Will a deal with China get done? Logic says yes but it may just depend on Trump’s mood. Clearly a deal with China and a resultant bump up in the stock market would further Trump’s reelection chances. But as will be discussed regardless of any deal the future for US/China economic relations does not look bright.
Meanwhile Alibaba Does Hong Kong!
With the approval of the American Congress the Hong Kong protestors do such noble things as burn Starbucks, destroy shopping centers and damage the city’s transit system. But while all this was going on Alibaba carried off a $11.2 billion IPO on the Hong Kong Stock Exchange. The Hong Kong Exchange now boasts such tech names as Tencent, Lenovo and Xiaomi. Like NASDAQ the HKSE exists only in computers. The Hong Kong dollar, operating under what is called a currency board system, is solid as a rock. Much to the disappointment of the China Haters, Beijing has not intervened in the city despite the fact that at times the local police force has been totally overwhelmed by the petrol bombs and bricks thrown by the protestors.
Alibaba already trades in ADR form in the US under the symbol BABA. Eight HK shares underly one US ADR. Right now residents of the Mainland cannot buy Alibaba shares. The Chinese currency is still subject to capital controls. But China now has in place a mechanism called Stock Connect whereby residents of the Mainland can buy approved Hong Kong stocks. Estimates are that this approval will come for Alibaba in about six months. Local analysts are prognosticating that a tsunami of buy orders for Alibaba will then come in from China. This makes sense. The Chinese people cannot live without Alibaba and Tencent.
Rumors have been about that the China Haters in the American government want to force Chinese companies to delist from US exchanges. A stupid idea in my opinion but a bonanza for Hong Kong. The US listed Chinese companies, much to the delight of the Chinese government, can relist on HK or Mainland exchanges. It actually doesn’t make sense for China that its top companies are listed in the United States.
The Brains Will Have It!
The China Haters as I have argued in past blogs better realize that global dominance in the 21st century will be a function of brains. The country with the most brains will win! Unfortunately, based on the latest results from an internationally given test for 15 year olds called The Program for International Student Assessment or PISA, things don’t look that good for the United States. Chinese students came in first on the PISA test while the United States did not even place in the top ten. Considering with 1.4 billion people the Chinese already have the numerical advantage, one would think the China Haters would be obsessed with improving American education before it’s too late.
Most Americans might not be aware that China has a long tradition of emphasizing intellectual achievement. The country has a long history of Imperial examinations going back to at least the sixth century in the Sui Dynasty. To get anywhere in Imperial China an applicant had to take and excel at a series of exams. The exams stressed the teachings of Confucius who stressed obedience. The best and the brightest (and most obedient) were thus selected for government service. This system extended all the way down to the village level. The exams were only dropped in 1905 just a few years before the fall of the Qing Dynasty in 1911. But the tradition of learning remains (as well as Confucian emphasis on obedience and order). Only now the Chinese focus on technology and math. The students going through this system today will be China’s future.
America by international standards spends fortunes on education but gets mediocre results at best. If he wants America to remain number one Trump should worry about this and not spend his time trying to cut off the global flow of technology. China will innovate around Trump’s embargoes but American tech suppliers will suffer. And in a not too far off future America will be competing with a China peopled by millions of scientists and engineers.
Right now China is hurting from the American trade sanctions. But the country will and is adjusting and it is moving up the curve in terms of intellectual property rights. Intellectual property rights are essential for a successful knowledge society and this has been a Chinese weakness.
And there is an additional factor. Chinese engineers and scientists, located principally in Taiwan and the US, are reportedly moving back to China. They take their intellectual capital with them. Higher salaries are one motivation. But in the US perceived hostility to Chinese origin scientists is another factor. And the US has become much more restrictive toward Chinese origin scientists and students in terms of granting visas. It’s hard to imagine a stupider policy and one bound to negatively affect American technological competitiveness.
Given the Chinese love of education and technology and their sheer numbers and the attraction China now holds for its own scientists, it seems likely that Chinese stocks will outperform American stocks in the coming decade.
Future Economic Relations With China Will Worsen
What is almost a certainty is that– deal or no deal –unfortunately future economic relations between the US and China are going to get worse. There are five factors creating this reality. The first is Trump’s proclaimed love of tariffs and his unabashed advocacy of mercantilist economics. With that view of the world, China (and lots of other countries) are the bad guys who must be punished with tariffs. And Trump has unlimited powers in this area. The Founding Fathers gave the power of taxation to the Congress but during the Cold War in the interest of national security Congress gave away the power to levy tariffs to the President. Trump has taken advantage of this.
The second is the views of Trump’s key economic advisor, Peter Navarro. It has to be assumed that Trump shares these views. Navarro in his book Crouching Tiger openly advocates a policy of “making China poor.” His books exhibit a total disdain for China, its history and a fear of its rise. His view supports the idea that China’s possible threat to the global primacy of the United States must be opposed by any means, fair or foul.
The third is the fact that Washington is inhabited by legions of cold war warriors who see China as the communist successor to the Soviet Union. These China Haters inhabit the Congress and the bureaucracy. They are busying themselves with preparing measures to cut off the flow of American technology to China. So what if the major market of American tech companies is eliminated. Or that American universities will suffer significantly without Chinese students. Or that the rapid growth of the Chinese private sector has no equivalent in the old Soviet Union.
The fourth is that there are significant differences between the Chinese and American economic models. This does create problems for the global trading system. The Chinese model which the Chinese call “socialism with a Chinese face” openly advocates state subsidies for target industries. The American free market model theoretically is opposed to such subsidies. Of course America has often violated its free market principles. And state support for major industries is a practice with a history in Asia. For example Asia’s two leading semiconductor firms, Taiwan Semiconductor (TSM) and Samsung (KRX: 005930) got their starts with injections of government capital.
The fifth is the antipathy to Asians in general that has characterized past American history. The record is one of lynchings, all kinds of anti-Asian laws, prohibitions on Asian immigration and the infamous WWII camps for Japanese American citizens. Americans might argue that this is the past. Many Americans are either ignorant or embarrassed by this history. But it can just as easily be argued that, subdued or not, anti-Asian sentiment still resides in the American psyche. This may account for the part of the fear of a rising China.