Why China Is the Only Rival in the Eyes of Trump

Donald Trump is the product of his time, and also a sign that America’s national will and strategic objectives are beginning to change. It is similar to the situation when, before America managed to disembody the Soviet Union, it welcomed a right-wing president who didn’t have much political experience, Ronald Reagan.

Presidents like Trump and Reagan are not professional politicians and their interests are relatively straightforward. Although Trump started out as a businessman, his deep-rooted bias toward politics means that, when it comes to politics, there won’t be serious problems of “quid pro quo,” and he won’t give in easily to pressure. He will be firm about putting words into action.

Regarding how the Reagan administration managed to accelerate the collapse of the Soviet Union, there is plenty of information to be found online as it is no longer a secret.

After Trump took office, the veil over many of his policies was lifted. Some of my earlier views have now been proved to be correct.

For instance, I didn’t think Trump would shrink America’s power on the international military landscape and in manipulating geopolitical relations. On the contrary, America will further justify its expansion, which is the opposite of the promises made during the election campaign, such as that America will close its borders to the outside world and de-globalize.

What the U.S. has done recently is worth looking at, including the dramatic increase in its national defense, the inclusion of Diaoyu Dao in the Treaty of Mutual Cooperation and Security between the United States and Japan, the entry into the South China Sea of U.S. aircraft carriers, and the deployment of the Terminal High Altitude Area Defense system in South Korea.

Only recently did Trump authorize a budget of $19.5 billion for NASA (which is $200 million more than that of 2016), aiming to send humans to Mars in 2033.

Despite drastic cuts to federal spending, Trump kept the huge amounts of funding for national defense and NASA. Similarly, in Reagan’s days, the Star Wars program was proposed amid America’s arms race with the Soviet Union.

When answering questions from CNN journalists at China’s recent “lianghui,”* spokeswoman Madam Fu Ying said, “I’m not sure if you would agree, but essentially the United States is worried that China will one day become as strong as, even stronger than, the U.S.”

Madam Fu Ying did not say this in a casual way. In the Trump era, America’s real strategic rival is none but China.

Of course, this kind of so-called “rivalry” is not the same as that between the U.S. and the Soviet Union during the Cold War. It is more like the rivalry in international trade and on the global financial market between the United Kingdom and the U.S. after World War II. It is also similar to the economic competition between the U.S. and Japan in the 1980s and 1990s. It is also analogous to the U.S.-Russia relationship in the past few years.

For a big economy such as China, especially when its development strategy is to focus on building a strong economy, the relationships between China and the U.S. are sure to revolve around economy and finance. Geopolitical issues, such as military power, are really a bargaining chip on the side and not something crucial in this analysis.

Because the Chinese government still has tight control over its capital and interest rate reform (which, of course, can be damaging not only to rivals but also to China itself), America’s response has taken a fundamental turn since Trump took office.

Agreements similar to the Plaza Accord to control the interest rate of the Japanese yen in the 1980s are unlikely to happen in China.

At the moment, what worries the market the most are issues relating to trade protectionism. If I were to hazard a guess here, I would say that there will be no trade war between China and the U.S.

As for trade barriers, if China is charged punitive tariffs, it will not be a good deal for America, because it will damage America’s reputation as a true market economy, making it difficult for America to head future talks on trade rules.

Additionally, the Trump administration has finally figured out that, when it comes to bringing back high-end manufacturing, America’s real competitors are Germany (toward which America’s attitude is worsening) and Japan (which Trump has publicly accused of manipulating interest rates), not China. This is not only because China’s economy relies completely on the U.S. dollar, but also because the two countries complement each other well in the division of labor and cooperative work.

But the crux of the game between China and the U.S. is still interest rates, even though fewer and fewer people now understand this game.

In order to sanction Russia in 2014, America released its domestic crude oil reserves and pumped up its production of, for example, shale oil, encouraging a short-selling atmosphere on the futures market. From June 2014, international crude oil prices fell off a cliff. Six months later, the oil prices dropped to $45 per barrel from $105 per barrel. As a result, the exchange rate of the Russian ruble against the U.S. dollar fell by 50 percent and Russia’s foreign exchange reserves shrank drastically by over $150 billion.

Please pay attention to the fact that at the time Russia’s initial total foreign exchange reserves had been only $460 billion, so the drop caused a 30 percent loss. The impact of falling oil prices on Russia was huge. In 2015, Russia’s gross domestic product dropped by 3.5 percent compared to the previous year and Russia’s GDP fell to $1.2 trillion from its peak of $2.3 trillion.

To sanction a country like Russia there is no other way than to target the oil prices that are Russia’s lifeblood. Because Russia does not have any control over the crude oil prices, to sanction Russia is something that is not very difficult to do.

When sanctioned, the Russian economy suffers tremendously, almost as if a person is cut in half at the waist.** Additionally, because of problems in Russia’s economic structure, the Russian economy would need at least another three to five years to regain its former strength before again becoming a potential threat. That being said, if a strong Russia is a threat, it is a threat first and foremost to the security of Europe, not America.

For the United States, Trump’s taking office means a complete strategic U-turn. The U.S. has realized that it does not gain much from sanctions against Russia except hatred from the latter. Moreover, in recent years when the oil prices kept falling, the U.S. elicited hostility from oil producers in the Middle East, such as Saudi Arabia, and therefore the interests of numerous American Republican oil moguls suffered damages.

On the other hand, the biggest beneficiary of sanctions against Russia is Europe, especially Germany. Russia’s threat to the U.S. is far less than its threat to Germany. From the strategic point of view, what worries Germany the most is Russia’s rise and its impact on all of Europe.

This is why Trump, after taking office, started lifting some of the sanctions on Russia. As a result, the strongest opposition came from no one else but the German chancellor, Angela Merkel.

As a rebuke to Merkel, Trump began accusing Germany of owing vast sums of money to NATO and demanding that Germany pay its NATO bills. The message was that the U.S. would no longer fight Russia on behalf of Germany. Because of this, we all witnessed the embarrassment during Merkel’s visit to the U.S., when Trump gave her the cold shoulder.

On the question of NATO, however, does Trump really need that money? No. Trump’s plan on his political abacus*** is clear as day. If Germany and the rest of Europe do not side with the U.S. against China, then the U.S. will not side with Germany against Russia.

In return, there will be a dramatic change in future global diplomatic relations; that is, Germany may very well become the next South Korea. No matter who will be in government next, Germany will become politically tough with China. America has played its two cards well to tighten the reins on Germany and South Korea. To Germany, it serves the Russia card, and to South Korea, the card of North Korea.

Now, you might be suspicious: Is the writer making up a story that does not exist in order to sell a conspiracy? Not at all. The writer’s ultimate purpose is to examine the market change within the bigger picture so as to explore possibilities in the uncertain future, which is very important for making investment decisions.

As ordinary retail investors, what we see most of the time is only the appearance of what’s happening in the world, not the root causes. This is why many of our decisions about the market are solely based on the market itself, whereas the market itself has little control over what happens to it.

Therefore, China should be on the lookout for signs in three areas, for which investors also need to be prepared.

First, contrary to the strategy for sanctions against Russia in 2014 of depressing crude oil prices in order to make it difficult for Russia’s economy, the future strategy will be to raise commodity prices, such as crude oil prices, and keep them high. The reason is that China is the biggest importer of commodities and raising the cost of imports is almost like transferring the profits generated by China’s economy. When part of the wealth created is quickly transferred to other countries, China will be effectively constrained.

The rise of commodity prices is like killing two birds with one stone for the U.S. On the one hand, it will increase the economic power of allies such as Australia. On the other hand, it will give Russia an opportunity to recuperate so that the U.S. will have a better chance of putting more pressure on Europe.

There are several ways to meet this strategic objective. The Trump administration will continue advocating the improvement of infrastructure, thus creating a market expectation of continued demand for various raw materials so that Wall Street can have something to speculate on. The dollar’s increased interest rate can prompt other central banks to change their monetary policies and raise their currencies’ exchange rates. With the U.S. Dollar Index**** declining instead of rising, commodity prices will continue to rise.

Meanwhile, the Trump administration is reviewing how to relax regulations on Wall Street. Some restrictions in the Dodd-Frank Act on investment banks’ risky practices might be lifted. It is important to point out that, in the past, behind every major opportunity for profit on the crude oil, gold, copper and silver markets, there was almost always the shadow of financial institutions, such as Goldman Sachs, Barclays and Deutsche Bank. Their influence on the commodity markets will reappear in the future.

Facts are far more convincing than deduction. In the previous couple of years, China was the biggest beneficiary of falling commodity prices. In 2015, Kenneth Courtis, then vice chairman of Goldman Sachs Asia, estimated that China saved $460 billion in one year from the sharp fall of commodity prices, of which $320 billion was saved on crude oil, whose price dropped the most.

It also needs to be pointed out that Russia’s current foreign exchange reserves are less than $400 billion in total.

At the beginning of last year, China’s Ministry of Commerce announced at its routine press conference that, in 2015, 10 types of commodities, including crude oil, plastics, soybeans, natural gas, pulp, grains and copper concentrates, have seen their import volume increase and prices drop, resulting in a total saving of $188 billion in foreign exchange (the equivalent of 1.2 trillion Chinese yuan). This greatly reduced the producers’ cost in China and increased efficiency.

How to cause trouble for China’s economy is obvious.

Second, to urge China to resolve the issues of trade surplus is what the U.S. will do in the future to put more pressure on China. The purpose is similar to that of jacking up commodity prices — that is, to deplete China’s foreign exchange reserves by all means.

If trade surplus is greatly reduced, the endorsement of the renminbi by China’s export capacities, which are China’s pride, may be reversed. Therefore, China’s foreign exchange reserves may be expected to decline further and the country will be prevented from adding to its gold reserves. So far, China has not increased its gold reserves for five consecutive months, which is very rare. On the other hand, Russia very quickly managed to increase its gold reserves (which grew by 1 million ounces this January), when the oil prices bounced back and its foreign exchange reserves grew.

Although China boasts foreign exchange reserves of $3 trillion, once the expectation is created of a gradual reduction in China’s foreign exchange reserves, the impact on the RMB may be difficult to control and it won’t be explained away by simply saying, “China does not need that much foreign exchange reserves.”

If China is unable to maintain stable foreign exchange reserves, then it won’t be able to sustain a strong trade surplus and expand its gold reserves. Then the RMB is in effect all on its own with no measure in place to hedge risks. This may cause big problems for credit ratings and lead to increased capital flows and more fluctuation in asset prices.

Third, it will come as no surprise that more geopolitical problems related to China are to be expected. More importantly, there will likely be new trade rules that will instill a sense of mistrust in China’s market.

This kind of risk is exactly what international long-term strategic investment will want to hedge, and the investment will drop its long-term objectives and switch into short-term speculation. As a result, China’s economy will suffer from more obvious speculation and more loss of its core strength. For example, the stock market has seen dramatic fluctuations; the cost of maintaining property prices gets higher; it is increasingly risky to de-leverage on the financial market; and policies will clearly be less effective.

That said, I believe China will be able to prepare an effective strategy to reduce all kinds of risk. Investors also need to be prepared to avoid being taken by surprise when the market changes.

The author is a columnist on finance and economics.

*Translator’s note: Literally translated as “the two meetings” or “the two conferences,” lianghui is a common Mandarin Chinese abbreviation for a pair of organizations that have close relations. It refers to the annual plenary sessions of the national or local People’s Congress and the national or local committee of the Chinese People’s Political Consultative Conference.

**Translator’s note: This used to be a form of execution in ancient China, causing extreme pain to the person being executed.

***Translator’s note: This is a metaphor in the Chinese language. One’s abacus means one’s tool for planning, often with a hidden agenda, as if using the actual abacus for arithmetic.

****Editor’s note: The ICE U.S. Dollar index measures the U.S. currency’s value against six others.

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