Be careful what you wish for, lest it come true.

Chinese President Xi Jinping may want to keep that in mind.

Xi has engineered a sharp reversal of the policies of his predecessor, Deng Xiaoping, who sought to strengthen China by modernizing it.

Deng’s approach was based on a Chinese aphorism: “It doesn’t matter whether a cat is black or white, if it catches mice it is a good cat.”

The mice Deng wanted to catch were economic, technological and military power sufficient to protect China from adversaries such as the United States and the Soviet Union. To do that, he allowed capitalist enterprise to operate in China.

Since then, the Chinese economy has exploded. Its gross domestic product grew by an average of 10% a year for 30 years. It’s now the second-largest economy in the world, and the biggest manufacturer and exporter. It has the largest banking sector in the world, the largest foreign exchange reserves and the second-highest number of billionaires. It’s technological and military prowess is growing by leaps and bounds.

Truly, Deng caught his mice. Now Xi believes the time is come to reign in the cat.

This is a dangerous geopolitical game for Xi … but investors who play it wisely could make a fortune.

A New Gang on the Asian Playground

Last week India’s The Economic Times reported that Japan, India and Australia are developing a “supply chain resilience initiative” to counter China’s dominance.

That should make Xi Jinping nervous … and cause savvy investors to take notice.

The three countries are among China’s biggest trade partners. Japan has significant industrial investment in its huge neighbor. Chinese firms have big investments in India and rely on Australian raw materials.

But the trio is also increasingly alarmed at Beijing’s militant behavior in the region … and engaged in escalating disputes with the rising power over trade and territorial issues:

  • Chinese and Indian troops have killed each other on their disputed border in the Himalayas. In response, India’s government banned Chinese smartphone apps and restricted the use of Chinese technology in the country.
  • The Japanese government is actively trying to reduce its dependence on exports to its second-largest trading partner.
  • Meanwhile, Australia is locked in an intense dispute with Xi’s government over agricultural exports.

All three countries are also concerned about events in Hong Kong, ongoing ethnic repression in Xinjiang, as well as China’s undisguised illegal territorial aggression in the South China Sea.

The proposed supply chain initiative will leverage existing programs in all three economies:

  • The Japanese government already offers $2.3 billion in subsidies to convince dozens of Japanese companies to leave China.
  • The Indian government offers tax holidays and incentives to attract electronics manufacturers from China, including Samsung, Foxconn and Apple Inc. (Nasdaq: AAPL).
  • Australia and India have been in discussions to deepen their trade relationship for some time to reduce their mutual dependence on China.

And the new plan comes on top of a global trend, away from dependence on fragile supply chains.

Earlier this month Bank of America Corp. (NYSE: BAC) analysis estimated that COVID-19 had caused 80% of global economic sectors to face supply chain disruptions, forcing over 75% of firms to speed up plans to redesign their supply chains.

Profit From the Great China Exodus

In the case of India, it has a substantial low-wage labor force that could compete with China’s.

Chinese labor is no longer as cheap as it was:

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But cheap labor is only part of the attraction. The main goal for each of the countries is supply chain stability. Stronger economic ties will lead to stronger political alliances, which will help to counter Beijing’s bullying in the region.

COVID-19 has taught the global economy that there is a trade-off between efficiency and resiliency. Supply chains reliant on China may be cheap, but they are fragile. The years of savings through this trade arrangement have been wiped out in a few months thanks to the pandemic.

And another reason I’m confident these initiatives represent a big change … and a big investment opportunity … is that I’ve seen these economies up close.

I’ve visited India dozens of times since the early 1990s, and have watched the country go from economic backwater to global technological leader. And as early as 1993, I saw Australian manufacturing firms deploying cutting-edge technology to produce low-cost manufactured goods. Although I’ve never been to Japan, its world-beating manufacturing techniques were the subject of my postgraduate studies in economic history.

One of the things I learned through the study of economic history is that things change over time … and that if you get in at the beginning of a new trend, you can make a lot of money.

Recently Clint Lee recommended the iShares MSCI Japan ETF (NYSE: EWJ), an exchange-traded fund (ETF), as a potential technical breakout candidate. This recent news will certainly help that.

For broad exposure to the fast-growing Indian economy, buy the iShares MSCI India ETF (NYSE: INDA).

And you could round out the trio with the iShares MSCI Australia ETF (NYSE: EWA).

EWJ is up 7.75%, but INDA and EWA are still down for the year. That makes it an excellent time to buy in preparation for a turnaround.

It may not happen right away, but mark my words, that turnaround is coming … because eventually, Xi Jinping is going to get what he’s asking for — a flight away from the Chinese economy.

Kind Regards,

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Ted Bauman

Editor, The Bauman Letter