In the last years of his life, between 1870 and 1880, Gustave Flaubert worked on the Dictionnaire des idées reçues, a dictionary of commonplaces which supplemented the Bouvard and Pécuchet, in turn a tragicomic study of the superficiality and stupidity of many of his overinformed and undercultured contemporaries. Flaubert was fascinated and obsessed with pretentious and approximate chatter and his perversion led him to avidly read 1500 books and say insipid and insignificant things about himself in order to be able to immerse himself in that way of thinking. In this sense Flaubert can well be considered an anticipator of thehistory of mentalities proposed by the historiographical school of Annales. Not a history of high thought, but an analysis of widespread beliefs.
There is no doubt that among the modern-day ideas to which Flaubert would pay attention is that China has already won (or is one step away from winning). It has already won in technology (5G, artificial intelligence, fintech), in the economy (double growth compared to America and triple compared to Europe), in politics (the neo-Confucian model is more stable and effective), in soft power (the conquest of Africa, the new silk road, the unification of Eurasia) and in the capacity for strategic vision. Just scroll through the international book news sites and you will notice that there is not a day in which a book does not come out that explains how China is the country of the future.
Just as broad, on the other hand, it is the bibliography on american decline, on Finis Europae, on Silicon Valley resting on its laurels and no longer inventing anything, on productivity in structural decline, on Trump destroying the West, on populist tendencies (Is Democracy Dying? wonders the cover of Foreign Affairs in June with anguish), on the debt that continues to grow, on the mounting diseases of the spirit (xenophobia, nationalism, atomisation) that miraculously disappear from the horizon if we start talking about China again.
Then it happens that, just to verify, you go and look how the world's major stock exchanges have reacted to the great transformation in recent years underway and it is expected that, in their collective wisdom, the markets could only confirm and celebrate the Chinese overtaking. And here the surprises begin.
We compare the closing of the stock exchanges on any day as with that of July 12, 2015, three years ago. The US stock market has since grown by 32.1 percent. The Dax of Europe in a brilliant recovery rose by a quarter, 7.8 percent. The Shanghai Stock Exchange Index fell 11.8 percent. Whoever invested 100 in New York would end up with 132.1, if he had invested in Shanghai he would have 88.2 today, a difference of 43.9 points. Someone will say, yes, but the change? Nothing, the exchange rate only makes things worse as the dollar has appreciated by 7.9 percent over the three years against the renminbi, raising America's outperformance over China to a rather impressive 51.8 points.
It will be said that it is not valid, in 2015 the Chinese stock market went into a bubble and then collapsed, in short, a messy and unrepresentative year. So let's go back not three but five years, to July 12, 2013, a fairly calm phase for everyone. Standard and Poor's closed at 1680, is now at 2787, a 65.9 percent increase. Meanwhile, the Dax grew by 51.7 and Shanghai by 37.3.
It might be argued that Western stock exchanges had a strong rebound after the 2008-2009 disaster and this distorts the comparison with China, which suffered no damage during the Great Recession. So let's go back 10 years, to July 12, 2008, just a few weeks before the collapse. Well, from that day to today Shanghai has risen by 1.2 percent, the Dax by 93.9 and New York by 121.2 percent, exactly one hundred times more than China (the exchange rate between the dollar and the renminbi was practically the same as today) .
All right, some will still say, but only the lazy (and those who wanted to avoid management fees) who bought the Chinese index-linked ETFs were stuck. Active funds, focusing on Chinese domestic consumption stocks and avoiding the big publicly owned bandwagons, have performed well, sometimes very well. True, but that's another story.
If we consider the stock exchanges as representative of the underlying economies, it is more than fair, in China, to include publicly owned companies, a large sector of the Chinese economy which has continued and continues to destroy value in recent years.
In practice we can say that China today has an economy almost three times the size of ten years ago (13 trillion dollars against 4.6 in 2007), but its market capitalization (a function of its system profitability) has remained unchanged .
Some get the idea from this buy China today and sell an overvalued America at the end of the cycleor. Maybe, but let's remember Japan, another country that in the mid-XNUMXs was considered the future master of the world and another stock exchange that continued to disappoint for the next two decades.
China has learned many things from Japan and has so far avoided strategic mistakes that Japan made, such as allowing prolonged financial and housing bubbles, running up excessive trade surpluses and tolerating exchange rate levels that are misaligned with fundamentals.
However, today China risks repeating another Japanese mistake, that of now feeling superior on all levels compared to America and, consequently, to underestimate it. As sinologist Christopher Balding notes on Bloomberg, with his action Trump is cannonballing the foundations of China's economic model, depriving it of exports and therefore of dollars. Of course, in theory China could respond by devaluing (it has already done some of it), but going beyond a certain limit would mean going to war not only with America but also with Europe and, even more dangerous, it would risk to restart the large-scale capital flight we saw in 2015 and which cost a trillion dollars of reserves (never recovered) in a few weeks.
This is why, behind the compactly nationalist facade, domestic pressure to deal with America grows. It is the same phenomenon that we have begun to see in Europe on cars. If Europe (before) and China (after) agree to make trade more balanced, Trump will go down in history not as a protectionist but as a new generation globalizer. With less American deficit, on the other hand, the world will have fewer dollars and this will risk aggravating the reduction in global liquidity of which we are already feeling the first signs.
In the coming months, global markets will still be supported by US earnings. Net of the trade wars, the US stock market will remain the most solid. Only if Europe and China meet America and make concessions on tariffs will their stock exchanges be able to do better than America. If instead the hit-by-hit line prevails, other damage will be inevitable.
