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A bubble in political risks, too

LiveMint logoLiveMint 18-08-2017 William Pesek

Asia’s latest bear market is in vacations. Anyone in politics, business or finance planning that dream holiday in Bali, Tuscany or the Serengeti is checking cancellation policies so they can return to the job as markets gyrate.

Between Donald Trump and Kim Jong-un exchanging nuclear threats, Beijing’s bullying in the South China Sea, renewed India-Pakistan tensions and tit-for-tat sanctions and mounting trade-war risks, investors have ample reason to doubt bull runs in markets from Mumbai to New York and beyond.

What makes today’s uncertainty different, though, is how asset bubbles are bumping up against surging political risk, a problem compounded by a uniquely weak roster of world leaders.

Really, when was the last time the global economy was in such weak hands? Take the Group of Seven (G7) nations. President Trump betrays his ignorance of global affairs, institutions and basic logic with every tweet and verbal bromide. Britain’s Theresa May is proving no match for the Brexit hazards unnerving investors. France’s Emmanuel Macron, the “radical centrist”, has seen support rates plunge toward Trump-like lows. So has Japan’s Shinzo Abe amid scandals and falling wages. Germany’s Angela Merkel is top of the pack, of course, but her agenda is lost in Europe’s economic, security and social strains.

How about developing Asia? Despite flourishes of audacity, Prime Minister Narendra Modi appears keen to rest on his laurels ahead of the 2019 election. Philippine President Rodrigo Duterte is busier bowing to Beijing than saving Manila’s investment-grade rating. For all the hype about strongman Xi Jinping consolidating vast power, China’s president has been timid about imposing his pro-market manifesto. Xi’s biggest weakness, though, may be North Korea’s Kim.

The most comforting explanation (and even this is a reach) for Trump’s “fire-and-fury” bluster is that he’s trying to prod Xi into action. Beijing can’t snap its fingers and tame Kim, but it can tighten the screws. Docking Kim’s allowance—cutting trade flows and halting energy and food exchanges—is still humankind’s best hope of calming North Asian tensions. Question is, how far might Trump go to troll Xi into action?

Here’s where the bubble in political risk comes into play. Strongman Xi can’t appear to be bowing to tough-guy Trump, and vice versa. This standoff could roil Asian markets caught in the crossfire. Trump’s move last week to slap tariffs on aluminum foil imports from China of between 16.5% and 81% could be an omen of bigger actions to come. His threatened levies of between 35% and 45% on Chinese goods could be on the way. So could a dollar plunge as the US loses safe-haven status.

Then Xi gets to retaliate. Options include devaluating the yuan; canceling all orders for Boeing planes; taxes on goods that slam Apple Inc., General Motors Co. and Wal-Mart Stores Inc.; dumping $1.1 trillion of US Treasuries; making it harder for US tech giants to operate on the mainland. If such squabbles throw China’s debt-and-bubble-wracked financial system off-balance, the entire Asia region will suffer the fallout.

Abe’s five-year struggle to beat deflation would end in tears and plunging Nikkei 225 stocks. South Korea’s efforts to upend a system top-heavy with uncompetitive family-run conglomerates gets delayed anew. Export-reliant economies from Taiwan to Singapore would get savaged. Beijing would have less cash to invest in Malaysia, Thailand and pet projects like the Asian Infrastructure Investment Bank and “One Belt, One Road” initiative. The ripples could transport Asia back to the market turbulence of 2013, or worse, shaking current-account deficit economies from India to Indonesia.

Political hijinks also abound in the South China Sea, of which Beijing claims 80%. It’s becoming a potential flashpoint as Chinese, Japanese and American naval ships and aircraft converge in some of the world’s busiest shipping lanes. This may be the Asian Century, but it’s looking like a bigger boon for Northrop Grumman Corp., Raytheon Co., General Dynamics Corp. and other US military-industrial complex bigwigs than lower-income Asians. This arms race is putting an array of military hardware in dangerously close proximity. The Kashmir question that’s long bedeviled India-Pakistan dynamics presents its own powder-keg of risks, including for an S&P BSE Sensex Index whose gains may be outpacing Modi’s reforms.

Yet Kim’s intercontinental-ballistic-missile adventures are the most immediate threat. And a newish US leader is taking Pyongyang’s bait. The Kim dynasty’s quest for nuclear deterrence began with Kim Il Sung, accelerated with Kim Jong Il and morphed from science fiction into science fact under Kim Jong Un. Pyongyang’s triumph coming on Trump’s watch isn’t sitting well with a mercurial president desperate for a big win.

Whereas the last three US leaders rolled their eyes and stomached Kim’s taunts, Trump is one-upping the Hermit Kingdom. How this ends is anyone’s guess. But if America’s S&P 500, Japan’s Nikkei and perhaps even India’s Sensex seemed bubbly one month ago, they’re now looking like potential collateral damage. World leaders should be reining in bubbles, not creating new ones in uncertainty. And sadly, there’s no vacation from that.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.

His Twitter handle is @williampesek

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