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Xi Sizes Up Trump: Investment Implications - Peter Diekmeyer (2/5/2017)

Xi Sizes Up Trump: Investment Implications - Peter Diekmeyer

May 2, 2017

China is the world’s largest gold producer and buyer. So President Xi Jinping’s takeaways in the wake of his recent meeting with Donald Trump, his U.S. counterpart, have huge market implications.

China, steeped in a 5,000-year history, tends to think in longer time frames than Western countries. Their leaders are thus less likely to act impulsively.

That’s a good thing for Trump. Because in Xi’s eyes, the U.S. President almost certainly came off as a vacillating showman who acts tough, but lacks an internal core.

To many Americans, whose opinions about negotiating strategies were formed while watching The Apprentice, the reality show Trump starred in, first impressions matter.

The President’s decision to launch missile attacks on Syria during a dinner with Xi, and to announce it over dessert, thus came off as clever signal that the United States is not to be messed with.

Trump caves on currency, trade and Taiwan

Xi, who, however, likely missed many episodes of The Apprentice, was less impressed by this brazen insult. His reaction was interesting: Xi smiled, kept his cool and said nothing (the Chinese condemned the attack after the summit was over).

Worse for Trump’s image was the fact that during the weeks after his meeting with Xi, he appears to have caved on his entire China policy.

The U.S. President started by backing away from his election promise to label China a “currency manipulator.”

Trump also failed to use the momentum during his “first 100 days” to enact the trade measures that he had promised against the Chinese.

Finally and most important, Trump retreated from his initial “tough-guy” challenge to the “One China,” policy by ruling out further phone calls with Tsai Ing-wen, Taiwan’s President.

On the surface, all of this is good news for China. However, at this point, Xi can’t even be sure if a weak and vacillating Trump won’t reverse his positions again.


Chinese strategist: the US will go to war to back the dollar

That said, in a sense it really does not matter. Because (as economist Alasdair Mcleod recently reminded us) Chinese policy regarding the U.S. dollar was spelled out two years ago, in a paper that Qiao Liang, a general, delivered to the University of Defence, China’s top military academy.

Liang posited that America’s key foreign policy objective is to enforce the U.S. dollar’s role as the global reserve currency, which it can then print at will whenever it needs to buy stuff.

The U.S. will even go to war to maintain the dollar’s dominance, he concludes.

“America has become an “empty” state,” Liang writes. “Today’s U.S. Gross Domestic Product (2015) has reached U.S. $18 trillion, but only $5 trillion is from the real economy. America’s real opponent is itself. America has shown a surprising slowness in realizing this point.”

Solid backing for gold

Liang also provides broad hints about where China comes out on the monetary policy front, suggesting that “the most important thing in the 20th century was not World War I, World War II, or the disintegration of the USSR, but rather the August 15, 1971 disconnection between the U.S. dollar and gold.”

That is some statement.

While Liang is just one of many People’s Liberation Army generals, for his paper to be published, it would have had to have been approved by the highest levels of leadership.

Xi will thus almost-certainly follow Sun Tsu’s advice regarding unnecessary conflicts: he will avoid direct confrontation and let America continue fighting itself.

Will China’s strategy be correct?

Investors who want to understand China would do well to remember Chou En-lai, the former communist leader, who when asked in the 1970s about the Paris Commune’s impact (which had taken place 100 years earlier), said it was “too soon to tell.”

The same applies to Xi’s assessment of Trump. While we have clues, it’s really too soon to tell.

However Donald Trump and The Apprentice’s wisdom contrast poorly with that of Xi Jinping and Sun Tsu.

Shrewd investors might thus consider hedging their bets.

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About the Author

Peter Diekmeyer has been a business writer/editor with publications such as Sprott Money News, the National Post and Canadian Defence Review and Jane's Defence for nearly three decades. He has studied in MBA, CA and Law programs but dropped out of all three after failing to convince the academics that they were wrong about everything.  Diekmeyer has interviewed more than 200 CEOs and filed reports from dozens of countries. 

His most terrifying moment came when he spoke to central bank economists for the first time and realized that (unlike politicians) they actually believed their own analysis and forecasts. 
He has been a regular contributor to the Sprott Money blog since 2015.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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