Background
Soft power has long been a proxy for influence and global standing. Rather, soft power, and the ability to project it, is the summation of strength in four areas – military capacity, economic sophistication, cultural ubiquity, and reputation (are you viewed as a ‘wolf warrior,’ do you break treaties, have you stood by your promises? Etc.) Effective soft power is the ability to get what you want through influence rather than conflict. Through this lens, we can better understand events playing out in the Solomon Islands and the greater global soft power jockeying between the U.S. and China.
In April, the Solomon Islands in the pacific signed a security pact with China, in which leaked language states, [1] “China may, according to its own needs and with the consent of the Solomon Islands, make ship visits to, carry out logistics replenishment in, and have stopover and transition in the Solomon Islands.” This leak and the subsequent signing of the pact sent alarm bells ringing in Canberra and Washington for fear of a Chinese military base being established on the island, or at the least enhanced capacity to surveil, disturb, or disrupt Australian and U.S. military activity. While both the Solomon Islands and China deny plans for an eventual base, Euan Graham at the International Institute for Strategic Studies (IISS) rightly points out that “official confirmation that [China] has concluded a government-to-government security agreement with the Solomon Islands suggests greater willingness – and confidence – openly to pursue a security role in the Southwest Pacific.”
This change of stance within China’s Ministry of Foreign Affairs (MoFA) highlights the country’s ability to utilize soft power to achieve national economic and, as we’re seeing now, military ambitions, not just in the Pacific but globally.
Analysis
Since April, the story has seen quite a few developments – the Solomon Islands suspended U.S. naval visits, threatened expulsion of foreign journalists in August, and nearly spurned a U.S.-Pacific Island pact in September. This back and forth not only exemplifies “a familiar small-state game, exploiting geopolitical rivalry between external powers in order to ‘bid up’ material benefits” as Graham writes but also importantly shows that China has significant soft power influence to begin with.
Over the past few decades, China has grown significantly in two of the four key areas crucial to soft power – militarily, as they grew to [2] $293B, or 13.9% of global military spending and economic sophistication, as China took the place of the world’s second-largest economy. However, in cultural ubiquity and reputation, China has always lacked. It’s near impossible to find an equal to the cultural impact the American ethos has on most countries, democracies or not.
Additionally, in recent years China has also been backsliding significantly in reputation. Over the last six years (ramping up notably in 2020 with the onset of the Covid-19 pandemic), China has wholly abandoned the principle of “hide your strength and bide your time” in favor of wolf warrior diplomacy or a stance by the MoFA that [3] “embodies an assertive or aggressive turn in Chinese foreign policy under Xi Jinping and marks a departure from the established Chinese diplomatic repertoire.” Simply put, the “dare to fight” (敢打, ganda) orientation of formal Chinese expressions on the international stage” has wrought serious damage to Chinese soft power, to the advantage of the U.S.
Democratic Chinese neighbors S. Korea, Japan, Taiwan, and Australia, already tentatively trustful of Beijing, grew pessimistically skeptical. While not large or direct security partners with the U.S., smaller ASEAN countries continuing to barb with China on aggressive territorial disputes are looking to the U.S. more and more as a regional counterweight. In Europe, a Chinese national and former Huawei executive was arrested in Poland for [4] espionage setting off speculation in EU capitals about Beijing’s benignity.
If international wolf warrior diplomacy was a peek behind China’s innocuous and benevolent veneer, then the 2022 five-thousand-word agreement with Russia was a complete dropping of the veil (Beijing’s continued rhetorical support for Moscow’s war has left particularly deep scars across the EU). The two countries declared a [5] “new era in the global order,” and as Robert Daly, the director of the Kissinger Institute on China and the United States, puts it, “This is a pledge to stand shoulder to shoulder against America and the West, ideologically as well as militarily.” The communique, followed swiftly by the Russian invasion of Ukraine, put the world on notice and turned much of the global skepticism of China driven by wolf warrior diplomacy to outright mistrust and diplomatic alienation.
Together this mosaic paints the picture of a blunt, soft power execution strategy for Beijing – either lean heavily on military drills and faux island creation (military pillar) or restrict access to Chinese markets (economic pillar). Favorably, using these tools of soft power as bludgeons is more effective regionally than globally. Opposite this picture, the U.S. utilizes its relative strength in these four pillars to a more potent effect globally. While regionally, in the Pacific and the Solomon Islands, the U.S. will have work to do, it’s much better positioned for effective long-term soft power projection than China.
Conclusion
While China has grown significantly in other pillars of soft power, its tarnished reputation leaves Beijing’s long-term prospects for effective soft power projection dim at best. While circumstances like those in the Solomon Islands will continue to crop up (less globally and more geographically close to China), the U.S. is better equipped to win these relationship opportunities. This will be particularly true if the U.S. can sustain material military hegemony in the Pacific, continues to engage [6] diplomatically (the U.S. closed the Solomon Islands embassy in 1993), and allows smaller players greater access to American markets.
Themes
- Commodities
- Defense
- Shipping
- Chinese equities
- U.S. Index Funds
We believe a growing [7] global rebuke of Chinese companies in tandem with draconian lockdowns and sector shakeups makes Chinese equities and the market in general, un-investable. Authoritarian regimes historically grow more repressive and arbitrary over time, not less. Coming out of the CCP’s 20th party conference, leadership saw a brain drain and calcification of monoculture thinking as the standing committee was stacked with Xi-yes men. This forecasts extremely poorly for domestic policy course correction and makes them more aggressive internationally. This is all before considering the potential for kinetic conflict over Taiwan, which would further corroborate our thesis.
Long-term U.S. global and Pacific soft power projection track well for essential commodities, defense, and shipping issuers. Additionally, more relationship wins like the Solomon Islands pact broadly point to U.S. company penetration of new markets and deeper integration with existing foreign markets (ex. China). On this point, U.S. mid-large cap index funds will also continue to be a safe play. We believe geopolitical risk has outsized potential to hit micro-small caps the hardest as disruptions in cost-focused supply chains greatly agitate capex and subsequently impact valuation multiples.
Sources:
[1] https://www.iiss.org/blogs/analysis/2022/05/china-solomon-islands
[2] https://www.visualcapitalist.com/ranked-top-10-countries-by-military-spending/
[3] https://journals.sagepub.com/doi/full/10.1177/18681026221079841
[4] https://www.gmfus.org/news/huawei-espionage-arrests-poland-wake-call-europe
[5] https://www.newyorker.com/news/daily-comment/russia-and-china-unveil-a-pact-against-america-and-the-west
[6] https://www.bloomberg.com/news/articles/2022-09-30/solomons-signs-us-led-pacific-agreement-after-historic-meeting
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