Moneycontrol Pro Panorama | When economics collides with geopolitics

Falling product prices raises one more question on whether the shift away from China can be as simple and seamless as is being made out to be.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 
The G-7 leaders’ communique seeks to clear the air on its approach towards China. If you take the statement at face value, they come in peace, have no intention of harming China or its economic progress, with a caveat that a “China that plays by international rules would be of global interest”. They then boldly declare they are not decoupling with China or turning inwards, terms commentators have used often to describe G7 countries' moves to free themselves of their industrial addiction to China.

If not decouple, what will G7 countries do instead? Economic resilience requires de-risking and diversifying, they say. “We will take steps, individually and collectively, to invest in our own economic vibrancy. We will reduce excessive dependencies in our critical supply chains.” Same same, but different.

After this line, the statement then lists a number of issues it has with China’s actions and it’s clear that the China versus developed world fight will continue. For Indian investors, what matters is that diversification of supply chains should mean more investments in the country. On a related note, do read: What does Modi-Biden camaraderie mean for India-US ties?

But two can play at that game. China and Russia are trying to persuade oil-producing nations to deal with oil-purchasing countries directly, and lower US influence on the oil market. In today’s edition, Saibal Dasgupta explains the ramifications of six oil-producing countries applying to be admitted to the BRICS partnership. It’s about economics sure, but politics too. Do read.

One concern the G7 leaders don't seem to have is the slowing Chinese economy. But China’s relatively weak economy should be a concern for investors. Ruchir Sharma opens today’s FT selection with this line, “Something is rotten with the Chinese economy, but don’t expect Wall Street analysts to tell you about it”. He then goes into the reasons why he believes the country is in for tough times and warns investors to not be complacent, unlike analysts who may not have much to lose by being wrong.

Sharma’s piece is a wake-up call that’s already being rung by industrial commodities. Today’s Chart of the Day sketches out the fall in non-ferrous metals, which has unwound the euphoria in prices around China’s economy reopening. It's not good news for investors in metal stocks.

But a more important question follows. A weak Chinese economy is likely to send down prices of industrial goods. How widespread or deep this can get should become evident in the coming quarters. These are also the very goods whose factories the developed world wants to bring back home, near home or to friendlier nations.

This is good for inflation, is the optimistic view. But making these goods requires businesses to set up factories, which require investments, which are in turn based on certain expected returns on their investment. If prices are falling, will these investments continue to make commercial sense? They are unlikely to be able to match China's cost of production, in many cases. And, if they don’t make commercial sense, will governments provide price and purchase guarantees, because they have national security concerns about their supply chain dependencies? They did this during COVID for vaccines, but will they do it for metals and chips, for instance? Falling product prices raises one more question on whether the shift away from China can be as simple and seamless as is being made out to be. The next few years may see what happens when economic collides with geopolitics and who wins the day.

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Technical Picks: Indiabulls Housing Finance, USD-INR, Turmeric, M&M, Birla Soft and Tata Investment (These are published every trading day before markets open and can be read on the app).

Ravi Ananthanarayanan
Moneycontrol Pro