How the climate crisis affects Asia

The changing climate is having a huge impact on people in Asia, mostly because temperatures are rising twice as fast there as in the rest of the world.  This can, according to the IMF, be attributed to the increased frequency and severity of weather-related natural disasters in the region – think frequent bush fires in Australia, record low water levels in the Mekong Delta in Vietnam, severe heatwaves in China and India, flooding in Pakistan, the drying up of the Yangtze River in China and the sharply rising frequency of cyclones all over the Asia-Pacific region.

With its many low-lying coastal cities, Asia is particularly exposed to climate change.  By mid-century, rising sea water levels will impact nearly a billion Asians.  Megacities such as Mumbai, Dhaka, Bangkok, Ho Chi Minh City, Jakarta, and Shanghai are all at risk of being submerged before the end of this century.  Indonesia is actually planning to move Jakarta to Borneo to protect its 11 million residents from dangerous flooding.  Meanwhile, smaller Pacific islands like Kiribati, the Marshall Islands and Tuvalu, face an existential threat from rising sea water levels.

As you can see in Exhibit 6 below, under RCP 8.5 (to be explained later), temperatures in Asia will soon reach lethal levels.  By 2050, almost a billion people will be living in areas with a higher than zero probability of a lethal heat wave in a given year, and the probability of being exposed to a lethal heat wave at least once every decade will rise to about 80%.  That could quite possibly have a detrimental impact on economic activity in the region.

By 2050, up to $4.7Tn of Asian GDP will be at risk from an effective loss of outdoor working hours every year (source: McKinsey & Co.).  The Asian GDP at risk accounts for more than two-thirds of the global GDP at risk.  In addition to that, about $1.2Tn of Asian capital stock is expected to be damaged by flooding a.o. severe weather events every year. In other words, Asia is at the forefront of the global war against climate change.

RCP 8.5 refers to the concentration of carbon that delivers global warming at an average of 8.5 watts per square meter across the planet.  The RCP 8.5 pathway will deliver an average temperature increase in Asia of 4.3˚C by 2100 relative to preindustrial times (source: climatenexus.org).  To the untrained eye, that may sound excessive; however, let me remind you that the average temperature in Asia is rising twice as fast as the global average.  4.3˚C in Asia is equivalent to ‘only’ 2.15˚C in Europe and North America.  At the going rate, we should consider ourselves lucky, if we can limit the temperature rise to that in our part of the world.

The pending water crisis

The Tibetan Plateau, which is often referred to as the roof of the world, is the most important freshwater resource in the world.  The unique atmospheric conditions in the area and the high-elevation terrain, dominated by monsoons and westerly winds, supplies precious freshwater to nearly two billion Asians.  To the north, the Amu Darya basin supplies freshwater to China, central Asia and Afghanistan and, to the south, the Indus basin supplies freshwater to India and Pakistan.  On a combined basis, the two water basins supply freshwater to about a quarter of the world's population.

A team of scientists have discovered that climate change has led to a severe depletion in terrestrial water storage in those two basins – about 15.8 gigatons per year.  Based on that finding, the team predict that, even under a moderate carbon emissions scenario, the Tibetan Plateau could experience a net loss of about 230 gigatons by the middle of the century.  Such a loss would mean an almost complete loss of water availability to the two billion people affected, according to the scientists (source: dw.com).

Most of Asia’s great rivers originate on the Tibetan Plateau.  From there, they flow to a dozen countries, including two of the most populous countries in the world, China and India.  If the Tibetan Plateau can’t deliver the water needed, an armed conflict could break out (source: The Diplomat).  It is virtually impossible to quantify that risk, but drastic action shall be required to avoid serious problems down the road.

As if that problem wasn’t bad enough, another sort of water crisis is also brewing in parts of Asia. Rising sea water levels are eroding arable land in lowly elevated coastal areas.  This is not well understood, but sea water levels actually vary substantially around the world.  Thermal expansion, ocean dynamics and ice loss contributions generate variations from the global mean of ±30% – in extreme cases a bit more (source: ipcc.ch).  Asia is particularly exposed to this issue, and that poses a severe risk to food security in the region, as much of the food in Asia is produced in low-lying areas.

The scuffle in Taiwan

In order to appreciate the complexities surrounding the Taiwan crisis, it is important to understand the background.  In 1949, the long-standing civil war in China, which started in 1927, came to a climax.  In May of that year, Chen Cheng, who served as the chairman of the provincial government in Taiwan, declared martial law on the island.  In December of the same year, the Republic of China’s armed forces were finally defeated by the Chinese Communist Party (CCP) under the leadership of Mao Zedong.  This forced the Government of the Republic of China under Chiang Kai-Shek’s leadership to relocate to Taiwan.

Following the move to Taiwan, Chiang Kai-Shek viewed the retreat as temporary.  As he said: “prepare for one year, counterattack in two years, sweep out the enemy in three years and succeed within five years”.  In the early years, this resulted in Taiwan prioritising military armament over economic development, but that has obviously changed, even if Taiwan’s military strength is still held in high regard.

Today, the geopolitical situation in the area is very tense, and China makes no secret of its goal to bring Taiwan back under the control of Beijing, as it was for thousands of years pre-1949.  This has resulted in plenty of speculation, with 2027 being the year most frequently mentioned as the invasion year.  Although I agree that Taiwan will probably ultimately have to give in, such a concession could easily be decades and possibly centuries away and may not involve an invasion.  Here is why:

1. Military drills are not necessarily indicative of pending military aggression.

China’s People’s Liberation Army have repeatedly held drills around Taiwan and, every time a drill is on, speculation is rife.  However, China’s leadership have a long history of making threats without following up on them.  Furthermore, it is a long-standing Chinese tradition to link their goals to a certain year, and there is a good reason why President Xi has picked 2027.  That year happens to be the 100th anniversary of the founding of the People’s Liberation Army.  By ordering his military to be ready to invade Taiwan in 2027 (source: thedefensepost.com), effectively, he made the threat more credible.  Having said that, many military experts argue that China won’t be ready by then.  It is also worth noting that the Chinese will most likely have learned a lesson or two from the war in Ukraine and from the West’s reaction to Russia’s unjustifiable invasion.  The Chinese will probably not want to run the risk of being frozen out of international trade, which they can hardly afford.

2. The Chinese military have not, irrespective of media reports, broken Taiwan’s territorial airspace.

Various media in our part of the world have reported that Chinese fighter jets repeatedly fly into Taiwanese territorial airspace, but that isn’t correct; however, they often fly into Taiwan’s air defence identification zone (known as ADIZ), which acts as a buffer zone outside the territorial airspace.  Every country has an ADIZ, allowing sovereigns to better monitor air traffic.  Yes, the Chinese provoke the Taiwanese by crossing that line, but they are not in breach of international law by doing so.  This fits very well with the Chinese inclination to make threats without actually following up on them.

3. China can do plenty of economic damage to Taiwan without having to invade the main island.

It is an oversimplification to assume that China’s only option is to invade Taiwan.  Many other options are open to the Chinese, for example blockades of Taiwanese ports and/or economic quarantines to choke off Taiwan’s international trade (source: The Carnegie Endowment for International Peace).  My source (who is American) tells me that China’s objective is not at all territorial expansion but of a far more defensive nature.  They are concerned that the Taiwanese and/or their allies (i.e. the Americans) might block the Chinese from shipping goods up and down the East and South China Sea, which is a critical corridor for the Chinese, commercially speaking.  Therefore, rather than invading the main island, China could choose to run a limited campaign to seize those Taiwan-held islands just off China’s coastline.  Such a move would give the Chinese unrestricted access to their own coastline.  A variant of this option would be a negotiated solution, where the Chinese rubberstamp Taiwan’s independence in return for Taiwan passing those islands to China.

As you can see, there are indeed quite a few possible endings to this story.  I happen to believe that the most likely ultimate outcome is a negotiated solution, but only after the Chinese have exhausted the Taiwanese for years.

The changing geopolitical landscape

The war in Ukraine has had some rather important geopolitical implications.  Although China has never endorsed the Russian invasion of Ukraine, having a common enemy (the Americans) has brought China and Russia closer to each other.  That is at least the first impression one gets, but it is an increasingly one-sided relationship, which is likely to cause plenty of problems down the road, at least with a brute like Putin in power in Russia.

As you can see in Exhibit 7 below, China’s economy is almost ten times bigger than the Russian economy, and the military spending in China is also much higher.  It is therefore unthinkable that the Chinese leadership will allow Putin to set the tone in their bilateral negotiations.  The big question is how Putin will deal with that.

Adding to that, the Russian invasion of Ukraine, and the subsequent sanction programme, has clearly weakened Russia in terms of its ability to negotiate attractive deals when trading internationally.  The Chinese are well aware that the Russians desperately need for China to take their oil and gas, and the Chinese take advantage of that.  It is worth noting that, despite the two countries bending over backwards to present a united front to the rest of the world, China has not sold a single rifle to the Russians.  The American threat to include China in the sanction programme, should they ever do that, has clearly worked.

Longer term, the most likely implication of the war in Ukraine is an increased focus on self-reliance.  Allow me to quote from a speech President Xi Jinping gave in August 2022:

“We should adhere to self-reliance, put the development of the country and nation on the basis of our own strength, and firmly seize the initiative in development.  To build a great modern socialist country in an all-round way and achieve the second Centenary Goal, we must take the road of independent innovation.”

The aim is clear.  President Xi wants to reduce China’s reliance on the rest of the world, and that is not good for international trade longer term.  This ‘inward tilt’ may have been part of the CCP’s policy programme for long, but it is only becoming clear to the rest of the world now (source: Chatham House).  And, before you say: “who cares?”, bear in mind that international trade is the root of most wealth around the world.  If you look at a global map and pinpoint the wealthiest cities in the world, without exception, they have all been big on international trade. Lower international trade means lower GDP growth, hence less wealth creation.  End of story.

Investment implications

Before I go into a few specific ideas, allow me to address a point that will most likely be on your mind right now.  With such a dire demographic outlook in China, with climate change doing its best to destroy all economic life throughout Asia and with a possible war in Taiwan on the cards, do you want to invest in Asia at all?

The short answer is yes.  First and a foremost, Asia is much more than China and, apart from Japan and Korea and a few smaller countries, almost all other Asian countries are confronted with a much more benign demographic outlook.  Furthermore, as long as you embrace the challenges that have come about as a result of the changing climate, many investment opportunities present themselves.

Take for example rising sea water levels.  Astronomical amounts of money will have to be spent on protecting property all over Asia (in fact, all over the world) from rising sea water levels.  Dikes will have to be built to protect low-lying areas, and entire cities must be moved to higher ground.  Imagine, for example, the amount of copper needed to move Jakarta (with 11 million inhabitants) to Borneo.  Therefore, although rising sea water levels may pose a risk to GDP growth, an attractive investment opportunity also presents itself.

Likewise the water depletion in the Tibetan Plateau.  Billions of Asians will be affected.  Having said that, better water pipes with fewer leakages and improved irrigation systems taking advantage of the newest technology will help to dramatically reduce the consumption of water.  The Israelis have demonstrated how little water is required in the agricultural industry (which accounts for about two-thirds of water consumption worldwide), if the water used is deployed optimally.  The rest of the world will now have to copy and paste.

Obvious investment opportunities would therefore include green metals, various building materials and a broad array of water technologies, but the opportunity set doesn’t stop there.  As living standards continue to rise in Asia, more money will be spent on healthcare, on education, on food and on various leisure activities.  

Taiwan, on the other hand, poses a risk to investors, although that risk will probably come and go over time.  As I said earlier, although Xi Jinping has referred to 2027 as the year the military must be ready to invade, he had his reasons for doing so.  Furthermore, the Chinese interpretation of “short-term” vis-à-vis “long-term” is very different from the western interpretation, and it wouldn’t surprise me if nothing were to happen in my lifetime.

Finally, how should the changing geopolitical landscape be handled investment-wise?  The short answer is that it is too early to say.  New alliances will be established, and new trade patterns will emerge, and that will take years.  Bottom line, though, less international trade is bad for wealth creation, i.e. bad for equity markets.  Therefore, we can only hope that politicians around the world won’t feel tempted to copy the British Brexit model but instead pursue a more inclusive model.

Final few words

This paper is a classic example as to how megatrends overlap and affect each other.  Today, I have written about The Rise of Asia, but Climate Change has in fact absorbed much of my allocated space.  Before you invest, you are advised to consider to what extent the megatrends in question interact with each other.

My own view when it comes to megatrend investing is very simple.  It is like only taking your bicycle for a ride when you are assured of tailwinds.  Cycling is so much easier when you constantly have the wind in your back.  Precisely the same is the case, if you stick to megatrend investing when investing.

Finally, a brief advanced notice.  Our megatrend papers are updated every three years, and the next one due for an update is our paper on The Rising Gap between Rich and Poor.  That update will drop into your inbox sometime in April of this year.

Niels C. Jensen

20 January 2023