Polina’s Perspective: Shooting for the moon - strategic rivalry in a fragile world

Would you like to fly to the moon as a new holiday destination? I was getting quite excited about the prospect, but the latest news flow suggests that commercial space companies have shifted focus away from citizen tourism to building logistics, cargo and infrastructure contracts for NASA’s upcoming Moon base. Are we aiming for the stars, or just another crater on the moon? As I reflect on my travels last week through China and the Philippines, it feels that today’s strategic geopolitical rivalries extend far beyond our terrestrial borders, including the race to the moon.

A few days ago, China successfully landed its first reusable rocket, positioning itself just 24 months behind the US in lunar capabilities - not the 10 years many had assumed. Building bases on the moon has become a strategic priority, since satellites can strike a target within minutes of deorbiting, while land-based intercontinental ballistic missiles (ICBMs) require at least double that flight time, plus the time to fuel and fire them.

In this new reality, both space and trade policy are the equivalent of foreign policy and the fragile equilibrium we've maintained since the end of the Cold War is being tested in ways that extend, quite literally, to infinity and beyond.

China's strategic advantage: energy and AI integration

During my week in Shanghai and Beijing, one thing became abundantly clear: China has developed a strategic advantage in two critical areas that will define the next decade – energy infrastructure and AI integration. While the US grapples with an inflation problem, stemming from an underdeveloped electricity grid and continued reliance on oil, China has built a sophisticated power network that delivers electricity at US$0.08 to US$0.12 per KWh. That is nearly half the cost of the US (US$0.15 to US$0.17 per KWh) and one-third of Europe (US$ 0.2 – US$ 0.4 per KWh).

^{The Xiaomi SU7 Ultra supercar – officially the fastest mass produced four-door car in the world today.}

This energy advantage has translated into remarkable AI integration across the economy. The scope is breathtaking – from accounting and contract checking to planning and facility optimisation, AI has penetrated production facilities at a pace that makes Western adoption look pedestrian. I witnessed Xiaomi's impressive human-car-home integration, with its new electric supercar boasting 1,548 horsepower (matching a Lamborghini) and 600-900km battery range with 25-minute full charging, all for US$75,000. The cheapest car with equivalent horsepower outside of China would be the Hennessey Venom F5, a petrol-fuelled vehicle, starting from $1.8 million. In China, AI integration is also visible in medicine, where medical applications like knee and dental implant robots are now covered by national insurance.

The economic implications are profound. AI is less credit-intensive than traditional industrial investment, which suggests more emphasis can be placed on monetary and fiscal policy to stimulate demand. We believe that in China the PBoC has room to cut rates further, given inflation remains under control. For example, with mortgage rates at 3% more rate cuts are needed to revive the real estate market. China has more monetary policy levers to pull than most developed markets struggling with inflationary pressures.

The monetary and fiscal policy imperative

In an environment where most major countries can ill-afford a conventional war and the AI revolution hasn't yet translated into income for most workers, both monetary and fiscal policy must do the heavy lifting. Without an inflation problem, China has more room to manoeuvre.

Yet, Chinese policy makers have been reluctant to embark on a large-scale fiscal expansion program. The shift toward 'small and beautiful' infrastructure projects under the Belt and Road Initiative reflects this new reality. Healthcare and drinking water projects have replaced mega-infrastructure as cash flows become more important than government guarantees. Even with capital account controls, RMB internationalisation continues steadily, with over 30% of trade now settled in RMB (compared to only 15% a decade ago) and the panda bond market growing at 50% annually.

This could prove to be a silver lining for a positive beta environment in Chinese local currency debt. The question is whether this theme can extend beyond China's borders. Here, it feels that regional proximity and attractive valuations might not be enough to have the halo effect. My trip to the Philippines is a case in point.

The Philippines: structural challenges in a competitive world

My visit to Manila revealed a country caught between its potential and its politics. The three-year local election political cycle, and the inability of presidents to be re-elected after one six-year term, combined with deeply entrenched conglomerates, makes quick economic adjustment nearly impossible. Growth has halved from 6% to 3%, partially due to the flood control corruption scandal last year that delayed infrastructure spending, while consumption has dropped to 4%, despite continued high borrowing and current account deficits.

Ironically, the previous Duterte regime, despite its obvious drawbacks, proved more effective in pushing through economic reform precisely because it wasn't in alliance with the entrenched oligarchy. The current policy standstill – with the Senate focused solely on the Vice President's impeachment, while President Marcos and Vice President Sara Duterte see eye-to-eye on little except their mutual dislike – exemplifies the structural challenges facing the country.

The Philippines is hoping that future AI partnerships with the US and focus on critical minerals might boost growth and FDI, but the pace of adjustment is far too slow. Examples abound across all facets of domestic policy: communist-era land reforms prevent ownership of more than five acres (leading to expensive food imports), and protectionist policies mean rice prices are double, and sugar prices triple the world average to name a few. The slow pace of change is even evident in the fact that the Philippines is the only UN member state without a general divorce law – a ban that stems from centuries of Spanish colonisation and arguably is a convenient way of protecting the business elite.

^{A Jeepney navigating Manila traffic - the Philippines' iconic mode of public transport has changed little since American Jeeps were repurposed after World War II, a fitting metaphor for a country struggling to modernise.}

It is true that the country sits on substantial FX reserve buffers, at US$100bn, seemingly manageable external vulnerabilities, with external debt-to-GDP at a modest 30%, and counter-cyclical remittance flows. However, the trend is concerning with both equity and bond investors voting with their feet. In fixed Income markets, local five-year bond yields have increased 140bps this year, reaching 7% - the highest level since the global financial crisis (GFC) - while the PHP has continued to gradually depreciate, dropping another 4.5% year-to-date, despite a higher policy rate of 4.75%, following two rate hikes this year. This is partially driven by investor concerns that inflation is likely to remain high (currently targeted at 6.4% this year), given the recent 12% minimum wage hike that has not been included in government forecasts, as well as the El Niño effect that is likely to put more pressure on rice prices that are already at a high level. Today, the local stock market is a distant memory of what it once was. At 8/9x PE ratio, it is now cheaper than during the GFC and a fraction of its 20x peak multiple over a decade ago. The Philippines’ market capitalisation is now only US$150bn, or 3x less than neighbouring Indonesia, with the number of companies in the index shrinking from 23 to 9. Yet, the absence of urgency for reform is striking. As one contact put it: "No sense of urgency, no competition, pure preservation mode! Society is made by the elite for the elite".

Regional competition and the new reality

This contrast between China and the Philippines illustrates a broader truth about today's world: regional and global competition is intensifying, and countries that cannot adapt quickly risk being left behind. The current environment differs markedly from the Asian crisis of 1997, with most countries maintaining substantial reserve buffers. However, it would be dangerous to rest on these laurels for too long.

China supports industries while America supports people – a fundamental difference in approach that extends to their international engagement. The US faces structural challenges stemming from its two-year electoral cycle and lack of strategic patience, while China demonstrates coherence and long-term planning, even if not always delivered in ways the West finds attractive. All regions might need to adjust to keep the strategic equilibrium aligned.  

Perhaps a world where China spends more, the US saves more and Europe invests more would provide a more solid footing.

Investment implications: looking beyond earth

For investors, this new reality creates both opportunities and challenges. Chinese local currency debt could benefit from the country's greater monetary policy flexibility, though current five-year local government yields at 1.4% are already at an all-time low. Sectors exposed to AI integration and energy transition merit close attention, though perhaps the best way to take advantage of those might be via equity rather than bond markets. 

However, the divergent paths of countries like the Philippines suggest that not all emerging markets assets will adapt equally well in this new competitive landscape. While valuations might look compelling in Philippine local fixed income assets, investors need to see a clear focus on pro-business reforms to unlock the country’s potential, including business and tax liberalisation laws, cutting red tape, simplifying regulatory processes and improving digital and physical infrastructure. In the meantime, we find it more appealing to follow Philippine conglomerates internationally, investing in their recent acquisitions in oil and gas assets in Colombia via hard currency corporate bonds that trade 300bps cheaper than the parent company, as an example. 

The race to the moon may seem like science fiction, but its implications for foreign policy, strategic alliances and, ultimately, investment returns are very much grounded in present-day reality. As we look toward the stars, we must remember that successful navigation requires both ambition and pragmatism – qualities that will determine which countries and which investments will truly reach for infinity and beyond.