensions are rising again. And in the early 2000s increased trade and globalisation spurred economies, but trade volumes as a share of global GDP have fallen over the past decade.

Portfolios need to adapt to this new reality, Wee said, with a higher allocation to inflation protection that is “more customised” in terms of its composition of assets. 

For example, inflation-linked bonds (ILBs) performed worse than nominal bonds last year, which was partly due to “the unintended duration exposure you had in ILBs which tended to be much longer bonds than your nominal index.” Investors could also consider adding more gold as a tail-risk hedge.

Investors also need greater “granularity” within each asset class, he said. For example, a commodities benchmark gives a significant exposure to energy, but the details count.

“Energy has done well in the last two years, but you need to think about–with the green transition coming–do you really want such a large exposure to fossil fuels?” Wee said. “Or do you think that industrial metals, for instance, which has typically not been a larger part of the index, could be a bigger part of energy storage or energy transportation?”

There will also be a “redistribution of trade” as trade falls, and there will be winners and losers in emerging markets that were “the winners of growth in the past 20 years,” Wee said.

Scott Chan, deputy chief investment officer at CalSTRS, said inflation could wipe out the four percent earnings yield of the US equity market in the coming few years. “If 40% of the CalSTRS portfolio is starting right now in a negative real yield on earnings–possibly zero over a period of time…that’s sort of a bad setup,” Chan said. 

In response, the fund had been seeking opportunities in other asset classes like real estate, infrastructure and fixed income, and also increasing the amount of private credit. CalSTRS would likely double its allocation to direct corporate private lending over the next four years, he said.

“Probably the largest area that’s scalable for us, which we’re going to be really following into, is direct corporate private lending,” Chan said. “I think a lot of people in the crowd are seeing the same thing. Mid-teens returns, lower default rates, and the opportunity to select high quality companies.”

And with investment opportunities not always fitting neatly into categories, the fund also planned to increase its opportunistic portfolio from the current 0 to 2.5% of the fund, to 0 to 5% of the fund, “to give us more flexibility to pursue those opportunities,” Chan said.

Some of the funds in the opportunistic portfolio would be used to scale existing investments, he said, due to a shortage of new opportunities. “We’re not finding a ton of opportunities because we think prices are going to go south from here,” Chan said.

Having reduced fixed income in recent years, the fund is also considering tilting back in as yields have improved. 

“Right now we’re not doing that, we’re actually just raising cash because we’re getting a fair amount of yield on the short-term piece of it, but I think in the long term we might decide to flow a little bit more back into fixed income,” Chan said.

Wai-Seng Wong, head of strategy and asset allocation at Khazanah Nasional Berhad–Malaysia’s sovereign wealth fund–said Khazanah was set up in the 1990s as a vehicle to hold privatised government entities, which had since evolved into listed companies. The fund changed its approach around 2004 with a greater focus on growing value across the portfolio – not just preserving value – by actively managing the portfolio companies as a major shareholder, and working on mergers and restructuring.

“That’s really how we view building portfolio resilience, because the reality is, close to half of what we have in our portfolio are these kinds of assets–domestic or regional assets that perhaps require a bit more intervention–where we hold substantial stakes, whether it’s 10%, 20%, sometimes 60%,” Wong said.

There are some “bright sparks,” but also some “old-economy companies in various sectors,” and the fund has a critical role in driving reform and performance, refreshing boards, holding management accountable, and pushing for capital expenditure and strategies to future-proof industries, he said.

It is critical for stakeholders in all nations to find nuanced ways to navigate rising tension between the US and China, with 80% of the world’s population living outside these two nations, argued Danny Quah, Dean and Li Ka Shing Professor in Economics at Lee Kuan Yew School of Public Policy at the National University of Singapore.

If the future moves towards two bifurcated realms where the only choice for smaller powers is to decide whose sphere of influence they fall into, the third nations of the world “will have surrendered our agency to the interests of great powers who are much more interested in a zero sum game of ascendancy,” Quah said, in a talk examining the future of the global economy and the role of Asia. 

Speaking with Amanda White, director of international at Conexus Financial, at Conexus’ Fiduciary Investors Symposium held in Singapore, Quah said “the great powers will not figure it out well without us getting involved.”

“Unless we get into the thick of that and help determine the way forward based on cold, hard-nosed, grim analysis of economic circumstances, if we leave it only to a political narrative of confrontation between democracy and freedom versus tyranny and authoritarianism, the solution won’t be a happy one,” Quah said.

In a provocative talk containing hard truths for both major powers, Quah began by looking at a news headline in local finance wires which talked about Singapore investors needing to “walk a fine line” amidst rising tensions between the US and China. How did things change so quickly from an “age of innocence and healthy optimism [where] we all thought Asia was the future?” he asked.

He presented a global map plotted with the “economic centre of gravity,” which was the average location of the planet’s economic activity, measured by GDP generated across hundreds of locations on the Earth’s surface. Beginning in the 1980s, it began shifting east, away from London and New York, crossing the Arabian Peninsula and ultimately after 2010 settling roughly on the GMT+8 timezone of Beijing (and Singapore).

But optimism began to morph into tension as the political situation shifted alongside the economic landscape, with the growing sense in Asia that the region did not have global decision-making power commensurate with its size.

“The smallest circle that can be drawn on the Earth that contains half the world’s people is this circle centred on GMT+8,” Quah said. 

“If you think peoples’ awareness, choices, political decisions matter, then grew the idea that if the world were truly a democracy, this is where it would begin to make decisions of global significance,” but this was clearly not where global decisions were being made.

China’s increasing aggression and “bullying attitude” has not helped its case, Quah said, pointing to the “Wolf Warrior diplomacy” famous among its diplomats and spokespeople, and its cross-border territorial aggressiveness in the South China Sea.

This undermined trust in Beijing’s narrative that it respected national sovereignty, to the point that when Russia invaded Ukraine, and China sent humanitarian aid to Ukraine without sending military aid to Russia, the United States was still able to easily spin a narrative about China being on Russia’s side, he said.

There is a lot “in play” over the next few years and governments and investors should avoid “sudden moves,” Quah said. 

It is still “up in the air” whether the US or China will lead on the key technologies for the future, with some analysts finding China is leading the US on most key future technologies. And China manufactures a large proportion of the world’s wind turbines, solar panels and lithium ion batteries critical for the green transition, and cutting off China will pose major challenges for the global zero-carbon transition.

“In the midst of this great power rivalry, we need all the help we can get to carve out a future that works well for all of us,” Quah said.

Investors in China need to look beyond the top-down narratives coming from foreign countries and media to dig up the true story of what’s really happening in the market, argued Lirong Xu, the Shanghai-based chief investment officer of Franklin Templeton Sealand Fund Management.

“I think that’s our job as stock pickers to dig into different sectors’ companies to find opportunities,” Xu told an audience of global asset owners managing around US$7 trillion at Conexus Financial’s Fiduciary Investment Symposium held in Singapore.

“That may be quite a different story than what you hear from the top-down angle, especially from the media.”

Franklin Templeton Sealand Fund Management is an 18-year joint venture between US asset manager Franklin Templeton and China’s Sealand Securities. Xu said some in the audience may be surprised to hear that during the last three to five years, the median return of mutual funds in China has been quite high.

“Last year and this year to date, the market has been volatile and challenging, but from a longer perspective looking at the next three years as a stock picker, I’m confident we can find good opportunities in almost all sectors to achieve good alpha returns for investors.”

Old economy sectors contain industry leaders that, over the past three years, have increased their market share during a difficult market environment, Xu said. And in the new economy there are a lot of exciting stories of growth.

Innovation is playing a growing share in driving both old and new sectors of the economy, he said. And valuations are relatively cheap compared to historic levels and also compared to other emerging markets.

The disruption to supply chains is also a story that is overblown, Xu said, noting he is “not too worried about that.” China is moving up the value chain of production in the same way other Asian economies have done in the past, with some parts of the supply chain leaving China and other parts moving in and taking their place.

“FDI in China grew substantially in the last three years compared to the last ten years,” Xu said. “And with the new situation of the regionalisation of supply chains and becoming less kind of globalised, there are both good sides and bad sides of that in terms of supply chains in China.”

“So things are not that bad. Maybe not as good as the last 20 years, but definitely not as bad as the media has pictured.”

And on the issue of transparency, the Chinese market is becoming more institutionalised having previously been dominated by retail investors, Xu said. This has helped the situation, although it can be challenging for foreigners who don’t speak the language. An increasing number of companies are producing English versions of their annual reports, he said.

“We’ve seen a trend where many companies that are not so good have good PR and fluent English, so they get more attention than they deserve,” Xu said.

Despite the solar industry being a cyclical and crowded market, leading solar producers are promising and were able to expand market share when the government stopped subsidising the sector five years ago, Xu said.

“I believe they will continue to grow as long as they stay focussed on innovation and new technology to grasp opportunities in the solar sector,” Xu said.

The online wealth management industry is also seeing a range of smaller companies emerge that are focussed on core areas of business, particularly mutual funds which are appealing in a country with a high savings rate.

“We continue to focus on these companies and still have a high conviction on these names,” Xu said.

Managing the rise of great power competition between the US and China, and not letting it “go off the rails,” is the epochal challenge of our day, according to former US National Security Council member Richard Falkenrath.

“The history is not good on this,” said Falkenrath, now the head of geopolitics and chief security officer at Bridgewater Associates, noting most people in the room had “lived in an anomalous period of great power peace.” 

“History, when you go back hundreds of years, is replete with wars, including with wars that were economically illogical, as this one would certainly be,” Falkenrath said.

Falkenrath served in the early 2000s as deputy assistant to the US President and deputy homeland security advisor. He was discussing the impact of geopolitical tensions on economies and markets at the Fiduciary Investors Symposium held in Singapore, in a panel discussion with Ben Weiss, managing director, Asia Pacific, of global business consultancy Veracity Worldwide. 

The deterioration of the US-China relationship was underway before former US President Donald Trump “blew it up,” Falkenrath said.

“In a very blunt, crass way he articulated what both sides of the aisle were feeling, and that’s testified by the fact that with the Biden administration, they have reversed none of what he did, expanded it in certain respects and refined its implementation, execution and articulation.”

He said he suspects whoever succeeds Biden will continue this policy of comprehensive competition with China. Managing this without it deteriorating into outright conflict is the epochal question of our day, he said, and the US administration is “struggling” with this.

They “don’t want it to go off the rails, but they also don’t want to be had or humiliated,” Falkenrath said. In the absence of cooperation, both China and the US are capable of exaggerating each others’ power and malevolence, he said.

The United States is completely convinced of its own benevolence, with a one-sided narrative about maintaining peace, prosperity, democracy and a rules-based order, he said. China, like many intelligent observers, rejects that narrative and has constructed an alternative narrative.

It is hard to imagine what the United States could possibly concede to China amidst this narrative, he said.

“There’s not a lot to offer when you think that everything you are offering is already right and just,” Falkenrath said. “And so essentially the rules based system, the free flow of trade and information, the protection of intellectual property, the treatment of minorities, the treatment of the environment, when you think that…you’re conceding that, it gets pretty hard.”

Facing rising tensions without an end in sight, Ben Weiss, Managing director, Asia Pacific, at Veracity Worldwide, said Veracity was speaking to investors about three key issues in the context of rising US-China competition. 

First is the importance of scenario planning and building structures inside organisations to interpret developments. Key stakeholders at a very senior level need to be involved. This should involve a worst case scenario of leaving China in a hurry, he said.

“There’s often geopolitical analysis happening within businesses, but it tends to be siloed or influencing very specific parts of the business,” Weiss said. 

Second, companies need to assess the level of risk that comes with their exposure to China in light of the vast amount of new legislation and regulation in the United States governing business with China.

Third, companies should engage with the US government and other governments around the world regarding new legislation in the pipeline, as US officials are interested in engaging with businesses to understand their concerns regarding the effects of this legislation, he said. Outbound investment restrictions for US businesses investing in China are “very likely to come,” he said.

“I would just encourage all of you to, in your government affairs, not see that as strictly a Washington or London or Canberra–or any other capital–exercise,” Weiss said. “Certainly the United States government is taking that advice on board.”

 

MORE ON GEOPOLITICAL RISK

A video interview with geopolitical expert Professor Stephen Kotkin looks at the investor implications of the Russia Ukraine conflict, the recalibration in the US China relationship and where the “real” geopolitical risk lies.

 

CalPERS has $67 million exposure to stricken Silicon Valley Bank, the high-profile venture capital and start up lender shut down at the end of last week by regulators and taken over by the Federal Deposit Insurance Corporation after customers raced to withdraw their money.

In addition the giant pension fund also has $11 million exposure to Signature Bank, chief of the fund’s investment officer, Nicole Musicco, told the board during the $457.4 billion fund’s latest investment committee meeting.

Musicco said that “in the grand scheme of things” CalPERS’ assets at risk are a small percentage of its assets under management. And that a “tumultuous” and “wild weekend” as the banks unravelled proved the importance of CalPERS’ resilience and transparency.

The collapse of the banks could be a pivotal moment for private equity and venture capital groups given SVB is a significant lender to GPs and their portfolio companies.

CalPERS is among the funds building its private equity exposure in recent years.

Musicco said resilience, transparency and innovation are now core tenets of how CalPERS executes.

The investment team was quick to identify the level of exposure, and in a “shout out to the team” she said she had received detailed analysis over the weekend as the situation unfolded.

Moreover, the process has shown that CalPERS’ liquidity framework is robust, evident that lessons have been learnt “in how we manage liquidity.”

The turmoil has also highlighted how CalPERS is now perceived by partners. Mussico said she has received a “number of calls” in recognition that the investment community now sees the giant pension fund as a strategic partner with balance sheet and the agility to provide long-term capital and solutions.

Although CalPERS has “nothing right now in the works,” she said her phone continues to buzz. “The message is out” that CalPERS is “open for business.”

Other institutional investors that have announced losses and exposure to SVB and Signature Bank include Norway’s sovereign wealth fund and Sweden’s largest pension fund Alecta.

Alecta has reported heavy losses to SVB, Signature and First Republic Bank, amounting to €1.2 billion – around 1 per cent of its total managed capital – according to a statement.

Alecta began investing in SVB in June 2019 and made its last investment in November 2022. The pension fund is the fourth largest shareholder in SVB.

“Alecta now values the shares in the two banks at zero,” the pension fund said, adding that the effect on Alecta’s customers would be small and its own financial position was “very strong.”

Elsewhere, reports in the Korean press say that Korea’s National Pension Service is considering all possible measures in relation to its investment in the US bank, with a reported 100,000 shares in SVB.

This article was edited on March 19, 2023, to update CalPERS’ exposure to Signature Bank