16 Feb 2023 3 min read

Spy game? 99 red balloons go by

By Christopher Jeffery , Matthew Rodger

A Chinese balloon has recently provided more interest than at a typical five-year-old's birthday party. What do the latest superpower tensions mean for investors?


The Chinese spy/weather balloon (delete as appropriate) drifting across the United States captured the world’s attention.

We should pause for a moment to marvel at the technology. NASA has a similar balloon programme, and the details are extraordinary. Their balloons are enormous: 40 million cubic feet (big enough to house a football stadium) encased in a polythene layer no thicker than a sandwich wrapper. China’s is estimated to have been 200 feet tall (i.e. taller than the Statue of Liberty) carrying a payload the size of a “regional jet airliner”. However, it turns out that it was no match for an F-22 Raptor armed with Aim-9X sidewinder missiles.

The temperature of the discussion is still quite low. Blinken has postponed his trip to China, but the language from both sides is still quite moderate: this balloon war seems to have very little hot air!

Could this be because both sides are busy spying on each other the whole time from space? And beyond some temporarily distracting footage, and 101 internet memes, what are the possible implications of this incident?

First the good news. Chinese balloons of this type make little green men less likely. US intelligence officials have determined that several "unidentified aerial phenomena” (aka. unidentified flying objects) stretching back to the Trump years were actually similar balloons.

I doubt there have been as many as 99, but it seems that there have been several previously undetected red balloons over recent years. Indeed, in a report last year, the US Defence Department estimated that China operates 260 “intelligence, surveillance and reconnaissance” satellites.

Second, we need to put this in context. The US programme of spying from space hides in plain sight. The National Reconnaissance Office is responsible for “developing, acquiring, launching and operating” American spy satellites. It boasts a motto that would make Buzz Lightyear proud (“above and beyond”) and touts children’s puzzles and colouring pages on its website. Its work is both covert and overt at the same time.

Also, it’s only a few years ago that we learnt that the US was spying on the leaders of France, Germany, Norway and Sweden through a highly dubious arrangement with the Danish intelligence agency. Countries, even allies, spy on each other the whole time.

Third, it’s a reminder of the superpower tensions that refuse to die down. Alongside drama about spy balloons, we’ve had news recently that the Netherlands and Japan are joining the US in banning certain exports to the Chinese semiconductor industry. The exact parameters of those bans have not yet been publicly disclosed, but their intent is to deprive China of the technology to develop the latest wave of semiconductors which might have particularly sensitive military applications.

The restrictions on semiconductor (and associated technology) exports to China need to be understood in the context of the AI revolution. Recent LGIM blogs have addressed the potential impact of accelerating AI on both industry and the future of work, but there is an important geopolitical angle here as well. Restricting China’s access to the most advanced chip technology is not about stopping them using a chatbot, it is about hampering their ability to compete in the unfolding military-industrial AI arms race.

It was a rough week for Chinese assets on the back of the latest bout of superpower tensions news.  After a stellar start to the year, Chinese H-shares have now given back half of their year-to-date rally. Investors who got sucked into the post-COVID rebound have been reminded that, just like balloons, markets can go down as well as up.

The faster the ride up into the stratosphere, the greater the risk of unfortunate deflation.

Christopher Jeffery

Head of Macro, Asset Allocation

Chris is Head of Macro within LGIM’s Asset Allocation team. He oversees LGIM’s Economic Research, Rates and Inflation, and the Multi-Asset Strategists and idea generators. He joined LGIM in 2014 from BNP Paribas Investment Partners where he worked as a senior economist and strategist within the Multi-Asset Solutions group. Prior to that, he worked as an economist within monetary analysis at the Bank of England with a focus on the UK domestic economy. Chris graduated from University College, Oxford in 2001 with a first class degree in philosophy, politics and economics. He also holds an Msc in economics (research) from the London School of Economics and is a CFA charterholder.

Christopher Jeffery

Matthew Rodger

Assistant Economist

Matthew is an economist covering emerging markets. He uses countries’ historical experience, alongside fresh economic data and quantitative methods, to recognise new investment opportunities. Prior to joining LGIM, Matthew graduated with an MSc in Economics from the London School of Economics and worked in various economic research roles. When not studying EM economies, he is enjoys reading, hillwalking and skiing.

Matthew Rodger