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In what was a long-awaited meeting, Xi Jinping and Joe Biden spoke for more than four hours on the fringes of the APEC (Asia-Pacific Economic Cooperation) summit in San Francisco. They last met at the Indonesian G20 summit in Bali over a year ago – an eternity in diplomatic terms – but Nancy Pelosi’s trip to Taiwan and the spy balloon affair had since put further strain on US-China relations.

Although no press release was forthcoming after the meeting, both parties said they were pleased with how it went. The United States said progress had been made on combating exports of fentanyl, a synthetic drug responsible for the deaths of over 120,000 Americans this year alone, as well as on reopening military communication channels.

However, progress on the thorniest issues was noticeably lacking. On Taiwan, where a presidential election is due to be held in January, China struck a harsh tone, reiterating that it would “realise reunification, and this is unstoppable”. Nor did Xi Jinping win any concessions on semiconductor export restrictions, with China accusing the US of hampering its technological development in the sector. Lastly, nothing was said about the levels of reciprocal import tariffs, imposed during Donald Trump’s trade war and kept in place even after the two countries signed a Phase One agreement in January 2020.

To attract new foreign capital, China must bounce back

But Xi Jinping’s visit wasn’t just about talks with Joe Biden: it was also about meeting US investors. Around 400 business leaders attended a gala dinner with the Chinese president. With foreign direct investment (FDI) into China turning negative in the third quarter of 2023 for the first time since this indicator began to be tracked (1998), now is, above all, a time for economic appeasement. After a wait-and-see phase, foreign firms investing in China have opted to repatriate their profits rather than reinvest in the country – a sign that they do not expect the macroeconomic and geopolitical backdrop to improve substantially in the short term.

By coincidence, the leading US pension fund (the Federal Retirement Thrift Investment Board), which manages $771 billion in assets on behalf of nearly 7 million retirees, chose this moment to announce that it was planning to withdraw from all indices that include companies listed in China or Hong Kong. With US fund managers – particularly those managing funds linked to public authorities – coming under increasing political pressure over the past five years, the poor performance of Chinese indices so far this year has finally convinced some of them to pull the plug.

Capital outflows have thus quickened since the beginning of 2022, with investors expecting interest rates to remain lastingly lower in China and lastingly higher in the US, despite recent US inflation numbers fuelling hopes that monetary policy might be eased sooner than expected.

Economic conditions remain hard to read

As regards economic activity, Chinese figures continue to point to lacklustre performance: helped by a favourable base effect, retail sales (up 7.6% year on year in October) and industrial production (up 4.6%) have tended to exceed consensus expectations, but investment and the real estate sector continue to fall short despite the latest stimulus measures announced by the authorities. This dichotomy is reflected in household consumption: while spending on services and leisure is quickening, spending on construction materials is slowing.

Foreign trade also continues to normalise after two years of record performance: exports were down 6.4% and imports 4.5% year on year in October, and the trade balance has fallen back below $800 billion after reaching nearly $1 trillion in April.

By deviating from its usual budget deficit target (3.8% of GDP in 2023, instead of 3%), Beijing was keen to send out a message that stabilising growth was still a priority. However, in targeting infrastructure investment, this fiscal stimulus is failing to target the Chinese economy’s structural weaknesses. The IMF’s revised growth forecasts (5.4% instead of 5% for 2023 and 4.6% instead of 4.2% for 2024) factor in this 0.8% fiscal stimulus but assume it will not have much of a knock-on effect.

Above all, real estate indicators, which once again contracted in October, point to the breadth and depth of the crisis in the sector and raise questions as to just how far it might yet fall. Total square footage sold over the last 12 months was down 6.8% in October, compared with 6.3% in September, while new construction was down 24.1% (vs. 24.4% in September), indicating that, rather than new projects being kicked off, inventory and accumulated overcapacity are still being sold off.

Our opinion – The fact that the Xi-Biden meeting took place at all is a step forward. By setting out his agenda, Joe Biden took the risk of coming home empty-handed. In the end, he secured progress on both the key issues he put forward: the resumption of military dialogue, interrupted since Nancy Pelosi’s escapade in Taiwan, and controlling exports of components of fentanyl, which continues to devastate US cities including San Francisco. Elsewhere, though, cooperation between China and the US remains tentative: climate-related discussions will resume but there has been no progress on semiconductors and even less on Taiwan, where a surprise alliance between two more Beijing-friendly candidates could scupper the chances of current vice president Lai Ching-te, who favours taking a harder line with Beijing, in January’s presidential election.

Beyond its important symbolic value, Xi Jinping’s visit was also about signalling openness to US firms at a time when FDI into China has slowed worryingly and China is set to lose its place as the United States’ primary trading partner to Mexico in 2023. While the extent of US disengagement from China is still difficult to assess, partly because accounting for FDI by nationality is complicated by the use of holding companies often located in non-cooperative jurisdictions and partly because the complexity of value chains makes it hard to trace each and every component of manufactured goods, the attention Xi Jinping is paying to US firms underlines their importance to the Chinese economy.

China is undeniably in the midst of a slowdown. After twenty years of robust, uninterrupted growth, this slowdown was not unexpected, but has proved too fast and strong relative to the trajectory projected by both the Chinese authorities and the rest of the world. While no one doubted China's ability to become the world's leading economic power prior to Covid, this prospect is growing more remote and convergence is once again becoming an issue. What is certain is that China's development path will be less straightforward than that of Japan, Korea or Taiwan at the same stage of development, as its potential growth is diminished by its size and the current geopolitical situation.

China still boasts undeniable strengths, in particular a unique industrial and logistics complex that has fuelled a growth model based on foreign trade and infrastructure investment. However, this model is no longer suited to current balances. Amid slowing global demand for goods and reorganization of value chains (which is unfavourable for China), the question of the transition to domestic-driven growth is becoming more acute.

Although this rebalancing act is necessary, however, it looks all the more difficult given that the country's extensive real estate crisis is weighing on household confidence, already been severely shaken by three years of zero-Covid policy and by the perception that economic growth is no longer the top priority of government authorities.
 

Where do we stand? If we want to see more clearly, we first have to reframe the long-term trends that underpin the global scenario. For the time being, the cyclical decline in US hegemonic power is unfolding more or less as predicted by political theory, with a crisis of democracy playing out alongside rivalry with the US’s main competitor, China. And all this is happening under the pressure of an environmental emergency which, whether we like it or not, is pushing us from an economy dependent on fossil fuels towards one that’s dependent on critical metals. The end of this hegemonic cycle is also a moment of opportunity for all revisionist actors¹, whether states or smaller groups, which, now that the world no longer has a policeman capable of stabilising the global system, are free to spring into action. For the moment, we’re trapped in this world where threats are being put into action, and our only viable option seems to be deterrence. 

This is precisely why the US has quickly moved its aircraft carriers into position close to the Israeli theatre of war to prevent the conflict from spreading. It’s also why Poland is rearming and trying to become one of NATO’s leading powers. Lastly, it’s the lesson that many Asian countries, chief among them Japan and the Philippines, have drawn from the conflict in Ukraine: to be effective, deterrence has to be very powerful and must be backed up by strategic alliances. It must be credible enough not only to prevent the other party from acting but also to prevent any other power from changing the prevailing status quo, not only militarily but also economically (sanctions, reprisals, etc.). For example, maintaining the status quo in the South China Sea is about not only preventing conflicts but also securing the trade flows on which the region’s countries still depend for their growth.

More players willing to act = a greater need for deterrence 

The deal Australia’s prime minister recently struck with China to smooth the way for the two countries to resume their trading relationship should not be seen as a “normalisation”, since Australia’s security arrangements are now aligned more closely with the US. It is, rather, an attempt to strike a balance between economic dependence on Beijing and deterrence. Nor will it halt the derisking of strategic sectors, first and foremost those that use dual technologies (military and civilian). Moreover, the concept of what constitutes a strategic sector may be broader or narrower depending on which country is doing the defining. It’s also on the basis of this kind of balance of deterrence that the US and China are trying to negotiate the pause that was derailed last year by the “spy balloon” affair. That’s the purpose of the potential Xi-Biden meeting, which obviously will not end the strategic stand-off. Lastly, for a deterrent to be effective, the risk of incidents – whether intentional or not – must be under control. That means re-establishing emergency military communications after the short-circuit triggered by Nancy Pelosi’s visit to Taiwan. Deterrence, which is now essential for defusing escalating tensions, is first and foremost a matter of respect, and its aims must be clearly defined: securing respect for one’s sovereignty, independence, freedom and dignity. But this, of course, means nothing without the ability to deter (economically, militarily and ideologically).

Nor can any diagnosis of global geopolitics sidestep the US election calendar. Ultimately, this is central to the scenario. At this stage, the forthcoming elections look set to be a global game-changer. If Donald Trump were to be re-elected, this time not by a ragtag assemblage of voters rejecting the current political class (known as dégagisme) but by a positive vote of support, this would not have the same political meaning as in 2016: it would confirm that Trumpist ideology is now firmly rooted in the electorate and among elected Republicans. Make no mistake: in an environment of extreme political polarisation, a Trump re-election would undoubtedly usher America into the institutional unknown – a concern that has sometimes been downplayed. Any attempt to reject this claim based on the resilience of America’s institutions – and the near-sacredness of its constitution – must be taken with an increasingly large pinch of salt: those very institutions are increasingly giving off signals that they are at breaking point. In particular, the Supreme Court is increasingly out of step with part of the electorate. Similarly, the fact that some US states are demurring from Supreme Court decisions is no trivial matter, notably when it comes to highly charged issues of identity such as abortion rights and gender.

A world of double standards is a world of cognitive warfare

Seen from the outside, the US, though it is still a superpower in a great many fields, is no longer accepted as a model, not just by the international company of autocrats but also by a good chunk of the global population. Since the war in Iraq, it is no longer the world’s natural and undisputed policeman. Western democracy’s ability to ensure equal treatment for all is now being undermined by a key phenomenon whose enormous political power has only been strengthened by the bombing of Gaza: the issue of double standards. Longstanding democracies are being pressured to admit that they don’t keep their promises and forced, for good or ill, to hear a message that can be summarised thus: “Keep out of our domestic affairs: you have no superior moral or ideological mandate to get involved in them”.

Moreover, the fact that a huge section of the global population is focused on this message is a major strategic signal. It points to what the Rand Corporation saw in 1999 as a future key tenet of grand strategy: the noosphere². This concept, invented in 1922 by Pierre Teilhard de Chardin, presupposed the gradual emergence of a “sphere of human thought”³ and moments of global planetary consciousness arising from humankind’s increased connectedness. When strategists at Rand dug up the Greek notion of the noos and invented noopolitik, the concept of information dominance burst onto the geopolitical stage. “Conflicts will be won not by the biggest bomb but by the best story.⁴” Astonishing as it may be that a French Jesuit priest should inspire US hegemonic strategy from beyond the grave, the undeniable fact is that this development ushered in modern battle of grand narratives. 

Battle of the grand narratives

Wars of influence are nothing new, of course: in fact, they tend to be waged alongside struggles for power. As any reader of Sun Tzu will understand, securing a favourable position ahead of combat – or even winning without fighting – puts you at an advantage. And Joseph Nye pointed out the importance of soft power⁵ in the information age. But the importance of influence went up a gear at the turn of the century when new technologies ran into the cognitive sciences. The idea of cognitive warfare is becoming much more of an operational reality for all modern armies, as well as for all revisionist groups. The goal now is to use cognitive science to shift people’s beliefs and values as well as their decision-making capability. To this end, cognitive warfare makes use of emotional manipulation, identifying our cognitive biases and playing on areas of moral dissonance (our doubts and hesitations). After the land, the air, the oceans, space and cyberspace, it’s now our minds that are being fought over.

As is evident from the war in Ukraine, the attacks on Israel and the bombing of Gaza, global public opinion will constitute one of the key battlegrounds of the 21st century. This will be a high-intensity conflict in which we are already targets, victims and actors. No longer is it only states that decide who their friends and enemies are: that decision is informed first and foremost by public opinion. That’s what will determine who goes down in history as the winners in conflicts, sometimes even in defiance of the outcome of military engagements. In fact, governments are partly losing their grip on political sovereignty, which is defined precisely as the ability to name the enemy: political sovereignty is now being fought over in what are known as cognitive arenas, i.e. “social spaces in which worldviews are constructed” (social media, television studios, think tanks, NGOs, etc.)⁶. 

However, not all geopolitical and political events become pretexts for a cognitive clash. For such a clash to take place, events must come up against a key element of power or ideology and must be seized upon by actors who are particularly active in this area. That’s precisely what’s happened with the attacks by Hamas and the ensuing bombing of Gaza, and it’s precisely the trap that’s been laid not only for Israel but for all governments held hostage by public opinion. Conversely, the question of Nagorno-Karabakh, swallowed up by Baku in the space of just a few days, was not a global cognitive battleground despite the Armenian drama and the strategic importance of the Caucasus. The information war between the US and China clearly is one such battleground, and the battle is set to rumble on for years to come. This is something we need to be prepared for. Lastly, there are some moments that are particularly conducive to cognitive and information attacks: the Taiwanese and US elections are prime examples. Meanwhile, climate issues are already a key cognitive battleground.

How do these clashes play out? How do they affect us as individuals and as employees of companies keen to push the boundaries of social responsibility? These questions arise because we are and will continue to be subject to cognitive attacks of all kinds, not limited to the geopolitical arena. These attacks impact our political and economic scenarios through multiple channels, both direct and indirect. They influence our choices, who we trust and what we invest in. If we are to resist this influence, we must understand how emotional shocks play out in time and space through mental pathways in us that act as powerful transmission belts. 

This means understanding how the pain of those exposed to violence is instrumentalised through the emotions of those exposed to words and images. And it means understanding the economic and geopolitical role played by our fears, our anger and our empathy.

1. States, groups and individuals that are radically opposed to prevailing rules, standards and values. Revisionist actors often think the only way to bring down the entire system is by adopting a radical posture (see A World Restored, Henry A. Kissinger, Houghton Mifflin, 1957).
2. J. Arquilla and D. Rondfeldt, The Emergence of Noopolitik: Toward an American Information Strategy, Rand Corporation, 1999 
3. G. S. Levit, The Biosphere and the Noosphere, Theories of V. I. Vernadsky and P. Teilhard de Chardin: A Methodological Essay, Archives Internationales d’Histoire des Sciences, 2000
4. Quote by John Arquilla and David Rondfeldt, Le Monde, 6 June 1999
5. J. Nye, Bound to Lead: The Changing Nature of American Power, New York, Basic Books, 1990
6. La guerre cognitive, Christian Harbulot et Didier Lucas, École de Guerre Économique

The soft-landing narrative continues to be fuelled by a resilient labour market, despite the slowdown in economic activity, and by the healthy economic and financial situation of private agents. The eurozone is no exception to the favourable trend in supply. But the eurozone economy is slowing more than others, raising more pressing questions as to the end of the abnormal cycle of expansion. While activity is now 2.6% higher than before the health crisis, the annual pace of quarterly GDP growth has dipped sharply, from 4.2% in Q2 2022 to 0.5% in Q3 2023.

InQ223, activity grew 0.2% QoQ,slightly better than expected by the consensus and the Bank of England (BoE), which were expecting zero growth and 0.1% QoQ respectively (our forecast was 0.3% QoQ). The details showed that domestic demand was still strong overall given the extent of the past rise in interest rates (515 basis points since the start of tightening in December 2021) and the significant rebound in corporate bankruptcies (to their highest level since 2009). However, since the end of the summer, the short-term outlook has darkened.

The French economy is making a soft landing following the post-COVID economic recovery in 2021 and the adverse effects of the outbreak of the war in Ukraine in 2022. The country has avoided a technical recession, with growth of 0.0% (qoq) in first-quarter 2023 and 0.5% in the second quarter. Growth is expected to be modest in the second half of 2023 as the effects of monetary tightening peak, but the rebound in household consumption linked to disinflation will enable gradual economic growth in 2024. Annual growth is expected to be 0.9% in 2023 then 1.0% in 2024.

Spanish GDP rose 0.4% in Q3 on the back of strong growth in private consumption (+1.6%) and investment (+4.6%), while the contribution of foreign demand was negative, by -1.3pp. Activity was primarily driven by services in spring, including artistic, recreational and other services, information and communications as well as non-market services. Conversely, the primary sector and, to a lesser extent, the industrial, energy and real estate services sectors recorded declines in activity.