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In my last blog post, I discussed how China’s enthusiastic plunge into a digital economy is unleashing massive changes that are reshaping Chinese society and, along the way, creating a bounty of investment opportunities. Rapid digitalization, however, is only one of the forces driving this transformation. Even more potent change is occurring on the back of China’s 40-year-old, now-flourishing “innovation ecosystem.”
Innovation is the advent of new ideas, technologies, business models, and products/services (Figure 1). Over the past 40 years of China’s transition to a market-driven economy, the conditions slowly developed for a vibrant innovation ecosystem to take root. The critical elements of this ecosystem — human capital, technical and experiential knowledge, and the institutions and incentives to promote an innovative culture — are relatively new in China, having only emerged over the past decade or so. (Before then, most “new” things that appeared in China were adaptations or copies of existing things.)
Thus, the ecosystem has only recently become truly “innovative” and is just starting to produce meaningful results — a tsunami of new…
The US-China tension is one very visible illustration of this reality, but this trend towards deglobalisation has been in place since the start of the financial crisis. For instance, it’s notable that global trade (as a share of global GDP) has been flatlining for 10 years now, after rising on a continual basis for over 30 years.
There will still be economic cycles, but this structural theme of deglobalisation is changing the nature of those cycles and the underlying trends they oscillate around. This is a clear frame break from the past and will be played out over multiple years. While we will likely see an ebb and flow, driven by the broader dynamics of the economic cycle, the path is clear and concerning for economic growth.
So where do things go from here? In this post, we share seven macro directions related to the theme of deglobalisation. The long-term investment implications of these trend breaks are clear, but over a cycle, how markets respond will depend on how policymakers respond. We believe these responses will likely vary across countries and be much less synchronised than in the past.
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