A mobile phone-based e-RMB payment interface. 'One can feel that 2020 was the grand finale of the US dollar,' says investor David Baverez. Photo: WeChat
Courtesy of David Baverez
This is the final installment of a two-part interview with David Baverez (left), a Hong Kong-based private investor, writer and essayist. Read Part 1 here.
Since 2012, Baverez has been assisting various startups focused on investment opportunities in Asia.
A graduate of the French business school HEC and INSEAD, he served as a portfolio manager at Fidelity Investments in London and Boston, then became founding partner of KDA Capital.
He spoke to Asia Times on the future of relations between Europe and China.
Adriel Kasonta: Ray Dalio, founder of Bridgewater Associates, noted some time ago that investment portfolios worldwide only have 3% of their assets in China, whereas the country accounts for 15% of world GDP and a good third of its future growth. What is at stake here?
David Baverez: The lesson from the 1930s is that economic crises are followed by financial crises that end up in monetary crisis. The same scenario [has been played out] since 2008.
The latest “season” in 2020 saw the US spending an unbelievable 40% of GDP trying to hide its inability and unwillingness to reform its system over the last 10 years. China instead, in a surprising manner, is focusing only on raising the productivity of its stimulus plan. As a result, we are ending up in a completely “upside-down world,” where investors are desperately trying to avoid the US dollar – the reserve currency of the world – and favor the RMB, despite it still being non-convertible.
Ray Dalio saw it before anyone else. As usual, he (and his friends) is behind the amazing $150 billion surplus of the Chinese balance of payments in Q4 2020. The last time a surplus of this magnitude happened was in 2008: Message well taken!
AK: Tell us a bit more about “thematic investment” in China. What is there to be won for Europe, especially in the context of the recent investment agreement between Beijing and Brussels?
DB: The second wave of the digital revolution – focusing on B2B [business to business] rather than B2C [business to consumer] – highlights the peculiarity of these new business models having very little marginal cost. As a result, more than ever, the “winner takes it all.”
Investors are therefore being asked to finance initially loss-making business in the hope that they will end up as the winner. This is the basis for “thematic investment,” where the economic value creation can be in an initial phase detached from the financial performance. The only issue is that in today’s world, financial markets give credit to many winners, when there will be only one in each vertical.
AK: Should Europe be afraid of Chinese investments, as some argue, or perhaps not? How should Europeans approach this dilemma?
DB: If you look at Europe excluding the UK, Chinese cumulative investment in Europe amounts to a mere $140 billion, while European investment in China is less than $200 billion, where the two geographies exchange more than $500 billion of goods on an annual basis. Hence the problem of Chinese investments in Europe is not that there are too many, but there are too few – amounting to less than 5% of accumulated FDI.
The more delicate issue is that Europe has been historically very bad at screening the quality of these Chinese investors, which is the real problem here, as illustrated by the example of HNA, Wanda or Anbang.
AK: Do you believe that China, with its digital yuan, will be able to effectively rethink the current world financial order – which, according to the Chinese, is about to implode? If yes, then what are implications of this development for Europe, both in terms of threats and opportunities?
DB: I am a great believer in digital currencies that will emerge from the monetary consequences of the economic and financial crisis. Today, central banks both in Europe and US have lost their credibility, having given up their political independence, which is not surprising once one realizes that their boards of governors are made up in majority of legal – not financial – experts.
A currency can only rely on trust, and the credibility of these digital currencies will come not from their issuing bodies, but from the control of their usage. This is where the pilot tests of the digital RMB in Guangdong or … Shanghai seem to me extremely interesting. Let us look forward to the Winter Olympic Games in Beijing in 2022.
AK: Can we assume that any future war between Washington and Beijing will be about balances of payments?
DB: Absolutely. One can feel that 2020 was the grand finale of the US dollar. The entire world cannot stand any more the legal extraterritoriality that the US has imposed on the rest of the globe thanks to the dollar dominance.
The period of “this is our currency, but this is your problem” is now clearly over. And China will be keen to accelerate the process of attracting Japanese and European – but also American – savings into China. This is what is behind the MSCI index inclusion of Chinese indices and the North-Connect between the Hong Kong Stock Exchange and mainland exchanges.
AK: As far as the US-led call to ban Huawei in Europe is concerned, bearing in mind that this is more of a political issue than technological one, what should be Europe’s response? How should it be approached to achieve the best possible outcome for European consumers?
DB: The issue surrounding Huawei is unique in the sense that it [arose] from the bet from the US 20 years ago that the value in telecoms would move to applications (Google and Facebook) and operating systems (IoS and Android) at the expense of the infrastructure that would become commoditized. This turned out to be well thought until the emergence of 5G and the return of intelligence into the network, typically at the edge.
The question for the West is therefore technical, in order to come up with a political answer: Are we in a position to catch up on network infrastructure for the next 6G generation? In which case, to limit Huawei in its developments could make sense. But let us try to negotiate the transitory period in a clever “Chinese” manner.
AK: In one of your articles, you argued that “China remains a prisoner of its natural leaning towards America when it comes to technology.” Does that mean there is potential here for Europe to restore the power balance by presenting an alternative to the US, and strengthen its technological cooperation with Beijing in order to form “a new alliance between Europe and China – a ‘New Silk Road’ of the 21st century, both digital and environmental”?
DB: As I mentioned earlier, the forthcoming decade will be the one of artificial intelligence and data analysis through the combination of hardware and software. Think about “digital manufacturing” – the US has favored a “fabless” business model for the last 20 years, effectively killing its industry, as exemplified by General Electric.
Europe masters many B2B softwares that are largely ignored by the general public, but that should be of utmost importance for China in order to boost its productivity, which remains only at between a quarter and a fifth of that of the US.
AK: Does it make sense to require reciprocity in a relationship between Europe and China?
DB: Reciprocity is a Western political concept, which is a non-starter. If I am Chinese, how can you offer me reciprocity when I open to you a market of 1.4 billion consumers?
AK: Should Europe listen to our Anglo-Saxon “friends” and join them in face-to-face conflict with China, or rather accurately identify the strengths and weaknesses of the Chinese system and aim at building a more balanced relationship based on mutual respect? Having said that, what are Beijing’s strengths and weaknesses, and how could Europe play them to its advantage?
DB: The right approach is the one involving complementarity. But in order to implement it, the West has to start studying China in order to identify – in a dispassionate manner – its strengths and weaknesses.
I would say that in general, China is very good at what is known for, and benefits from its size and economies of scale. Europe excels at what is unknown. Let me remind you that a good third of new ideas on this planet emerge from Europe, but we are very bad at exploiting them commercially. So let us team up together.
AK: It was famous French philosopher Raymond Aron who coined the following remark about the postwar era: “Peace impossible, war unlikely.” On that note, should Europe maintain a non-aligned status in order to work with Beijing and Washington, as it increasingly looks that the both are hesitant to constructively work together, or pick sides?
DB: We are today in the opposite situation to the one seen in 1947. Today, between the US and China, war is impossible, as there is too much to lose from the intertwined economies. But peace is unlikely, as each side is convinced of its good faith: “China is stealing our technology,” but “the US is stealing our development.”
We are therefore entering a period of “Cold Peace” – not “Cold War” – where the two camps are going to fight a proxy war in a neutral territory. If Europe doesn’t react swiftly, it faces the risk of “Yemenization” – becoming a battleground, where the fight will take place. Conversely, if it plays it in a clever manner, it could double its commercial opportunities.
AK: You once said that “we [Europeans] are moving from a community of 700 million privileged Westerners to a planet of over 7 billion inhabitants.” How long, in your opinion, will it take before “the West leaves its arrogance behind and get accustomed to taking inspiration from countries with models as different as South Korea, Taiwan, Singapore, New Zealand, Australia and Vietnam”? Is it not more constructive to study the many successes of the Southeast Asian model, than promoting industrial relocation?
DB: There will not be an industrial relocation in the West. Ask Terry Gu about his endeavors to try to build a factory in the US. What we will see is a geographical diversification of Western supply chains all across Asia, which is a positive trend. As to Western arrogance, unfortunately, you have to be patient on this one….
AK: Bearing in mind that the reconstruction of Europe cannot be envisaged without thought having been given to the positioning of the “Old Continent” in relation to China’s rise to power, what country is best suited to breathe new life into the Europe of tomorrow?
DB: The positive aspect of the €750 billion recovery package back in summer 2020 is that it allowed Germany (and Northern Europe) to finally take over the leadership in Brussels. So, in a contra-intuitive manner, we may see Europe coming back at a time when the rest of the world seems to have written us off.
France, unfortunately, now belongs definitely to Southern Europe, having failed in its management of the Covid crisis. Remember that the Chinese had already been visionary in 2013 when designing two New Silk Roads to Europe, anticipating the split of Europe between the North – to be supplied with high-value-added goods through trains – and the South – to be supplied with low-value-added goods through boats.
AK: Do you believe that Europe will be able, as you’ve put it in one of your articles, to “find a way to take a long-term view, similar to that of General de Gaulle in 1964 [when he was one of the first world leaders to establish diplomatic relations with Communist China], and … build a 21st-century Eurasia with Xi Jinping’s China,” or rather it will still aspire, as French poet Paul Valéry observed in 1927, “to be governed by an American commission”?
DB: The answer to your fundamental question for the 21st century will come not only from Europe, but also from China. We need a reset from both sides in order to build the same bridge in this century between China and Europe as the bridge that the 20th century built between Europe and the US.
This will require China to realize that its sharp-power diplomacy results only in its lowest approval ratings ever by the rest of the world. Europe will need to stop its moral lessons, abandon its concept of reciprocity, and work on complementarities.
AK: And finally, do you really believe that we are going to be “invaded,” as some paint this scenario, by the Chinese like in the famous French comedy movie Les Chinois à Paris (Chinese in Paris)?
DB: China always takes some pride in not having ever invaded anyone. The best way to fight off European arrogance and paranoia is just to increase European knowledge of China. The good news is that this process is the opposite to the one visible in the US. The more you deepen your knowledge of China, the more you tend to enjoy it.
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