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China's Power Up, U.S.'s Down

May 25, 2017 | Multi-Asset

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We are making one change to our Asia game theater as a result of my recent research trip to Asia: China's coalition power is increasing while the Unites States' coalition power is decreasing. This change has implications not only in the U.S. and Chinese coalition powers, but affects the smaller players within the game theater as well. Let me explain some of the dynamics affecting the region, and why they led to the change.

In “Rocky, Bullwinkle, and Game Theory,” Brian Singer, CFA, head of the Dynamic Allocation Strategies team at William Blair, explained the dimensions of influence players can use to exert control over other players by imparting potency to negotiating strategies, including coalition power. Coalition power is the ability to form and alter coalitions to augment the effectiveness of a negotiating strategy, and in Asia, we can readily see how it is changing.

China and the United States are the big players in the region, and the United States' coalition power is decreasing.

China and the United States are the big players in the region, and the United States' coalition power is decreasing. The United States' withdrawal from the Trans-Pacific Partnership (TPP) left Asian nations at the altar, and trust in the United States is waning. On my research trip, the only country that expressed enthusiasm in partnering with the United States was Japan, and that desire is likely more security-driven than trade-driven.

That opens the door for China to gain coalition power, and it is increasingly doing so via partnerships with Malaysia and the Philippines. China is increasingly connecting with Malaysia via investment in infrastructure, labor flow, and trade, and it is increasing its interests in the Philippines through various infrastructure projects. Indeed, the Philippines' finance minister noted that monthly meetings are taking place now with senior leaders in China after years of limited engagement. In addition to increasing China's coalition power, it also increases Malaysia's and the Philippines'.

We've updated our Asia game theater chart below to reflect China's growing coalition power.

Further, while we have not made any formal changes yet, we do note the potential evolution of endowment power sourced by Chinese tourism in the region. Currently only 5% of Chinese citizens have a passport; however, that number is expected to grow to 10% in the next 5 to 10 years. In anticipation, other Asian nations are increasing investment in tourism-related infrastructure, such as airports.

Historically, China has used its ability to limit tourism (by denying visas) to exert influence, which presently is most relevant to Vietnam, Taiwan, and South Korea. This gives China another potential source of rising endowment power and influence in the region.