“The total decoupling of U.S. and China technologies is not possible…After all, we will know what these American scientists are doing if they release their research in the internet age. They can never live in the refrigerator.”
Huawei CEO Ren Zhengfei
“Our school communities are desperately short of nurses, social workers, psychologists, counselors and other support staff, even as our students struggle with high levels of trauma driven by poverty and neighborhood violence.”
Chicago Teachers Union president Jesse Sharkey
The optimists on Wall Street just don’t get it. For them, logic demands that the US and China eventually bury the hatchet on their trade war. This will push up stocks. This has to happen. Or does it? And does it really matter?
The Wall Street optimists refuse to believe the Navarro/Bannon Hurt China strategy is the real US policy. Trump has tried to hide it. (How many times have we heard the phony “My good friend President Xi.”) The Hurt China strategy is to inflict a pre-emptive strike on the Chinese economy so to prevent China from ever displacing the US as the pre-eminent world power. The trade war is just one part of the pre-emptive strike. A settlement there won’t change the fact that the real US objective is to retard the advance of Chinese technology: Strike now when the US is still economically and technologically considerably ahead of China. Employ any means short of a military confrontation — fair or foul. Collateral damage to US companies — notably the tech industry — is to be accepted.
Most economists would argue that globalization is key to further human and technological progress. But Navarro and Bannon would forgo this progress if the US can’t be “Number One”. And Trump said clearly and proudly that he is not a globalist.
After his UN speech, Trump bragged that the US was still Number One thanks to his efforts. Without him, Trump said, China would have become Number One. This statement is completely false — China, even without the Trump Hurt China attack, would still be way behind the United States by any objective measure. Moreover, Trump’s remarks reflect the view that the United States is entitled to be Number One. He bragged how China had lost millions of jobs thanks to his policies. No reporter challenged him on this because most Americans instinctively agree with his premise: The US is entitled to be Number One. The US has been quite deservedly Number One since WWII. For Americans, that is, therefore, the natural order of things.
The Hurt China strategy is a big potential negative for the US stock market and the US economy. So far, the strategy has not hurt Trump that much politically. Yes, many sectors of the US economy have been hurt. But the Democrat presidential candidates are so far left, so to make them electoral pushovers, or so the Republicans conclude. US employment is at all-time highs as is the stock market. One can make the argument that stocks, especially tech stocks, would be a lot higher were it not for Hurt China. But, only a dramatic crash in the stock market and a US recession would jeopardize Trump’s reelection. Those events would cause an adjustment in the Hurt China strategy.
From a portfolio manager’s viewpoint, wishing for a market crash or a recession so to get the President to change a harmful strategy is a lose-lose proposition.
In the long run, the Navarro/Bannon strategy is going to fail. Admittedly, the long run might take 10 or 20 years. China has 1.4 billion hard-working technologically-obsessed people with above-average population IQs (excluding Ashkenazi Jews, East Asian average IQs including China, Korea, Japan and Singapore are the world’s highest).
In contrast, the US has 330 million people. Look at the quote above from the Chicago Teachers Union president. It’s hard to imagine any Chinese educator offering a complaint like that. The latest tests show 63% of Chicago elementary school students met national norms in reading and 57% did so in math. The situation is worse in other cities. Project Baltimore analyzed 2017 state testing data and found one-third of high schools in Baltimore had zero students proficient in math. These students are the long-run future of the US. Can they compete in the global markets?
Banning Chinese Stocks Undermines America’s Role As the World’s Capital Market
Vibrations are coming out of Washington that the Trump Administration is considering delisting Chinese firms from American Stock Exchanges and somehow limiting American corporate investment in China. President Trump recently boasted he could order all American companies out of China based on some “trumped up” interpretation of national security under 1977 legislation. That remains to be seen.
Delisting is consistent with the Bannon/Navarro view that Wall Streeters who deal with China are traitors. And of course, it is consistent with the Hurt China strategy. I can’t think of a worse idea from the US point of view.
Around the world, there is a consensus view that the global primacy of the US capital markets is one major factor in making the US “Number One”. The proponents of the Hurt China strategy have been rolling out the sophistry for some time. Senator Marco Rubio for example — a man who sees a Chinese spy under every bed — has legislation that would protect American investor against Chinese accounting chicanery. Just like the tariffs were imposed based on specious threats to American security, now it will be exaggerated needs for “investor protection” that will justify screwing Chinese companies trading in American markets.
It has always been somewhat of a mystery as to why Chinese companies have chosen to raise capital in the US. China is a high savings country and would seem to have the capacity to finance its own IPOs. Two reasons might be: (1) restrictions put on the IPO process in China and (2) the lack of convertibility of the renminbi.
Actually, the Chinese government wants Chinese tech companies to IPO at home and has now launched the STAR market for tech IPOs in Shanghai. Sooner or later Chinese companies were going to prefer to IPO in China, including in Hong Kong.
Micron — Beneficiary or Victim of Trump’s Policy?
President Trump in his UN speech cited Micron (MU) as an American company victimized by Chinese intellectual property theft. He claimed $9 billion of Micron’s intellectual property was at risk and his Administration’s efforts saved the day for Micron. Reporters failed to ask him what he was talking about.
Here’s a brief summary of the Micron situation: Micron in 2018 alleged that Chinese state-owned Fujian Jinhua and Taiwan-based United Microelectronics (UMC) conspired to steal Micron’s intellectual property. Lawsuits over intellectual property are quite common in the semiconductor industry and big numbers like $9 billion often get tossed around. This issue is now in US courts with Fujian Jinhua pleading innocent to all charges. But for the Trump Administration, this incident was red meat to be fed to its Hurt China strategy. Without waiting for any court verdict, it banned all American semiconductor equipment companies from further exports to Fujian Jinhua. This effectively shut down Fujian Jinhua in which the Chinese government had invested substantial funds and which in another year would have been a competitor for Micron. And meanwhile, American semiconductor equipment providers lost a big customer. One suspects that even if the US courts find Fujian Jinhua innocent, in the eyes of the Trump Administration it will still be guilty.
Micron’s stock dropped 10% last Friday thanks in part to US-created uncertainties in exporting to Huawei and the news that the US might delist Chinese companies. And most of the semiconductor company stocks dropped along with it. Who is going to protect US investors from President Trump?
In the Twenty-First Century Knowledge is Wealth
The long-run winner in the contest to be Number One is going to be the nation with the most brains. Brains to master artificial intelligence, brains to build 5G, brains to unlock the mystery of the genome, brains to build quantum computers — brains for a myriad of technological tasks. Unfortunately the US — the unequalled winner in the brain contest in the twentieth century — is in jeopardy of losing its primary status.
America has attracted the best and the brightest from all over the world — another facet of globalization. So many American companies were started by people not born in the US. For example, Sanjay Mehrotra of aforementioned Micron.
And in the US, the so-called stem subjects (science, technology, engineering, mathematics) are dominated by foreign students, mostly from China and India. Why American born students avoid the stem subjects is something about which Trump and his band of China haters should be worried. Modern China, as mentioned, is a technologically-obsessed civilization. Actually, on IQ tests, Chinese do better on quantitative vs verbal. Perfect for stem subjects. Nobody needs to tell Chinese youth to major in stem subjects. If Trump really wants the US to maintain its Number One status, he should be sponsoring programs to induce the best and the brightest US students to major in stem subjects.