Here is the news from today.
http://www.foxbusiness.com/markets/2017/06/29/latest-us-want…
Treasury Secretary Steven Mnuchin (mih-NOO’-shin) says the U.S. still wants to work with China — even as the U.S. is penalizing a Chinese bank that’s accused of illicit dealings with North Korea.
This has me worried because it could start a trade war. Does anyone think that China is going to hit back or do you think they will just let it slide? I am worried for any company doing business in China.
I have been worried about crony capitalism in China for a long time. It did not happen last decade. But we all know what is going on in China. Cities going up with no people in them, money being invested in state owned industries that are inefficient, graft and corruption to insiders, and irrational investments that are building bubbles. The thing holding it up is that China is growing fast enough to support this aspect of their economy.
I am reading an article on Chinese banks and some concerning statistics that are appearing in their books.
At some point, it always happens, when the banking sector goes bubble (see housing crash), it will have a ripple effect, and China is too big to fail.
That is an area worth keeping watch on. But for now, just watching it as just one of many points of interest.
Tinker
Right Tinker, China has made some really dumb moves and it is a black swan waiting to happen. But what do you think about the sanctions. Do you think it will trigger China to react and hit back. I am worried this could hurt any company doing business in China. But China needs us as much as we need them so if they did start a trade war it could trigger a recession. More likely it would hurt them worse.
Andy
This has me worried because it could start a trade war. Does anyone think that China is going to hit back or do you think they will just let it slide? I am worried for any company doing business in China.
It’s no use drawing lines in the sand and then ignoring them when they get crossed. That was the previous administration.
Denny Schlesinger
This has me worried because it could start a trade war. Does anyone think that China is going to hit back or do you think they will just let it slide? I am worried for any company doing business in China.
It’s no use drawing lines in the sand and then ignoring them when they get crossed. That was the previous administration.
Denny Schlesinger
Denny,
Please keep politics out of this. If you wish to discuss politics there are boards for that. I am trying to figure out how this is going to effect my investments. If you have any thoughts on that I would like to hear them.
Andy
Andy,
I think China has more to lose by a trade war than any other country in the entire world. I have not looked at the statistics, but I think it is a good guess that China probably has the highest positive balance of trade in the world (absent aberrational countries like North Korea whose only imports are to the few hundred elites, and have no money to spend even if they could import items).
As such, what Trump’s modus operandi is, and he wrote about it, is he probes the other side. He asks for the most outrageous deals, pushes the other side to the limit, and then gets the best deal that can be gotten in this manner. His modus operandi is to act absurd.
Think about it, if the leader of North Korea did not act insane (and he probably is, but lets assume it was just an act) he would have been taken out by the United States long ago. It is his very perception of insanity that creaates credible deterrence. Kim Jung fat face could actually do what he says even if it is insane. So the United States has been deterrred.
Trump puts out a personae that he is capable of an awful lot. This perception gets out there, and those who negotiate with him are put into a credible state of fear in regard to Trump’s credibility in negotiation. This allows Trump to push negotiations further than could some normal person.
As such, with Trump, you have to not take the rhetoric literally. Trump’s rhetoric serves a purpose. The purpose is to create an environment that improves his negotiation position. It is what he has been doing for decades.
That is one problem the press has with Trump vs. his voters. His voters understand this and don’t expect Trump to accomplish everything as his rhetoric states he will, but the press takes it verbatim. And you know what, so do most of the diplomats around the world.
So my conclusion is, no, we are not going to have an all out trade war. Trump will push China though as hard as he can, and Chinese diplomats perceive trump as somewhat of a “nut” and therefore have fear that Trump might actually do it, thereby making it less likely that China will call his bluff in negotiations.
I say this in a non-political manner, but as an observation of Trump’s philosophy and how he acts and has always acted. Like it or not, it is his method, and in the end, Trump has never flown out of the coop in the end.
So trade war is not my biggest concern with China.
Tinker
I have no interest in discussing politics here but it’s no use burying your head in the sand and “hoping.” It is what it is and one has to manage investments accordingly.
If you have any thoughts on that I would like to hear them.
I avoid investing in China. The bulk of my investments are in the USA which has the best investor protection laws and practices that I know of. At this point in time my two exceptions are NVO (Denmark) and CLB (Netherlands).
Denny Schlesinger
Btw/ Maintaining China’s growth is a political imperative in China for multiple reasons. A trade war with China’s largest market would be politically disastrous for China.
On the other hand, China owns a lot of our government debt, and forcing China into a position that causes China to sell off those bonds would jack up interest rates in the United States, and our own government debt is what, near $20 trillion now? Doubled or more in the last 8 years. This was possible due to low interest rates.
I don’t see how either country could conceivably push a trade war and think it will be to their advantage. On the other hand, there are many measures on the margins, that depending on negotiating strength, China may be willing to concede.
We shall see. But that is what I think is going on in regard to Chinese trade.
Tinker
Thanks Tinker so if a trade war is not your biggest concern what is? War itself?
I remember when Huaweii was banned from the U.S., well China refused to buy any United States telecommunications equipment. Infinera and Ciena were completely locked out of the Chinese market. So if we are putting trade restrictions on a Chinese bank does that mean that China will only retaliate against our banks or will they have to go after something else? I just think they are going to retaliate, just trying to think where it is going to be. I think companies that are actually producing jobs in China might escape any trade bans.
Andy
Trade war, war, not my real concerns. It is China’s economy itself imploding from excesses in the financial sector. Just as the U.S. economy did in the housing crisis, China’s practices have been much worse but covered up by the incredible growth that China has experienced.
China must continue to grow, if it does not these excesses will come back to haunt us and may be the next unexpected world financial crisis as it will impact the world’s economy.
Yet another reason why China cannot afford a trade war. The U.S. can handle a recession, but at this point in time China cannot.
Tinker
Tinker,
Many of the things you have cited are simply not true, while others indeed are. The western press is not very honest about what is actually happening in China. I spend a lot of time there and know a lot of people there. And I observe things with my own two eyes:
Cities going up with no people in them - true, but the cities don’t remain vacant. People end up buying the condos (for the most part, single family homes only exist in the countryside). Over time the empty cities fill up with people because there’s such an enormous demand for housing.
Money being invested in SOEs: Again, only partially true. Not all of the SOEs are bad investments. Some of them have high demand products and services, good management and also provide a relatively safe investment. Xi Jinping is planning on shutting down hundreds of SOEs over the next few years, most of them involved with basic materials production (steel, aluminum, etc) because they are producing more materials than can be consumed by China or the world markets. This doesn’t benefit anyone and the current government knows it.
Graft and corruption to insiders: Bo Xilai (former “mayor” of ChongQing and his wife are in prison. Former head of rails (enormous budget), in prison. Countless insiders are in prison or in some cases executed. Another goal of Xi Jinping’s that no one thought he could execute. He’s been more successful at bringing down corruption in China than anyone could have imagined. Certainly no worse at this time than our own government.
Irrational investments building bubbles: Well yeah kinda sorta. The Chinese have very little experience in the whole concept of investing. This is exacerbated by the fact that there are actually very few investment vehicles in China. But, very few people “invest” their life savings in equities. It’s more like gambling for those who are in the Chinese stock market at all - and for good reason.
I started writing an essay about investing in China almost two years ago which I intended to publish on this board. I occasionally continue to work on it and may even finish it some time in the not too distant future. It’s grown rather long because I’ve included a lot of background material - probably too much.
And BTW, because of my first hand knowledge and experience in China, I personally refuse to hold any Chinese companies in my portfolio, even the big, trusted names like Baidu, Tencent, Ali Baba, etc. are far too risky for my money. But not for the reasons you listed.
Brittlerock,
If what you say is true, it will probably be the first time in history that such cronyism, excesses, and state run industries are rationally managed, by-passing continuing goodies for insiders, for the benefit of the economy and the future of the nation.
I will not hold my breath in regard, but to date, the “inevitable” implosion has not occurred, not even through our housing bubble.
So perhaps, in a historically unprecedented manner China is being well run and managed. And if so, we in the United States have a lot more to worry about with China as a future super power than we ever imagined because no country has ever pulled off the things that you wrote about without either bloodshed or an economic implosion along the way.
I by-passed holding BIDU at its early stages for the very reasons you cite and I am citing. Cost me what would be probably, at least, a 20 bagger…tears, tears 
It will be historically a very impressive feat but maybe they can do it.
Tinker
Tinker,
If what you say is true, it will probably be the first time in history that such cronyism, excesses, and state run industries are rationally managed, by-passing continuing goodies for insiders, for the benefit of the economy and the future of the nation.
First, thanks for the vote of confidence about my integrity . . .
China is a weird place. Most people don’t realize that they had a strong move towards a democracy around the turn of the 20th century centered in the southern city of Guangzhou. However, the leader of this movement, Sun Yat Sen, believed that the country was not prepared for a democratically elected government due to the low literacy rate of the population. He took seriously the notion that a democracy demands well informed public - wish that it were the same here (but wanting to avoid a political post, I’ll not pursue it).
In any case, Mao ended up winning the revolution and unfortunately thereby became the political leader as well. The country was doomed to nearly 30 years of horrific experiences in that Mao was focused on the goal of becoming a communist nation and finally conceded that a socialist nation was a necessary step along the way.
While Mao was a great military leader, I have no kudos for him as a political leader (in fact, right up there with Stalin in my book), but even there he more or less designed the one party political system that China still operates under. It is not a dictatorship, and under Deng Xiaoping they instituted term limits for the top leadership (two five year terms, max).
The “President” (Secretary of the party) has far more power than the President of the US. You wrote: it will probably be the first time in history that such cronyism, excesses, and state run industries are rationally managed, by-passing continuing goodies for insiders, for the benefit of the economy and the future of the nation. Well, I’m not sure about all of history, but I’m quite confident about my comments regarding China. Hu Jintao (Xi Jinping’s predecessor) indeed did nothing about these ills. Either he felt it a lost cause to try or he didn’t care, I know not which. But Xi saw this as a direct threat to the ability of the government to function because the general population was losing confidence in the government. Historically, the Chinese are a patient people and willing to put up with all kinds of trials (remember, they have a very different history than we, there are no democratic principles or government forms in their history), but the one thing that causes them to rebel is when they lose complete confidence in the government. This is the reason Mao was able to defeat the Republican army with a volunteer force.
Xi cracked down on government corruption in its many different forms. He has been largely successful. Of course, there’s still corruption, but I challenge you to name a government anywhere without corruption. And yes, there are well managed SOEs that compete against private companies. China Mobile is the largest phone company in the world, it’s also an SOE. Sinopec (oil & gas) is an SOE. Bank of China and China Construction Bank are SOEs. The list goes on. Many of these companies trade ADRs on the big board. But, let’s be clear about two things, first, SOEs are not strictly profit driven, they have the dual function of providing jobs as well as goods/services. So what may look like inefficiency to a westerner is actually fulfilment of their charter. This is not corruption by any stretch of the imagination, it is simply a dual (and somewhat contrary) business function. The other major point is that most SOEs are not owned or directly controlled by Beijing. The vast majority are owned by the provinces. Many of these SOEs are poorly managed and suffer from the ills you cited and additionally, when it comes to extraction and raw materials in particular, contribute to the worldwide glut of commodities which the central government recognizes as a severe trade problem, it is a lot of these SOEs that President Xi intends to shut down. But SOEs employ hundreds of thousands Chinese, the provinces resist Beijing’s efforts to close these companies. Xi has come up with a plan that doesn’t just close factories, it provides retraining funds and educators as well as assistance to families with laid off workers - in other words there are carrots and sticks employed so success is more likely to come, but the pace of closings may not match Beijing’s desires.
One last comment, Xi Jinping has already largely succeeded in areas no one thought possible, According to my wife (who reads the Chinese press daily and also a fan of President Xi and Li Keqiang, the Premier who were both conscripted into farm labor during the Cultural Revolution as was my wife) Xi is now targeting wealth inequality in China, even though China has a rapidly growing middle class (as opposed to the shrinking US middle class), President Xi rightly perceives this as a growing problem with respect to the confidence in the government. There is still massive poverty in China and having a very small percentage of the population with very conspicuous wealth is seen as a detriment to Chinese society.
“I started writing an essay about investing in China almost two years ago which I intended to publish on this board. I occasionally continue to work on it and may even finish it some time in the not too distant future. It’s grown rather long because I’ve included a lot of background material - probably too much.”
I hope you end up posting it!