Conclusion: While Gaddafi, Wisconsin, and Greece continue to dominate the geopolitical risk headlines, some of Asia’s largest economies are currently dealing with uprisings of their own. Each, to varying degrees, has the potential to heat up substantially in the coming days and weeks.
Position: Short Emerging Market equities via the etf EEM.
While the conflict in MENA and the recent volatility associated with global crude oil prices appropriately garner the bulk of investor attention, that doesn’t mean geopolitical risk ceases to exist elsewhere. Given, we detail below three scenes in Asia where current uprisings have the potential to accelerate in the coming week(s):
CHINA: Cold For Now
LinkedIn Corp. has become the latest social networking site to be blocked in mainland China after a user, “Jasmine Z”, posted comments that explicitly stated Tunisia’s Jasmine Revolution should be spread throughout China. Additionally, the user set up a forum whereby others in the discussion group could post their opinions. The Chinese government’s suppression here puts China in direct contention with recently-enacted US foreign policy:
“The US will help people in oppressive internet environments get around filters, stay one step ahead of the censors, the hackers, and the thugs who beat them up or imprison them for what they say online.”
-Hillary Clinton, US Secretary of State, Feb. 2011
We doubt Washington D.C. has the political will to get in between China and its citizens; we will point out, however, that any reneging on the US’s hard stance on this topic could potentially undermine their efforts and influence in MENA negotiations.
Elsewhere in China, demonstrators continue to make a push for weekly demonstrations at 13 locations throughout the country after the initial gatherings on Feb. 20 failed to produce more protestors than police. China’s Foreign Ministry Spokesman Ma Zhaoxu had this to say regarding the demonstrations:
“It is the Chinese people’s common aspiration to safeguard social and political stability, promote social harmony, and safeguard our people’s livelihood… No one can force or sway our resolve.”
Translation: We will continue to suppress any uprising and the US/UN rhetoric will not factor into our decision.
All told, the situation remains fairly muted in China at this point, and given the recent wage increases and the potential for the next five-year plan to focus exclusively on raising broad living standards throughout the country, we don’t see this as a situation that will get out of hand.
INDIA: Warm; Poised to Heat Up?
On Feb. 3, we published a report titled, “Falling Like a BRICk: Is India the Next Egypt?”; in the report, we detailed the similarities between India’s economy and the now-falling MENA States. Furthermore, we highlighted the #1 risk that could propel Indian citizens to do their best Tunisian/Egyptian/Libyan impersonations: accelerating inflation.
We’ve been vocal about the RBI’s poor effort to adequately resolve India’s inflation issue (instead of raising rates, they spent the bulk of 4Q10 buying back gov’t bonds to increase liquidity in its banking sector). Now India is in a scenario whereby food and energy inflation is spilling over into “core” inflation as producers and retailers hike prices throughout the economy – and this is before $112 Brent crude oil gets factored into corporate decision-making.
As we’ve maintained for the past few months, high and rising food, fuel, and now “core” inflation in an economy where ~830 million people live on less than $2 per day is a sure recipe for social unrest – and now India is getting exactly what the RBI has “cooked” up. Led by the country's trade unions, thousands of workers have convened on the nation’s capital this week to protest rising food prices, low wages, and job insecurity.
And this is with +9% YoY GDP growth. Imagine what the scene would look like if Indian GDP growth slowed by 100-200bps over the next 6-9 months…
Monday (2/28) will be a critical day for the direction of social instability in India, as Finance Minister Pranab Mukherjee unveils the government’s FY12 budget. The budget is expected to be filled with food and fuel subsidies for low-income citizens, as well as guaranteed work programs for over 41 million of its poorest rural families.
The expectations for massive stimulus for the low-income segment of the Indian populace have been set; any “miss” relative to these expectations could potentially incite further unrest among Indian voters – many of which have been turning away from the ruling Congress Party in the recent polls due to corruption and unpalatable inflation, among other things.
All told, the Indian government cannot afford for the budget to miss expectations or for it to get derailed via further legislative gridlock. Opposition to the alleged graft of former Congress Party officials has stalled the legislative agenda and made the final parliament session of 2010 the least productive in 25 years!
The opposing Bharatiya Janata Party’s insistence on a parliamentary probe of the alleged graft has finally resulted in capitulation by Prime Minister Manmohan Singh, who finally agreed to the probe earlier this week, understanding just how important it is for India to get the upcoming budget bill through parliament:
“We can ill afford the situation that our parliament is not allowed to function during the critical budget session… It is in these special circumstances that our government agrees to setting up a joint parliamentary committee.”
-Indian Prime Minister Manmohan Singh, Feb. 22, 211
Special circumstances indeed... We’ll continue to monitor this situation closely, as the current demonstrations have the potential to go from “warm” to “very hot” in a heartbeat.
KOREA: Dry Ice Hot
In what is likely the wackiest news of the week, it appears South Korea is stirring the pot of its northern neighbor, attempting to incite a Jasmine Revolution-style uprising designed to overthrow the Kim regime. Its military has dropped over three million leaflets containing information regarding the pro-democracy revolts in the MENA. In addition to the leaflets, the South is also flying in rice, clothing, medicine, and working radios (with the intention of keeping them up to speed on the uprisings).
While the South Korean military declined to comment, other officials did chime in with clues as to where this may potentially be headed:
“North Korean people’s protests may also be able to bring a change to the regime… South Korea’s military and government should also be ready for any revolt inside North Korea.”
-Song Yong Sun, Member of the National Assembly’s Defense Committee
While it’s too early to tell if this latest attempt at psychological warfare will successfully incite a massive uprising in North Korea, we do believe it is of upmost importance to keep this risk on your radar. As we saw last year with the North’s sinking of the South’s naval warship Cheonan in March and its November shelling of Yeonpyeong, tensions can heat up on this peninsula in a real hurry. And perhaps more so than Libya or Egypt, any real outbreak here brings with it a great deal of global geopolitical risk, as the US and Japan remain firmly behind South Korea and China (albeit less firmly) stands behind the North.
Let us not forget that a) North and South Korea are still technically at war (and have been since 1950); and b) nuclear weapons (or merely talk of nuclear weapons) have the potential to be a factor here.
While it’s much, much too early to even assign the slightest thousandth of a percent to the probability that a nuclear conflict ensues here, we do think it’s important to keep the Korean peninsula on your screens as a place where significant geopolitical risk could erupt rather quickly.