24 March 2019
The patriotic tone of China’s highest-grossing blockbuster movie, Wolf Warrior 2, has been widely shared by many Chinese amid the border dispute with India. Photo: Beijing Dengfeng International Media
The patriotic tone of China’s highest-grossing blockbuster movie, Wolf Warrior 2, has been widely shared by many Chinese amid the border dispute with India. Photo: Beijing Dengfeng International Media

Is war good for the stock market?

There are voices from inside China and overseas suggesting the positive impact of war on the economy and the stock market. Some even say that investors should expect a sharp rally when the country goes to war on the crest of patriotism and nationalism.

In the past two months, shares of defense contractors in the A-share market have surged as Chinese and Indian troops engaged in a standoff at the Doklam Plateau in the most serious and prolonged confrontation in decades. (The latest news reports say both countries have agreed to end the border standoff).

First of all, nobody should wish for war to make money. Life is too precious and cannot be exchanged for money or wealth. Besides, the theory that war is good for stocks and the economy is a mistake.

According to an analysis by research house Oxford Economics, in the 372 “conflict episodes” in the past half century, including civil wars and wars between countries, war brought near-term economic loss with a bear stock market, followed by a recovery.

Also, the worse the conflict, the worse the impact on the economy. And in wars that lasted longer, GDP growth tended to continue to decline for a long period afterward.

The findings can be illustrated by Russia’s economy. Since the country seized control of Ukraine’s Crimean peninsula in 2014, Europe-Russia relationship has been in a deep freeze, with Russia having been slapped with serious economic sanctions. With its economy dependent on oil and gas, Russia’s currency and economy have been sent into free fall by slumping oil prices.

From 30 rubles to one US dollar, Russia’s national currency once hit 80 rubles against the dollar. It has rebounded to about 58 rubles.

Russia’s benchmark index, the dollar-denominated RTS index is having a rough year, dropping 7.4 percent year to date. It fell from 1,400 in 2014 to about 1,000 points now. After three years, a substantial recovery for Russia’s economy remains elusive.

What happened in Russia is a warning to China.

China’s economy is at a critical stage. It not only needs to beat the middle-income trap (middle-income economies wind up stagnating, unable to keep up with economically more developed economies in the market), it also has to prevent itself from falling into the Thucydides Trap.

Thucydides Trap was coined by Graham Allison, director of Harvard’s Belfer Center for Science and International Affairs. It refers a scenario in which a rising power causes fear in an established power and the situation escalates toward war. The catchphrase has been so popular that even China’s President Xi Jinping is fond of quoting it in his speeches.

Thucydides was an Athenian historian and general. He was also the author of the History of the Peloponnesian War, which recounts the struggle between Athens and Sparta in the 5th century B.C.

Sparta, as the established power at that time, felt threatened by the rising Athens. The Peloponnesian war lasted 30 years. Athens was finally defeated and unable to regain its strength.

According to Allison, in 12 of 16 cases over the past 500 years in which a rising power confronted a ruling power, the result was war. Examining with the Thucydides Trap theory, China-US relations remain his top concern in recent years.

China’s economy has picked up growth momentum. If this trend keeps going, I am very confident that the 40,000 target of Hong Kong’s benchmark Hang Seng Index will be reached after two years and possibly achieving a higher level in the long term.

The only limit to our realization of the future will be war. No matter how small the war is, or how justified it is, it would be used as an excuse by western nations to unleash military retaliation, diplomatic isolation or even economic sanctions. We should bear in mind that peace is not a sure thing. After all, in 12 of the 16 past cases of similar conflicts between powers, the result has been bloodshed.

This article appeared in the Hong Kong Economic Journal on Aug. 29

Translation by Ben Ng

[Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.

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