Trump’s Chinese Policy May Be Lots of Things – But Stupid Isn’t One of Them

Keith Fitz-Gerald Dec 07, 2016

Policy insiders and political apparatchiks were aghast when Trump took a congratulatory call from Taiwanese President Tsai Ing-Wen, then tweeted about it. And they couldn’t wait to explain the “gaffe.”

Only it wasn’t a gaffe at all.

What Trump did was brilliant and potentially very, very profitable.

Here’s what everybody is missing.

No doubt you’ve seen the headlines.

To hear the mainstream media tell it, President-elect Donald Trump is hell bent on starting a trade war:

In China-U.S. Trade War, Trump Would have Weapons – The New York Times

Election of Donald Trump Foreshadows Trade War in Asia – Defend Democracy Press

Trump’s Vow to Target China’s Currency Could Be First Step to Trade War – The Wall Street Journal

Speaking to Taiwan’s President last Friday was the move of “bottomless pig-ignorance,” according to an anonymous liberal foreign policy commentator cited in The Chicago Tribune. Others were far less generous.

Oh, really?

Think about this for a second.

Most people who believe Trump is off the rails are Washington insiders with huge vested interests to protect on both sides of the aisle. Very few of ’em have ever visited China, let alone spent decades in global markets.

China-bears have called for a total collapse every year there for the last 40 years.

Admittedly, their arguments are alluring and certainly sound convincing.

I know because I hear investors all over the world parrot them… China can’t succeed because it’s Communist, because China doesn’t have free markets, because China doesn’t have an advanced legal system, because there are ghost cities, non-performing loans, the data’s cooked… yada, yada, yada.

I really feel for these guys. They’ve called for China’s collapse and total economic devastation every year for the past 40 years, and for 40 years they’ve been dead wrong.

Most investors are stunned to learn that China has had the world’s largest economy for 18 out of the last 20 centuries. If anything, American economic strength over the last 200 years is the aberration.

China’s economy is 25 times larger today than it was in 1990. Cooked or not, you’re talking about a growth rate backed by 1.6 billion people and a middle class that is now more than 600 million strong.

Chinese consumer consumption is growing by double-digits and has been for decades at a rate that’s more than double its GDP growth. Cars, stereos, washing machines, and even mundane stuff like toilet paper sell in quantities that are unimaginable here.

What’s more, they’re on the move.

Flush with cash, Chinese consumers are now the single largest outbound tourism group in the world with more than 120 million having hit the road last year alone. That number will top more than 200 million a year by 2020 and require more than 7,000 new aircraft worth more than $1 trillion to carry them, according to Boeing.

Simply put, anybody who bets against China long-term is asking for trouble.

Just last year Barron’s published a September cover story suggesting that China’s Alibaba was ripe for a 50% fall. Shares were actually up 60% just 12 months later, making a mockery of the doom and gloom crowd.

China GDP Chart

Obviously, nothing goes up forever. There will be ups and downs but those are nothing more than a temporary blip. It’s naïve to think otherwise.

What I want you to understand when it comes to China is that a rising tide raises all boats there, just like it does here. That’s why every CEO worth his or her salt is pursuing growth in China, or at a minimum because of China.

It’s why Zuckerberg is making overtures to Chinese officials – and even learning flawless Mandarin – in an effort to win approval for his website’s launch there, saying “you can’t have a mission to connect the world while leaving out the world’s biggest country.” It’s why Tim Cook is so determined to hold on to Apple’s head start in market share in China. It’s why more than 28 nations – including, most recently Egypt last week – have signed bilateral currency swap agreements worth in excess of $400 billion directly with China that bypass traditional foreign exchange markets.

Investors anxious to condemn China forget, conveniently or deliberately, that we had 20 depressions in the United States during the 19th century. We also had tremendous pollution, child labor, exploited workers, robber barons, and shoddy infrastructure. We even had a civil war.

Yet, the United States still became a global superpower and the most profitable financial market in recorded history. Investors who went along for the ride made millions. No scratch that… billions.

China’s simply coming up to speed, which is why you want to find a way to play along.

Here’s the same chart overlaid against US GDP figures. I don’t know an investor in the world who can look at that chart honestly and believe that failure is imminent.

China vs US GDP Chart

Again, I know that’s not a comforting thought.

But recognize that you’ve been spoon-fed an ongoing narrative by Washington and the mainstream media and issued an ideological straightjacket intended to keep you from challenging the status quo and their protected interests.

Critical messages are often delivered by third parties in China, which is why an indirect move like Trump’s can deliver what conventional communications cannot when something truly important must be “said.”

The Chinese, of course, have to “protest” officially because Trump’s actions represent a public push back to the narrative they’ve carefully crafted for their own people. That’s why there will also be a blizzard of stories in Chinese state-owned papers portraying Trump as an amateur dolt in the weeks ahead. In that sense, the outrage they’re expressing is little more than stage management.

The U.S. press very conveniently glossed over the fact that China actually knew the call was coming ahead of time, and that legendary statesman Henry Kissinger was the one who told them it was going to happen during a meeting with President Xi Jingping in Beijing beforehand. So did the Chinese press when they realized that they’d been outmaneuvered.

The reality is that China needs us just as much as we need them.

China’s exports to the U.S. were worth $483 billion while U.S. exports to China were around $116 billion in 2015. Roughly 35% of China’s GDP comes from “processing trade,” which means they’re importing components from other countries, assembling them, and then exporting finished goods.

China has respected strength and exploited weakness for more than 5,000 years. There is no doubt in my mind that Beijing’s leadership is acutely aware that it will have to stop cheating on trade or risk a very public loss of “face” when Trump calls them on it.

That’s why Trump’s call was so brilliant.

He’s putting the Chinese on notice that America will no longer accept a position of condescending weakness and that the very carefully orchestrated charade played out over the last several decades is over.

And what does that mean for your money?

Two words… big profits.

Start with an obvious choice like Alibaba Group Holding Ltd. (NYSE:BABA), which dominates Chinese e-commerce the way Inc. (NasdaqGS:AMZN) does in the United States. Flesh out your portfolio with a choice like Baidu Inc. (NasdaqGS:BIDU),which mirrors Alphabet Inc. (NasdaqGS:GOOG).

You could buy a Chinese ETF like Guggenheim Small Cap China ETF (NYSEArca:HAO)  and do okay but I think very specific choices like the two I’ve just mentioned are going to be far more profitable than the “one-size fits all” approach that sweeps in questionable trash for your hard earned cash.

And if you really want to dive in but don’t feel comfortable investing directly in China?

I get that question a lot.

American companies with big plans, well-known brands, and lots of locations are your ticket because they’re tapped into the Chinese consumer market.

My favorite right now is Starbucks Corp. (NasdaqGS:SBUX).

The company is going local and plans to have more than 5,000 stores open by 2021, which represents a 1,150% increase from the 400 they had open in 2011.

I like the fact that the company is constantly improving Chinese operations and, in the process, making the most recently opened stores orders of magnitude more profitable than earlier iterations.

I’m particularly excited by plans to open a 30,000-square foot premium roastery on West Nanjing Road in Shanghai’s uber-busy shopping district because that will help reinforce the premium coffee concept at a time when Chinese consumers are perfectly positioned to spend $5 a cup on flavored water.

I hope to be there in 2017 when it opens and will, of course, report on what I find.

Until next time,


24 Responses to Trump’s Chinese Policy May Be Lots of Things – But Stupid Isn’t One of Them

  1. Myron Martin says:

    Taking a stand against the Chinese for “freedom of expression and human rights” may not be “politically correct” in some circles, but kudos to Donald Trump for standing on the side of freedom by talking to a democratically elected leader who has the support of people who rejected Communist tyranny. Since he did not even initiate the call, the idea that he should have refused it is simply bureaucratic idiocy at the highest level.

    • Keith says:

      Well said Myron.

      I think it’s fascinating that many Beltway Insiders seem to be more upset about the violation of “protocol” than the profit potential associated with renewed interaction.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Don Demers says:

    Keith – what do you know about 292-C stocks in China? Does it make sense to invest in these Chinese stocks?

    • Keith says:

      Hello Don.

      It’s not a term I am familiar with but looking at the promo highlighting them I infer that they are early stage growth companies traded on Chinese markets. No doubt that gives them huge upside but there is potentially huge volatility, too. Most investors don’t have the capacity to analyze them properly which is why an ETF may be the better bet.

  3. R. J. says:

    Brilliant article.

    Remember also what Lao Tzu art said in the Art of War: “All war is deception.”

    Keith, I’ve watched the Chinese negotiate oil to South America and Russian energy import in native currency swaps, as well as establish financial centers globally. Are you saying that the 28 nation currency swap will bypass the criminals at the Bank of International Settlements in Basil, Switzerland, as well as the SWIFTS payment system that the U.S. has essentially controlled?

    And what does that mean for the dollar?

    We’re dealing with a very old culture that few of us understand. So yes, the Chinese will masquerade and feign that Trump is a bumbler. And yes, it could be a brilliant move to “put on notice” our intent. Let’s see how the cards are dealt and played out.

    • Keith says:

      Thanks for the kind words, RJ. It was fun to write and I’m glad you enjoyed it.

      As for the bilateral swaps…yes. They bypass traditional currency pairs and the SWIFT system. China, in fact, is setting up its own version of SWIFT which, of course, the West will arrogantly dismiss right up to the point where it takes over. The dollar, for all intents and purposes, will not be affected because it operates separately – which is China’s point and why they are doing this…to shift a huge portion of global trade to the Yuan.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. James says:

    I thought that Canada was the largest trading partner with the USA and. Consider the small population of the country.

  5. ron piretti says:

    trump was returning a favor to Bob Dole for his support, he is the lobbyist for Taiwan

    • Keith says:

      Hi Ron.

      Interesting thought that had not occurred to me.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. James says:

    President-elect Donald J. Trump has one mandate from the American people: CHANGE.
    Change the way we think and act.
    The election result is proof of that fact.
    I voted for Hillary Clinton and she still is my choice if she were to run again, but Donald Trump proved by winning the election that there are other ways to lead the country.
    Hillary Clinton said at her concession speech to be open and give Donald Trump a chance to lead.
    I agree and by watching television CNBC and Bloomberg closely, I have made a complete 360 degree turnaround in my view of this man.
    He has the smarts to lead our country in a new direction.
    The China play is one. He is not beholden to any one man or group of people. He is his own man and expresses his own views.
    Donald Trump is a breath of fresh air in a polluted national and global environment.
    Let’s see what he can do the next four years to succeed or fail.
    I think he is going to succeed way beyond our wildest imagination, like what he did winning an unseemly out-of-reach presidential election.
    He made me a believer in his goals, which he pursues purposefully, despite his crude, sarcastic and demeaning remarks which may be just noise.
    Donald Trump is high risk as President, but he is a good risk that the country took.
    The next four years looks good in my opinion. If he messes up, like George W. Bush, we always have the Democrats to clean up.
    That is the beauty of America and our voting system.
    God bless America!

    • Keith says:

      Hello James.

      I’ve got to tell you what an impact your note had on me this morning. You’ve written and expressed something exceptionally powerful. Thank you for taking the time to write such a thoughtful and very personal commentary.

      With best regards and thank you for being a part of the Total Wealth Family, Keith 🙂

  7. selcuk esendal says:

    Keith, Outstanding synthesis. Thanks.

    • Keith says:

      Thank you for the kind words, Selcuk! I am thrilled that you found it valuable.

      Best regards and thank you for being part of the Total Wealth Family, Keith 🙂

  8. Joe says:

    Agree with your assessment of China on the whole but Trump putting the Chinese on notice! Yes, they surely are shaking in their boots, are you kidding? They see right through his bluster and will not be fazed by the guy and his rants on Twittter. Unlike the U.S., China has a long range strategy and will execute on it no matter who is the White House occupant, even one with bluster and threats of trade wars which neither country can afford. Where that leads should be perfectly evident on this 75th Anniversary of Pearl Harbor.

    • Keith says:

      Good morning Joe.

      Perhaps without realizing it, you made my point. China does, indeed, have a long term strategy. I have personally seen 100 year strategic plans there that would make a Western executive cringe. The key is how they adapt to Trump…but adapt they will. I only hope America is savvy enough to realize the game being played.

      Respectfully to your point about Pearl Harbor, China has no history of engaging militarily beyond its borders when it can simply open trade and accomplish the same thing economically. Recent moves in the Pacific are to fill voids created by weakness in the West, not military expansion even though they’re using the Chinese military to do it.

      What’s interesting about this is that they’ve been very open about their objectives – all of which are highlighted in a book entitled “Unrestricted Warfare” first published in 1999 by two colonels in the People’s Liberation Army, Qiao Liang and Wang Xiangsui. It’s available on Amazon in case you’d like to see what’s next. And, it’s required reading for their officer corps.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  9. Mike says:

    Very astute insight. I have been to China five times in the past ten years and watched as they first embraced capitalism, and now have taken it to another level. Their middle class alone is enough to support their economy and it continues to grow. Their markets are basically free to rise and fall based on supply and demand, unlike in the USA, where capitalism has been totally eradicated by a criminal organization which controls the financial, political and major food and drug manufacturers. Yes, China is definitely a communist country, but they have evolved capitalism to a rewarding level for their rich and poor alike. They quickly root out any criminals from their financial markets who if they are lucky, they spend the rest of their time in jail, or they are swiftly executed as a deterrent to others. How many proven criminal bankers have gone to jail recently in America?
    The Chinese infrastructure is quickly becoming second to none and when they have completed the new “Silk Road” they will be trading goods and services with over 60% of the world population.
    China and their eventual rise to economic world trade dominance should not be one of Donald Trump’s more important worries. Without a fair, regulated system of capitalism in place it is impossible to ever hope to have a democracy, or a republic, whichever you may think we have right now. Without capitalism, America will never be great again and Donald Trump has no chance of ever navigating us through the horrific financial mess left to him by the criminal Bush’s, Clintons and Obama.

    • Keith says:

      Thanks Mike. I would have to say the same thing about your note. You’ve made some very astute points and, having seen a lot of the infrastructure you’re talking about up close, I agree.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  10. randy a says:

    I would think Americans are the only idiots that would spend $5 for a cup of lousy coffee. Did they stop drinking tea in China????

    • Keith says:

      Good morning Randy.

      You’d be flabbergasted to see what the Chinese pay for stuff they want. Name brand labels, for example, cost roughly 5X in China what they cost here yet they buy them as fast as they hit the shelves. The world’s largest Ferrari Club used to be in Shanghai (and may still be but I haven’t looked in a while). It’s consumerism on a level that most westerners find simply incomprehensible….but plenty profitable.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  11. Robert LePera says:

    Keith if you are going to try and cover for the President Elect every time he puts his tweet wrong then you are going to be a very busy guy – good luck with that.

    • Keith says:

      Hi Robert.

      Respectfully, I’m not sure you thought through your comment completely. Love him or hate him, President elect Trump’s Tweets move markets which means every last one of ’em is potentially a tradeable event if you know what to look for. And, I’ll have more on that tomorrow.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  12. Franklin Collins says:

    President trump will make all the non believers believe in him when you see how the country turns around..

    • Franklin Collins says:

      Wait till president Trump takes office all the non believers will see what a real man can do.a lot of you are not old enough to see what President Reagan did.l

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