Monday, July 24, 2017

Can China Say No (updated)

In the last decades, Japan and some oil-rich countries could not say “No” to the USA, but China can to some extent and definitely can in 10 years.

Being the major players in the global economy, a full-fledged trade war with China would mean global recession and actually we would lose more than China. A military war would likely cause market crashes starting in the US and Asia.

Today’s China is not your Daddy’s China

China is not as strong as the US, but the gap has been reduced in the last 30 years, and at that time China could not build a reliable bicycle.

China lacks natural resources that she can obtain from many countries. China can get many high tech products from EU and Russia such as jet planes and agricultural products from many countries including SE Asia and Australia. At the meantime, Chinese are advancing their products. China no longer is export-oriented. Basically it is moving to a developed country with higher-value products. With its huge internal market, Chinese can manufacture products cheaply due to the economy of scale.

China’s rise is primarily due to the USA playing China card against Russia and now the US plays India (and possibly Taiwan) card(s) against China.

Let’s examine some critical factors in this book starting with a little history. In  about 200 years ago, the alliance of 8 nations forced China to trade. When China refused, they enforced it with battle ships and cannons. When the Brits had nothing to trade, they pushed opium obtained from India and killed millions of Chinese. The alliance asked for ‘damages’ that bankrupted China and led to the national humiliation for China. The US was generous to use the money to fund Chinese foreign students to the US. They returned and modernized China.

What if China withdraws all the debts we owe?
It would lead to the global depression starting in the US. It is too obvious and I go no further. China is one link in the global economy. It will survive without our trades. A full-fledged trade war would hurt us more than China. Our trading competitors are EU countries, not China as we produce similar products such as airplanes. China would be more cautious in lending us money and/or buying US properties/companies. As of 1/2017, China was demoted to #2 in US debt holder. Unlike businesses, creditors have no weight in our political decisions.

Chinese is still buying our Treasuries for their interest. If they stop, the interest rate would rise and it would cause a housing recession. As of Jan., 2016, our debt to China is just over 1.05 trillion, or about 28% debts held by foreign countries.

How about the deficit with China
We had about $347B in trade deficit with China in 2016. A lot of products such as Apple’s iPhones are counted as import. We’re a victim of our own success: A higher living standard means higher wages, more protections to our workers, more regulations for our environment… Our strong USD reduces the competitive edge of our export. However, we need China to take out the obstacles to our products. To illustrate, most of our consumer products cost a lot more in China than similar local products.

Modern warfare
Modern warfare is different from the 60s. We need better cyber security for both the government and the corporations. We need to fight against terrorists in our own soil.

We have enough nuclear weapons to destroy the entire world. N. Korea is not a nuclear threat unless the guy is really crazy and we drive him to the cliff. We do have to replace the 5" floppy disk though – it could be a security protection.

Aircraft carriers are a drain of the budget. It will not be useful as in the old days. They are sitting ducks for the carrier missiles... Why we need carriers with dual nuclear generators? In addition, China’s missiles can destroy GPS satellite which our guided missiles depend on.

Have we learned from our losses in Vietnam and Afghan? Does Vietnam today threaten us? Did we learn from the French and Russians? It is expensive to send soldiers thousands of miles away.

China has modernized its arm forces via development, acquisition and espionage. China produces cheaper military drones, which have been tested in the Middle East. China has mastered stealth technology in their jets and submarines; the technology could be stolen from us. China becomes the largest export on the military drones due to low prices and no questions asked.

To conclude, China’s military might is not that primitive and not that advanced as proposed by our offense vendors who want to sell their weapons. By quality and quantity, today China cannot compete with the US in military, but she is improving enough to defend her territory.

We cannot afford another war

The two wars in Middle East have been draining our resources. We’ve been broke. We will become a real paper tiger when the wars continue for another ten years.

Obama’s administration saved the market at the expense of our national debt which is at its recent height. Our competitive edge will be reduced by servicing the debt instead of investing on profitable projects such as infrastructure. The debts will be paid by our children and grandchildren who do not have a voice today. Are we following the footstep of Greece? We complains on Chinese military buildup without mentioning our military budget is more than the total of the next five countries not including China due to unconfirmed data.

China, the victim

China has not been an aggressor to foreign countries in her entire history. The last conflict is a brief war with Vietnam in 1979 to teach her former ally a ‘lesson’ and lessen the Russia influence in the region. China had no choice in the Korean War and she benefited by getting rid of the former Chiang’s soldiers. The war with India was a joke as China could win it by redirecting the water flow from Tibet. China’s involvement in wars is relatively less compared to our endless participation in wars.

In Roman time, China was as strong as Rome, but they very seldom colonized any country as opposed to the Roman. In around 1420, Zheng He’s fleet was far larger in size and number than Columbus’s and they just wanted the foreign countries to pay annual tributes and for that they received compensations in return. It contrasts significantly with Columbus.

For the last three centuries starting from the Opium Wars, China was the victim of aggressors. Actually the two dynasties of the last three were ruled by foreigners before Mao included these ‘barbarians’ as part of the Chinese minorities.

The late Deng X. P. said that China would recover most its lost territories in 100 years: many islets in South/East islets, Outer Mongolia (a buffer zone created by Russia), many farm lands from Russia… The boundary line between India and China was drawn by a British general favorable to India.

Why we identify China as an aggressor? Even they steal our intelligence properties due to our lack of protection - it is not the reason to start a war that would hurt us more.


They could be China invading (or ‘reuniting’) Taiwan and the islet disputes in South/East China Sea. When China is richer and stronger in 50 more years or so, the national pride will drive China to reunite with China. Hopefully it will be achieved economically rather than militarily. Without the US’s full support of Taiwan, it would not be a tough job.

When the economy tanks, the US government would have to redirect our attention to other areas such as blaming China. Today we cannot as more jobs are replaced by lower-wage countries, not China. The job loss is also due to robots and less demands from the consumers since 2008.

China say “No” as the priority of political stability is more important than a trade war.

Will Chinese wake up and fight against the government?

It is the common thought of the China bashers. Most Chinese will not as most are busy in making money. After they taste the fruit of capitalism, no one is stupid enough to fight against the government and they learn the bitter lesson from Tiananmen Square incident.

Our investment in China

Currently, GM has about 25% profit from China and Ford has 16%. They will be replaced by cars produced in Europe and Asia. The first victim could be Boeing when China can buy jets from EU; it is worth more than $1 trillion in the coming 20 years. Walmart’s products will skyrocket in prices reducing the buying power of the low-income citizens.

Apple is a good example among many high-tech companies. Can Apple move their manufacturing back to the US to eliminate the 35% to 45% proposed tariff?

How can they find enough rare earth elements for their phones? They are available but most cannot be mined without damaging the environment. Many of these mines outside China were bankrupted. How can they motivate an army of educated workers for a new model with slavery wages and unions? It is easy to collect the generous welfare than working in these monotonous jobs. How can we get 40,000 technicians? How can Apple move all the component manufacturers from China? What is the impact on Apple in losing the China market (131 million iPhones vs. 110 million in US in 2015)?

One solution is to manufacture the individual parts in China and has the final assembly here in the USA with a label of “Made in USA” even the label is made in China.

Counting friends and enemies

The US used to have a lot of friends and formed powerful allies with them. When the allies embargo a country, they’re successful. However, our relationships with many of our allies are changing. Russia is not our enemy now and we have avoided some of the conflicts by not participating in actual wars. Russia is an important trade partner of China. Israel, our important ally, has been arguing with our political decisions more frequently than before. China is building two modern silk routes: one by sea and one by land to connect Asia, Africa and Europe better. The US has little use for these routes.

Strange relationships

The chess masters are the US, Russia and China. Japan, N. Korea, Taiwan, Philippines, India, SE Asia countries, Israel and EU are the chess pieces. The US and Japan are friends and both want to ‘contain’ China. Russia and China are trade partners with advanced weapons. Trump seems to be friendly with Russia to build a partnership. However, if we have any war, Russia will be sided with China, but we cannot count on EU now. Many EU countries are busy in fixing their economies and some do not want us to be our puppets. They just want our contributions to their defense. We should be reminded we have a hard time to end a war. When we do not learn history from Vietnam and the Middle East wars, we will repeat history. Why we should always find an enemy?

The US used to play the China card against Russia and attributed to China’s rise by taking out the embargo. Now, it tries to play Russia card against China. This is another example of “my enemy’s enemy is my friend”.

Being a US citizen and born in Hong Kong, it will be my saddest day if there is a war which is predictable as unavoidable by many. I hope it will not happen in my life time.

Investors have to watch the development of the possible conflict. The only winners are offense sector and precious metals. The recent news of capturing of a submarine drone drove the market lower. What will the market react when there is a military war between the two countries?

I have different feed backs from readers with different backgrounds. Being born in Hong Kong, I’m naturally biased.


The above is from my book "Can China Say No?". Click here for more info in 

No comments:

Post a Comment