The Gloves Are Off: Chinese Edition
When the world leaders tell us they are not interested in peace, we should listen
A NATO vs Russia alone is already a grim prospect. But China is also giving up on diplomatic discourse, switching to blame and open accusations. Especially from the upper levels.
It was synthesized in the official report named”US Hegemony and Its Perils”, but I will come back to this later.
Leaders’ Declarations
There has been plenty of coordinated attacks on the US from virtually ALL Chinese officials in the last few weeks.
President Xi
Rising the stakes through threats is nothing new from Xi, as last year he stated that China would “continue to strive for peaceful reunification with Taiwan, but will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.“
China FM spokesman Wenbin:
Chinese Ambassador to the EU Fu Cong
“If Western countries, led by the USA, want to defeat Russia, then this will be followed by a cruel and long war. (the idea that) Russia will slide into the level of a second-rate country is even more dangerous, exclude the possibility of peace negotiations, and could turn into an escalation of the conflict“
Chinese Foreign Ministry spokeswoman Mao Ning
Washignton is peddling false information about weapons, and sanction Chinese firms for no reasons, describing this as hypocritical and a blatant act of bullying.
Foreign Minister Qin Qang
He warned the USA to “hit the brakes, or risk conflict and confrontation”
Takeaway
Overall the message is that the USA is a warmongering, unreasonable, dangerous and unstable country.
Any war outbreak would be solely caused by the USA, and China would have only been forced to defend itself.
Not really a new message in history. Everyone has always been “forced'“ to war, right?
What is significant is that the goal seems to have moved from “managing tensions” to convincing third parties who to blame WHEN it blows up, not IF.
Trade War 2.0
US weapons companies have also been punished with (inapplicable) sanctions: China sanctions Lockheed Martin, Raytheon over Taiwan arms sales.
Speaking of narrative, The Chinese state television channel CGTN published a report - an investigation into how the United States blew up the Nord Stream.
Lastly, and probably of more interest to many of my readers, comes into question the possibility to get money out of China. I am more unsure of that by the day (I personally own just a very small amount of Alibaba shares at the moment).
And that before mass delisting from US exchanges or other sanctions
US Hegemony and Its Perils
The whole document published by the PRC’s ministry of Foreign Affairs is rather short and I encourage you to read it (click on the title above).
It is also incredibly undiplomatic, and really reminds me of that moment when Russia gave up on negotiating and started preparing for the war in Ukraine.
It hits hard at US interests and actions in the last 20 years around the world. A few excerpts will give you a general idea.
FOREIGN AFFAIRS
Instances of U.S. interference in other countries' internal affairs abound. In the name of "promoting democracy," the United States practiced a "Neo-Monroe Doctrine" in Latin America, instigated "color revolutions" in Eurasia, and orchestrated the "Arab Spring" in West Asia and North Africa, bringing chaos and disaster to many countries.
As former U.S. President Jimmy Carter said, the United States is undoubtedly the most warlike nation in the history of the world.
In September 2022, Turkish Interior Minister Suleyman Soylu commented at a rally that the United States has waged a proxy war in Syria, turned Afghanistan into an opium field and heroin factory, thrown Pakistan into turmoil, and left Libya in incessant civil unrest.
Dollar
The hegemony of the U.S. dollar is the main source of instability and uncertainty in the world economy.
John Connally once remarked, with self-satisfaction yet sharp precision, that "the dollar is our currency, but it is your problem."
Economy
Forcing Japan to sign the U.S.-Japan Semiconductor Agreement. As a result, Japanese semiconductor enterprises were almost completely driven out of global competition, and their market share dropped from 50 percent to 10 percent.
The United States abuses its technological hegemony by carrying out cyber attacks and eavesdropping. The United States has long been notorious as an "empire of hackers," blamed for its rampant acts of cyber theft around the world.
The Trump administration alone has imposed more than 3,900 sanctions, which means three sanctions per day.
So far, the United States had or has imposed economic sanctions on nearly 40 countries across the world, including Cuba, China, Russia, the DPRK, Iran and Venezuela, affecting nearly half of the world's population.
Press & Culture
The United States practices double standards on the freedom of the press. It brutally suppresses and silences media of other countries by various means.
The U.S. government strictly censors all social media companies and demands their obedience.
The United States abuses its cultural hegemony to instigate "peaceful evolution" in socialist countries. It sets up news media and cultural outfits targeting socialist countries.
Conclusion
The United States must conduct serious soul-searching. It must critically examine what it has done, let go of its arrogance and prejudice, and quit its hegemonic, domineering and bullying practices.
Takeaway
Now, does that sound like China is going to trade peacefully with the USA in the future?
Unfortunatly not. I used to see the “China is uninvestable” as plainly wrong. I am revising my judgment. Quickly.
In other words, I was wrong.
The USA will not tolerate a China that is more powerful than the US economically.
China will not tolerate the USA dictating its economic and foreign policy.
These 2 facts lead to an almost unavoidable conflict.
Investing Takeaways
There is still time to take preventive actions, although I am not sure how much. The perfect portfolio will have covered ALL these questions.
Assets vulnerability
First is for Westerners to get their money out of China, and the same for Chinese out of the West.
Mass confiscation by Beijing is possible. More likely, it is your own government that will ban you from owning “enemy equities”, like it occurred with Russia. So even if China does not change its business practice, only directly owning a trading account with a Chinese / Hong Kong broker will be an option at some point.
Still, it might simply turn into legal liabilities to do business with “the enemy”…
Business Risk
The second is to assess each of your assets exposure to a breakdown of international trade.
This is to apply not only to China/USA trade but virtually to ANY Asia/Rest-of-the-world trade. If missiles are flying in the West Pacific, I doubt Made in Japan or Vietnam will manage to be exported.
The portion of the business revenues coming from overseas.
AND the portion of overseas revenues for the company’s clients.
Dependency on foreign-based production (looking at you, Apple)
Dependency on foreign suppliers.
Especially specialized items, like rare spare parts, unique chemicals, custom chips, batteries, etc…
Dependency on raw resources or materials processed in China.
Rare earth, base chemicals, pharmaceuticals, fertilizers, cheap mass production.
This expands the list VERY widely:
IT anything
renewables
hospitals
intensive farming
etc…
Geography
Asia, but also Europe are the most vulnerable. South America and paradoxically even Africa look better.
Other possible “winners” include Australia and Canada, as the sole reliable providers of raw materials to the Western alliance.
Macroeconomics
The inflationary shock on Western countries cannot be underestimated. Not only we would lose the cheap Asian supply, but it would take years to rebuild it at home or in friendly countries.
Add a potential Hyper-OPEC (the extended BRICS) restraining supply of ALL commodities, and you will see 20% inflation at the very minimum. This puts bonds and most fixed income out of the question. Forget about the financial sector as well.
Companies with a reasonable level of fixed-rate debt is actually a good thing in that context.
Discounters might be fine if they have the right supply chain. So are essential goods. Luxury and discretionary spending are to be avoided.
Anti-fragile sectors
An obvious sector is defense.
This might be the topic of my next stock report. The challenge is to find defense companies doing simple weapons than can be mass-produced. More basic artillery shells and trucks, fewer top-of-the-line guided missiles or F-35s.
Substitution
Another one is any company benefiting from the removal of its Asian competitors. Think of any decent company that has struggled against cheap made-in-China/Vietnam/Taiwan.
Or even better, manage to handle “made in USA/EU” despite that competition, and might have 80% of its competitors suddenly removed.
Lot of pricing power there. Deep industry and competitive knowledge will pay off.
Commodities
With a potential looming Hyper-OPEC embargo, Western-based producers should be great in theory. Not getting caught in Green policy madness is harder in practice. Bonus for Australia, but also Central America compared to Canada/USA/EU.
Infrastructure
A simple recurring way for the government to compensate for economic shock is by building stimulus. It provides jobs and very visible/popular actions to the public. So companies doing pipes, cables, concrete, etc… might do a lot better than you would at first expect in a context of economic turmoil.
Lastly,
Finally, I think I will conclude with this quote from Sun Tzu.
Something to live by.