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The Week Ahead – 03 Aug 2022: Pelosi, China, & Taiwan

Learn more about CI Futures here: http://completeintel.com/2022Promo

There’s all this buzz around Nancy Pelosi’s visit to Taiwan. What is she doing there? Why all the stress? Why is China upset?

Also, Yellen got China to stop the stimulus. If China starts the stimulus, will that be a really good thing for Chinese equities? And what does that do for the CNY?

We also discussed the likelihood now with Pelosi’s visit that China will start stimulating. And what does that mean for oil and gas imports and Europe?

Will China try to hurt US companies that are in China? Do you think they could push against ex-pats in China and make life difficult for them? What are possible aggressive moves that China could take? Like cyberattacks?

There have been some potential whispers of China taking over some of Taiwan’s small islands to make a statement. Is that possible? And will they take it on other countries like India? What is the likelihood of China and the US in direct warfare engagement in the next twelve months?

Listen to Spotify here:

This is the 28th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Chris: https://twitter.com/BaldingsWorld

Transcript

TN: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and we’ve got a special Week Ahead right now. We’re joined by Albert Marko and Dr. Christopher Balding to talk about the Taiwan-China issues around Nancy Pelosi’s visit. 

Before we get started, I want to let you know about a special we’re having for CI Futures. We’re doing CI Futures for $50 a month. With CI Futures, we forecast about 2000 economic variables every month and about 900 market variables (currencies, commodities, equities) every week. That $50 deal is for the next couple of weeks. And you don’t even have to take a year-long commitment. For the next couple of weeks, you do it a month at a time, and it’s $50 a month. 

So let’s get onto the show, guys. Thanks again for joining. I appreciate it. 

I want to get into there’s all this buzz around Nancy Pelosi’s visit to Taiwan, and I want to take a step back and go, why all the stress? Why is China upset? Because I think there are a lot of loaded assumptions in the discussions that are happening. So can you guys talk us through a little bit, maybe? Chris, if you want to start, why is China so upset about this?

CB: So there’s the full history of the claim of Taiwan as Chinese territory. They refer to it as a Chinese province. That’s the general background. I’m going to assume that most of your listeners or watchers already know that.

However, if we jump ahead to this specific visit, to be honest, I’m a little bit mystified as to why this

specific visit has turned into this small crisis. Trump was sending a cabinet secretary and undersecretaries. There’s been a steady stream of Congresspeople to Taiwan. So why this specific visit? I think there’s very reasonable speculation we can go through those. But why this specific visit has turned into what it has, I think there are probably only a couple of people that could answer that question. 

TN: Okay, Albert?

AM: Well, to expand on that, I can understand why the Chinese have a little bit more drama involved in this visit simply because the economic situation in China at the moment is so dire for Xi that they need a little bit of a distraction just to get the headlines out of the way at the moment.

TN: Yeah, I think that’s a good point. And when I think about this, it’s, yes, you can go back into all the history and the UNC, the 1971 and all of this stuff, but I think my view is democrats need a distraction for the midterms. You have the Afghanistan anniversary coming up, all of these things coming up. A bill was just passed that either does or doesn’t raise taxes on a lot of the population. There’s a lot of discussion around that. 

Are we in a recession? Not a recession. I think this is a convenient foreign policy issue for Democrats to grab onto before the Midterms to raise some external issues that are a little bit more mysterious for people, a little more exciting. Will there be a war? That sort of thing. 

And I think, Albert, you’re exactly right. With the November meeting coming up in Beijing, where Xi is supposed to be this golden boy and a lot more power and all this stuff, the new Mao or whatever, I think China’s economy is in a horrific state. I think the provinces and cities are not falling in line with Beijing, and I think politics in China is terrible. So I think this helps galvanize people in China, it helps galvanize people in the US. And I think it’s more of a convenient event than anything.

AM: It is a convenient event. Other issues are going on within China with the actual US.

Fed and Yellen are Yellen got them to capitulate to stop stimulus to fight inflation. So from the Chinese perspective, they’re a little bit they feel a little bit betrayed here. Seeing Nancy Pelosi

nude sunbathing on Taiwanese beaches, it’s like, what are you doing?

TN: Yellen got them to capitulate, to stop safely. So you’re saying Yellen got China to stop stimulus? 

AM: Yeah. I don’t know if it was direct or indirect, but Xi warned them to don’t stimulate while we’re trying to combat inflation. Look what happened to the Russians. And from the Chinese elite perspective, looking at the oligarchs in Russia, being completely isolated from the rest of the world, that’s just something that a pill that they didn’t want to swallow, and they were glad to hold off stimulus up until this event. Now, I don’t know, after this event, the Chinese might renege on that gentleman’s deal, but we’ll see at this point.

TN: Okay, let me pursue that in a minute because that’s interesting. So if you’re saying that the Chinese were holding back stimulus because of a quiet bargain, and they reverse on that and they start, as I’ve been expecting them to do for the last six months, just dump truckloads of cash on the squares in Chinese cities, if they start doing that, that could potentially actually be a perfect thing for Chinese equities, right? 

AM: Well, of course, but it’s negative for the US inflation and the commodities will start ripping. It’s an asymmetric shot against the US. So it’s something that they have in their toolbox and they haven’t used yet, but they certainly could after this.

TN: Okay, and so what does that do for the CNY, guys? If China starts stimulus, if it’s fiscal that appreciates CNY, at least from a textbook perspective, right? 

AM: Yeah, from the textbook perspective, sure. They control whatever they want to set the CNY at, so, I mean, I can’t see them allowing it to shoot up too far just because they are an export-dependent economy. 

TN: Okay, Chris.

CB: I just wanted to circle back to what we were talking about before jumping back to the CNY issue because this has been a real puzzle about they’ve been pretty restrained, and there are all kinds of questions as to why that is. 

And again, I wish we could provide good, solid answers about that. I think a lot of the issues, like with Taiwan and stuff like that, I think there’s like, Tony, you mentioned the economy. I think that’s distinctly possible. I think it’s also one of those issues. If you go back right after the first of the year, they changed the language about reunification and how they were going to solve that problem for the new era. 

What’s the new era? It’s Xi getting the third term. So is it possible that the economy is, like, pushing this along, egging it forward, so to speak? Yeah, I think that’s possible. I also think there’s much more like Xi has staked his credibility on, I’m making China great again, come hell or high water, if I have to drive it off a cliff to do it. That’s part of what you’re seeing.

AM: Yeah, I agree with Balding on that one. The only caveat that I would throw in there is that would be exactly the case up until the Ukraine situation where Russia got their butts handed to them. 30,000 troops lost, flagship battleship gone, sunk.

From the PLA perspective, it’s like, hey, what happens if we lose? Because it’s not a 0% chance, right? What happens if we get decimated? Our military could be set back 50 years, 100 years. And I think that at this point, it’s too much of a cost for them to take an adventure in Taiwan.

CB: Yeah. I will say you and I disagreed on this previously. Like, what were the risks? Let’s assume Ukraine had never happened. I would say there’s probably a not immaterial chance of something

happening with China and Taiwan in the next, let’s say six to 18 months.

At this point, I definitely would push that back a little bit. If something’s going to happen, I think, within the next few years. But absolutely. I think they’re going back to the drawing board because they see what’s happening to Russia in Ukraine, and they’re like, there’s absolutely no way in hell this can happen to us. 

AM: Yeah, they saw Afghanistan as a point where they could probably take some territory away from the US sphere of influence. But then again, Ukraine happened, and that threw everything through, wrenching all the plans. 

TN: Okay, so let’s talk about that a little bit. The Russia-Ukraine angle is interesting. So when sanctions were put on Russia, Russia can do okay without sanctions, not thrive, but can survive. But China is so intermingled in global trade that if sanctions are put on China, it could be very difficult for them. Right. Or what am I missing? 

AM: It could, but they’re the world’s manufacturing base, so it’s like, you put sanctions on them, they’ll put sanctions, they’ll do something asymmetric, and it’ll hurt the West more than the West can hurt China, to be honest. I mean, The US can handle it. The Europeans can’t. They’re already in dire rates. 

CB: The other thing that I would add to that is people make the sanctions argument. I don’t buy the sanctions argument for two specific reasons. One is basically what they import. The bulk of what they import from the rest of the world is raw materials. And that’s not coming from Western Europe, Japan, or other places like that.

Then the high-tech products that they do import, let’s say very high-grade chips, are going into things like iPhones and then being re-exported right away. Okay, so they’re not on an import basis highly dependent on the rest of the world. 

They’ve made two bets with that in mind. Number one is that they can convince people not to block their exports, meaning Chinese exports to their country. Number one. And then also that other countries are so dependent upon them that they can’t. Okay?

What would happen to Walmart during the Christmas season if they couldn’t buy from China? Okay.

It’s a simple example, but it does throw a monkey wrench in there. 

AM: Caterpillar is another one. The Chinese have done a marvelous job of using US agricultural companies against the US political system. So they’ve got a noose around them. Buick also. GM, Buick, Caterpillar. I can name half a dozen companies. Yeah.

TN: My main focus in terms of sanctions was food. These other things, of course, they’re importing goods, really, largely to be transformed and re-exported. Food is the main issue that I would think would be damaging to China, potentially. 

AM: Yeah, that was always one of my main points of contention about a war starting with Taiwan is those ports being shut down in the eastern part of China, it would be devastating. They would have food and security problems. The Chinese middle class has been growing. They don’t want rice anymore. They want noodles and dumplings. So they have a persistent food issue that just gets worse and worse every year.

TN: Right. Okay, so let’s go into this. I saw Pelosi kind of pull up into that. I think it was the Grand Hyatt she’s staying at in Taipei. And really, what is she doing there? Like official, non Official. What do you think she’s doing there?

AM: That’s a pure distraction from the midterms in the economy in the US at the moment. It’s an easy distraction. They know China is not going to do anything outlandish. They’re a pretty pragmatic country when everything is said and done anyway. So it’s like, what negative is there for them, for Pelosi and the Democrats at the moment?

CB: Here’s the only reason I’m going to disagree with you, and you said something very similar earlier, Tony. Here’s. The only reason I’m going to disagree with you is that this assumes a level of evil genius out of the White House and maniacal thinking that I just don’t think they’re capable of, okay? Okay. Again, I could be wrong.

AM: I just don’t see these guys as the evil genius that says, hey, we need a distraction, what can we do?

I don’t think it’s an evil genius. I think that’s a little bit too strong. The game of scapegoating and distractions in the beltway is as old as time itself. The professionals at it. They can see what they want to do to pull people’s eyes away from one issue onto another and they have the media under their grips so they can do anything. They want to distract people. So the evil genius part comes in what are, steps 2, 3, 4, and 5 after this? Because now the Chinese can retaliate and I don’t think the US is prepared for that.

TN: In what ways? 

AM: Well, I mean if the Chinese decide to start simulating next week and commodities start ripping, inflation in, the US is going to have a ten print, 10% print on CPI come October, November, then what? You’re in the smack middle of the midterms looking at 10% inflation and you’re losing 50, 60 seats in the House and you’re losing the Senate and then you have the Republican take over and start throwing out hearings against Joe Biden every week like they did Trump. It’s chaotic. 

TN: Okay, so that’s an interesting scenario. Okay, I want to ask about that and then I want to ask another question about a potential reason for visiting. But you’ve mentioned that a couple of times. So what’s the likelihood, since they’ve said that they’ll undertake serious pushback, is there a likelihood that they’ll do that? Do you put that at a 50, 60, or 70% likelihood or do you think they’ll continue to hold?

AM: I think after this visit by Nancy Pelosi, it’s a greater than 50% chance that the Chinese start stimulating a little bit earlier than scheduled with commodities ripping.

TN: Okay, so that means more oil and gas imports, more pressure on gas prices, and diesel prices. All this would hurt Europe too? 

AM: Oh, of course. Europe has got massive energy issues going forward and they’re unsolvable within six months. 

TN: Okay, so so far I’m hearing potentially bullish Chinese equities and potentially bullish commodities, particularly energy, commodities, and industrial metals, right?

AM: Oh, absolutely, yeah. Full discretion, I’m going into KWEB. I have Baba at this low with this Pelosi landing. So for me, it’s just like Chinese equities have been battered with no stimulus. We’re down to the point. Yeah.

TN: Okay, so on tech, you mentioned tech. Is it possible that with the chips act just passing in the US, this is the one that supports semiconductor companies for putting operations in the US? Is it possible that there is a message being passed to TSMC or any of the strategic industry guys in Taiwan by Pelosi and her staff? Is that a possibility? And if so, what do you think it would be? 

CB: Absolutely. I would say that that’s one of the things I don’t know if you caught this statement from the chairman of TSMC, but he gave an interview just a day or two ago and he said, “China, if you invade, like all of our plants on the island are dust, they’re worthless. There’s nothing there.” Because I can guarantee you that. I’m sure that the US Air Force would have the coordinates for every TSMC plant that it’s like, hey, we’re going to make sure that China doesn’t get them. I’m sure that TSMC, at this point, their reputation is being a pretty well-run company, very attuned to security issues. And so I’m sure that they have multiple redundancy plans and multiple security plans to address that if China is locked in. So you have to think that TSMC, all the way down to all their key suppliers and things like that, are in some type of meeting here with Nancy.

AM: Yeah. I’m not very keen on this chip sack bill. I think it’s just fireworks and stringers and ticker tape raid. But there are EPA issues to deal with when chip-making also. So no matter what, whatever they want to throw out for legislation, as long as the EPA is hampering manufacturing in the United States, manufacturing is going nowhere, at least for the next five to ten years in the United States. So this chip act, although it gives a little bit of pressure, don’t think it’s going to be that big of a driver in the next five to ten years. 

TN: Okay. I want to talk to you guys a little bit about the pushback that China may give to US companies. So China already blocked a $5 billion battery investment from a Chinese company in the US. That was just announced today, and those batteries were supposed to support Tesla and Ford, I believe. Do you think China may try to hurt US companies that are in China? Could they directly take action against, say, Tesla or GM or Ford or GE or any of the American companies that are sitting in China? Do you think they could push against, say, ex-pats in China, and US ex-pats in China and make life difficult for them? 

Because if we look, for example, at what happened in Russia, we have a lot of Western companies that have abandoned their operations in Russia over the last eight months. Right? Is it possible that American companies get pushback from the Chinese government? 

Because if I think of what the Chinese government did to Japanese companies in 2012 if you remember that. It was very aggressive. They were instigating protests against Japanese companies, Japanese expatriates, and Japanese government officials. Could they instigate that against the US? Companies? And could they push us Companies to just give up their operations in China? 

CB: Well, the only way I would rephrase that is how would that differ from normal standard operating practice? Even within the past couple of years, there’s been a massive flood of not just Americans, but all foreigners out of China. And these are everything from journalists to just basic school teachers, English teachers. Okay? So it doesn’t even matter if you’re a sensitive national or in the sensitive industry or what China deems is sensitive. 

This goes for businesses as well. You heard stories about companies saying, oh, well, I have 10 million, $50 million of profits I can repatriate. I’m going to close down my China plant and go to Vietnam. And basically what they do is they just freeze everything and said, oh, you have an unpaid tax bill, coincidentally, the same amount of money that you were going to repatriate. And so they just have to walk away from everything or sell it for one dollar or something like that. 

So when you talk about that, I think that’s entirely fair. I think that’s going to happen. I think the only people that are going to effectively remain there till the end are the Shells of the world that didn’t get out of Russia until the bombs and the missiles started flying. I think it’s going to be the same with China.

TN: Are you saying that you think some US companies will in the next, let’s say, two to three years, abandon their China operations? Do you think that’s feasible? 

CB: Oh, yeah.

TN: Okay. 

CB: I think it’s already been happening. It’s not announced. You see a couple of announcements here and there. You hear about many more talking to people that are still there. But yeah. 

TN: Albert, what do you think about that? 

AM: Yes, they will. There’ll be certain companies that they go after depending on whatever political calculations they can throw at the US, for sure, without question. They’ve done this. I mean, Christopher said they’ve done this in the past. Nothing new. 

TN: Right. So how would that start? Would they try to push aggressively to localize leadership? I know a lot of that leadership is already localized, but would they almost make it mandatory for leadership of, say, US companies to be Chinese and then kind of cascade that through? Or what would the early phases of that look like?

AM: I think the early phases would be phantom tax violations or some kind of fines or fees that just pop up out of Chinese mountains. Who knows? Do you know what I mean? So I think that’s the first thing you’d want to look at if they start doing it.

CB: Yeah. And again, what you’re talking about, I think, is basically what’s been happening for the past couple of years is whether it’s the phantom tax bill, whether it’s all senior leadership has to be Chinese or party members or all those kinds of things. I mean, when you’re asking about that in the future, it is like, well, how would that differ from the past two to three years?

TN: Right. It feels like we’re on the precipice of that. And some of us have been talking about kind of the end of the Asian century for probably the last five to eight to ten years. And China is what seems slow, but very rapid decline in terms of its ability to grow. Not the fact that it’s not already huge, but its ability to continue to accelerate growth. That’s gone. Those days are gone. Right.

And when growth stalls out, the opportunity becomes a zero-sum game. And it’s about market share. It’s about getting your piece of the pie. Not a growing pie, but a stagnant pie. And that’s when things get very difficult in authoritarian countries. Right?

CB: Well, I think to add upon that, they were following the Asian growth model of build, in simple terms, run large trade surpluses, controlled currency, build apartments. It’s a pretty tried, true path. But one of the things that are very different is if Malaysia runs a large fiscal surplus, nobody cares. If Taiwan runs a significant trade surplus, some people care, but whatever. 

For every percentage point of GDP in trade surpluses that China runs at this point when you’re the second largest economy in the world, that is a massive, massive number, not just against your economy, but against the global economy. And that’s going to create massive, massive dislocations elsewhere. 

And then the other thing is that when your only source of growth is basically building apartments, and now they’ve got like 20% to 25% of these apartments all over the country, empty and household debt that is significantly above the OECD average. It doesn’t make any sense, and this is what they’re running up against. Okay.

AM: To take that a step further, it’s like if you have low growth and your economy starts in the waiver, how do you fund a growing military to combat the United States on a global level? The math doesn’t add up. Very difficult.

TN: Okay, I want to move next on to things like cyberattacks. Chris, I know that you’re very focused on kind of the IT side of what the Chinese government is doing. Can you talk us through some of the potential, maybe aggressive moves that China could take in the wake of this?

CB: Sure. So there are all kinds of things. And one of the things, you saw today where they were looking at, they shut down the Taiwanese Prime Minister’s website. But that’s, to be honest, small potatoes. 

The type of thing that you would look at, and you’ve seen this a little bit in Ukraine is where they went after things like nuclear reactors and other things like that. So if you’re looking at this, one of the types of things that you would be looking at would be, for instance, Taiwan being an island, there’s a handful of spots where cables come ashore. So what would you be looking at? Because if you wanted to make it hard on Taiwan, that might be something that you would go after. 

If you had the capability, and they are very likely due to some capacity, you would be looking at putting bugs in the TSMC type of production capacity. So those would be the types of things to narrow it to Taiwan. But generally speaking, if you aren’t being hacked by China, that basically just renders your place in the universe irrelevant, almost, because they’ve pretty much gone after everybody.

TN: Right. Albert, what do you think? 

AM: Yeah, I mean, the Chinese are prevalent in the cyber terrorism space. They’re out there stealing trade secrets and corporate secrets all over the place, especially in the United States. And I don’t foresee that slowing down at all. If anything ramping up, and they’re good at it, and we have lacked security in the United States, and it needs to be tightened up.

TN: Right. And we intentionally, for the viewers, did not record this on Zoom. That’s an indication of some of the thoughts around there. 

Now, guys, there are some islands between Taiwan and China, and there have been some potential whispers of China taking over, say, some islands, some of Taiwan’s small islands to make a statement. Do you think that’s possible?

AM: It’s possible. I don’t understand why they would try even risking that. What if they lose a few ships?

What if they lose 1000 or 2000 troops? It’s like all of a sudden you look weak and then you’re going to be forced into a position to do something bigger. It would make no sense from my perspective.

CB: The only reason I kind of disagrees is that there’s a handful of some of these very small islands, so I doubt that they have any military hardware there. And some of them are literally, I think, as close as like 10 miles off the Chinese mainland like that. They’re just that close. And so just as a symbolic act, something like that wouldn’t surprise me at all.

AM: It won’t surprise me at all. I’m just saying anything closer to the Taiwanese actual island, I would be wary of seeing the Chinese try to take them. 

TN: I spent a week on one of those islands in 2009 waiting out of typhoon, and it was an experience, but I think it’s feasible. It’s an island off of Taidong, which is no, that’s on the southwest side. They wouldn’t do that. They would do it on the I was on the southeast side. They would do it on the southwest side or the northwest side. But there are lots of islands, very small islands off of Taiwan.

Okay, good. What else I think do we need to be thinking about here? There has been talking of the Biden administration removing trade tariffs and this sort of thing on China. Do you think that could be something that the administration aggressively goes after to kind of compensate China? Or do you think this would maybe solidify those tariffs? 

AM: I don’t think so. Honestly, I would rather see what the rhetoric is around the oil market price cap that they’ve been talking about with G7 and the China terrorists might fall into that realm in negotiations. I would want to see what China’s reaction is to the oil cap at the moment.

CB: I’d be very skeptical at this moment of some type of tariff rollback because for them to… The White House has very badly managed this entire situation where they created a situation where if she went or if she didn’t go, they were losers. They’re not looking bad. And so if they were to roll back tariffs at this point, I think they would get they would get slaughtered, even among the Democrats at this point. So I think that’s very unlikely. 

But look, Jake Sullivan is the guy that a decade ago was proposing, what do you say we walk up to China and give them back Taiwan in exchange for peace in our time? So with these guys, anything is possible.

AM: This is the worst foreign policy cabinet I have ever seen in my life. No one’s even close second at the moment. And that kind of commentary by Jake Sullivan is just unbelievable.

TN: Yeah. Okay, guys, so let me ask you kind of one final question, and you have to answer it with one of these two answers you can’t equivocate in between. Okay. The likelihood of China and the US in some sort of direct warfare engagement in the next, say, twelve months, is it closer to, say, 20% likelihood, or is it closer to 70% likelihood?

AM: 20% in my opinion. 

CB: 20%. 

TN: Oh, good. Okay, so do you think it’s greater than 20% or less than 20%?

AM: I’d say less than 20%. Okay. I would again say less than 20%,

CB: and I would say if you were to draw that out, 24, 36 months, I see it going up, probably steeper as time goes on.

TN: Okay, so that’s fair. So there’s a risk all around, right? We’ve got economic suffering globally. We’ve got inflation globally. We have whatever’s happening post-COVID trying to be figured out globally. We’ve got political uncertainty globally. So we’ve got risk and uncertainty everywhere. Adding a conflict to that mix would not be positive for anybody. 

CB: And the one thing I would say is, even though I say less than 20%, that’s not like a firmly, deeply held conviction. Because if you’re talking about risk, I would have what I would call wide error bands in a lot of these situations. Look, we talk about, like, what is Xi going to do? Xi could say, hey, America is distracted by Ukraine. They got extra troops there. They’re shipping all kinds of weapons. Now’s the time to go to Taiwan. I don’t think people do that. That’s also not crazy to speculate. Yeah,

AM: I would have to agree with that because I never thought that Putin would try to take Kyiv with so few troops, but here we are, him making a vital mistake. And sometimes leaders make bad mistakes because they have a bunch of yes men around them. Yeah. Let me ask you one very quick question.

TN: Do you think there’s a possibility that China kind of takes it out on somebody else? Do they have a dust-up maybe with India to show strength at home while avoiding it with the US? Or something like that? Do they lash out to somebody else so that they can kind of flex muscles at home? 

AM: Yeah, they could, but I mean, honestly, the Indians are not people to be trifled with, to be honest. They are itching to take on China if they show any kind of aggression. So I don’t see who they can pressure to say they’re big, bad China at the moment. I don’t even think they should be doing that. They should be figuring out their economic situation more than anything else. 

TN: Xi Jinping’s role model is Mao. And Mao ultimately was a failure and a pariah in his own country by the time he died. Right. So I don’t think Xi has the sense to understand that Mao was a pariah by the time he died. And so that’s his role model who killed 60 million people through starvation and other things. So this is a problem. We have a guy in the office in China whose role model killed 60 million people directly.

AM: Yes, I understand that, Tony. The problem is the difference is that the CCP has wealthy families now that have almost equal footing as Xi in terms of power, and they can of them if they wanted to. 

TN: Well, and that’s the reality, right? And that’s what nobody talks about. And that may be the backstop for a lot of this stuff.

CB: I’ll tell you this. The rumor mill among Chinese ex-pats, dissidents, et cetera, et cetera, are in hyperdrive this year. Look, it’s hard to know what to believe. It’s very hard to know what to believe. Okay? So I’m not about to push any theories, but there’s a lot of that discussion going around.

TN: Guys, this has been great. Thank you so much for doing this on such short notice. For anyone watching, please put comments below. We’ll take a look at them and we’ll watch them through the next week. If you have any additional thoughts, please let us know, and look forward to seeing how the next thanks a lot.

Categories
QuickHit

QuickHit: What China is thinking right now?

What China is thinking right now?

China expert Chris Balding joins us this week for #QuickHit to discuss “What China is thinking right now?” What is the state of the Chinese economy? Are they really doing well in Covid? How about the deleveraging process, is that even real? And what’s happening to CNY? Also talked about are the politics around China especially how it relates to Afghanistan.

 

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This QuickHit episode was recorded on August 24, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Hi, everyone. Thanks for joining us for another QuickHit. My name is Tony Nash with Complete Intelligence. Today we’re talking with Christopher Balding about what is China thinking now.

 

Chris, thanks for joining us. Can you let us know a few things about yourself? Give us a little background?

 

CB: Sure. I was a professor at Peking University in China for nine years and then two years in Vietnam at the Fulbright University Vietnam. And today I am a super genius in the United States.

 

TN: Yes, you are. Thanks for taking the time, Chris. You’re one of the very few people I know who’ve actually had on the ground experience in China with a Chinese government organization.

 

So I think it’s really important to go to people like you, who had experience like you to understand what kind of China or the Chinese government is thinking now. Of course, it’s not monolithic. There are a lot of different opinions, but it’s good to have that insider’s view.

 

So I want to start off as we look at where we are in COVID, we’re a year and a half into it, depending on the school of thought, maybe it did or didn’t start in China, but we hear that Chinese economy is doing great and they’ve come out of COVID really well, all these other things. I’m really curious your view on the state of the Chinese economy right now. And what are Chinese economic planners thinking right now as they kind of potentially go into year two of Covid.

 

CB: So I think there is a couple of highlights out of the Chinese economy. First of all is that they’ve resorted to the pretty similar playbook that they go back to every year, which is pump credit, pump construction and infrastructure type spending.

 

In the early part of this year, we saw a significant amounts of credit growth. That’s softened as we’ve moved into summertime. That’s primarily due to because there’s a very clear summer and fall building season that allows builders in China to do things because the weather becomes inclement in significant parts of the year. And then if you add in the Corona backlog, that kind of is essentially almost trying to put two years of expected growth into one year.

 

We actually saw a lot of that. And that front loaded a lot of the credit and demand for things like commodities. This is why you’ve seen such demand for things like coal and steel, which were quite high. We’ve seen that soften as firms built their inventory and really ramped up during the summer building season as the demand for credit has softened and some of the building has actually been undertaken. You’ve seen a softening of that which has caused you’ve already seen talk of maybe there’s going to be unleashing or the economy is a little bit softer than the planners would like. So there’s talk of unleashing some additional credit growth trying to stimulate different parts of the economy. We’ll have to wait and see if that happens.

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Generally speaking, the rule is, if there’s a debate about whether or not they’re going to unleash credit growth, I would definitely take the over.

 

TN: By about three times. Right. So one of the interesting things you mentioned is that you said that they expended credit in the early part of this year. But what I read from investment banks and what I’ve read from other people who look at China is that China just underwent this big deleveraging process. Is that real? I’m just not sure, because I see on one side that there’s this talk about deleveraging, but my gut tells me it may not necessarily be happening. Is it happening, or is it something that’s just happening on paper or what’s your view?

 

CB: It’s tough to understand the Chinese National Bureau of Statistics and PBOC’s math as to how they arrived at that, because if you’re just running more generalized numbers, it’s very clear that debt at all levels has continued to outpace GDP. So it’s very difficult to understand how they’re estimating a leveraging. And it’s important to note that we did not see, let’s say, the rapid, rapid expansion of economic growth that you saw, for instance, in the United States.

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And what I mean by that is, whereas any United States, maybe growth went from two or three to 5% relative, almost doubling, you know. You probably saw Chinese growth go for maybe like 5% last year to seven or 8% with the Corona boost where you have that base effect. And so you didn’t see it go to, like, 10, 12, 15% that you might have seen if it had really in relative terms, they doubled from the previous year.

 

And so it’s very difficult to understand how they arrive at those deleveraging numbers. And as we all know, China is famous for fudging their numbers. So it’s very difficult to understand how they’re arriving at those numbers.

 

TN: Right. No, I agree. I haven’t believed it when I’ve heard it, but I kind of nod along as if it’s real. But I think, you know, the Chinese economic data a lot more intimately than I do, but I just don’t see where it’s happening, where it’s actually materializing instead of just being debt transfers.

 

Okay. So earlier you said that Chinese economy is slowing. Now, from my perspective, that’s worrisome partly because you’re going into a big export season, and we’ve got some ports that are stopped up. We’ve also got an election next year with Xi Jinping being reelected, whether that’s in square quotes or not, but Xi Jinping being reelected next year.

 

In terms of the resources put towards stimulus this time around, do you expect that to be more intensive than normal?

 

CB: Typically, what you see. And you saw this the first time Xi was elected, you saw this second time Xi was elected. What you typically see is a pretty significant boost to fiscal outlays. And so I think if history is any guide, I think you’re probably going to see going in the fall and the first of year, it’s very, very likely you’re going to see some type of significant boost to fiscal outlays. And this pattern goes back many, many years well before Xi that when there are these elections. And I’m not sure if it’s a scare quotes or air quotes, but both seem to…

 

TN: Yeah.

 

CB: So I think it is very, very likely that you’re likely to see that. And one of the things I think that a lot of people have missed out on is yes, there were absolutely corporate, let’s say, bailouts or corporate funds for Corona. But one of the things is that in the United States, there were the large amounts of transfers directly to households. China has not enjoyed those transfers directly to households.

 

And so actually, consumer spending in China is actually pretty soft. And those are buying inflated data standards. And so I think that is something that is very important to note when we’re talking about the health of the Chinese consumer.

 

TN: Yep. That’s great. Okay. So I also want to talk about the supply chain issues. And I was just reading a story today about how Pudong Airport has been shut down. Cargo on Pudong Airport is going to be much slower for a period of time because of anothe Covid outbreak. This sort of thing. Do you see ongoing port capacity issues related to COVID? Is that something that you’re kind of concerned about?

 

CB: I think that is something that you’re going to be seeing for definitely the foreseeable future. And I should say it’s not just China. You’re seeing a lot of this in other parts of the world that I know, specifically Vietnam, the Middle East. I’ve heard of similar things in Europe where they are just straining at capacity. Sometimes it’s due to COVID shut down. Sometimes it’s due to other issues. But absolutely, these are issues that I think are not going away anytime soon.

 

And it is, I mean one of the debates in the United States right now is transitory or structural inflation. And I think, not to be capping out on the issue, but I do think it is kind of a mix of both. And I think the supply chain issues don’t be surprised if we’re looking at very likely two years before all these issues are really worked through, because when people went to, let’s say, just in time or contract manufacturing, what that did is that gave you less wiggle room. So you did not just have a massive warehouse of supply that you inventory, and then you could draw down as necessary where it would give you three months to make a mistake. Now people were essentially saying, I got one week of inventory, and if that one week gets shot, I’m in deep trouble.

 

So the chips are, there’s chips, there’s car, there’s Corona shutdowns, there’s capacity issues at some ports. And so it’s going to take a couple of years, probably to work through all these issues to return to what we think of as some degree of normalcy.

 

TN: Right. What’s interesting to me about that is the previous administration of the US tried to bring manufacturing businesses back to the US.

 

Now, with COVID because of the global supply chain issues and the intermittent supply issues, there’s more of a move to bring things back, at least to North America. I know lots going into Mexico right now. Some’s going into the US to minimize the disruption of things, especially in electronic supply chain.

 

So it seems like regardless of the kind of official policy, whether it’s trade policy or just say public health policy, it looks like more of this regionalization is happening. Does that make sense to you?

 

CB: Yeah, absolutely. I mean, look, nobody is going to announce that they’re leaving China for many reasons. But nobody’s going to announce that they’re leaving China. But you do absolutely see a spread of manufacturing capabilities.

 

Whether that is because they want to have multiple manufacturing bases, they want to be more diversified, whether it’s because of IT issues, whether it’s because of Corona risks, tariffs, all of these issues, there is absolutely increasing diversification of manufacturing capabilities, whether it’s Mexico, India, Malaysia, all of these different places. You’ve even seen Africa doing relatively well in certain areas. So it has absolutely happened.

 

TN: Okay. One last question on the economy then we’ll move to kind of politics and China’s place in the world. What’s the thought behind the elevated CNY? We’re trading much higher than we have for a long time, and it stayed there, right? It’s pegged right around 6.4 something, and it’s been there since Q1, I think. Why the persistent strength in CNY?

 

CB: Well, I mean, I think first of all, they have been running during Corona pretty significant surpluses. The United States has exports to China and other parts of the world have declined, not insignificantly or remained flat as we’re importing a lot more. That’s number one.

 

I think also the dollar has gone into a specific range. And the way that I think of the CNY is it’s basically just a reverse USB tracker, which I think explains most of what we’re seeing. I think what they’re trying to do and the reason that China has been buying some dollars, not in major amounts, but I think they kind of have, like, ICBC and CCB, those types of banks acting as dollar cushions for lack of a better term, is that they don’t want it to appreciate too much for a number of reasons, because they know they’ve become more expensive and that would just make it that much more expensive. So in a way, I think they’re trying to manage that, manage that flow. But I think it’s still generally within a range where it’s like you can say they’re within spitting distance of what their index say they should be. Okay, that’s fair.

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TN: Okay. Now let’s move on to politics. Let’s move on to kind of China’s big, long term, multi hundred year plan to rule the world, which I think is not real.

 

So let’s talk about Afghanistan. This just happened over the last couple of weeks, and there’s a few that China is going to be the master winner of the US withdrawal from Afghanistan. I think there are multiple perspectives on that, but the consensus view seems to be that the US really did had to job on the withdrawal. And the ultimate winner of this is China. Can you kind of walk me through some of your views on that? What are some of the possibilities there with China and Afghanistan?

 

CB: Sure. So I think it is very fair to say that the United States has pretty badly bungled the withdrawal. You know, why, you know, we should have waited until we’d already evacuated all the army to say we’re going to start evacuating US citizens and Afghani translators and people like that.

 

One of the things I do think is absolutely happening. And this is not just China. And you’ve heard this from country after country. Taiwan, Germany, UK on down is they are saying we need to go back to the drawing board and re evaluate everything we think we know.

 

Okay. And somebody that I was talking to, I think, expressed it very well is the United States still has credibility because we can move large amounts of assets, whether it’s military, governmental, other private sector, we can bring significant assets and influence to the table. What, this has really changed in a lot of people’s minds is confidence.

 

TN: Yes. That’s fair.

 

CB: That has changed a lot of people’s mind. So you have a lot of people going back to the drawing board. One of the things I’m going to be a little bit hesitant to do is start pronouncing winners, losers, and this is what XYZ country is going to do in ABC country is going to do. And the reason I say that is it’s very, very plausible to construct a scenario where the Taliban and the CCP become BFFs. Okay?

 

TN: Sure.

 

CB: I mean, if China is shipping large amounts of fentanyl out of northeast China, it’s not a crazy scenario to say they partner with the Taliban to start shipping large amounts of opium into the United States at the same time.

 

TN: Sure.

 

CB: Not a crazy scenario. It’s also not a crazy scenario for the Taliban to start bombing China within a year or two. Okay. You could very easily construct those types of scenarios that lead to that. Okay. So it’s very, very difficult to construct those types of scenarios with any what I would consider a degree of certainty. Okay?

 

TN: Sure. So what about the, the China-Pakistan relationship? $46 billion of investment, supposedly, supposedly a tight relationship there. That’s arguable. Do you think that pays dividends in Afghanistan, or is that kind of something that’s a little bit, I wouldn’t say irrelevant, but a little bit less directly connected.

 

CB: So I think Pakistan is actually very pretty directly involved in all of this. But again, it’s very difficult to say with a high degree of certainty what’s happening there because Pakistan has very direct connections into both the Taliban, Al Qaeda. Some would even say that they were a Pakistani security service creation. At the same time, it’s well known that there are blood feuds between groups within each of those organizations.

 

So it’s very difficult to get to say exactly who the winner, loser there. With regards to China and Pakistan, one of the things that you’ve seen very clearly is that pretty much the Pakistani government and the Pakistani elites are effectively compromised by China. They will say nothing about wingers and other issues.

 

At the same time, everything, I think indicative on the ground and of the mass population is that there is maybe not extreme, but I would say broad discontent with the Pakistani relationship with China for many reasons.

 

TN: From who and Pakistan? Is it from the armed forces? Is it from other parts of the government, from regular folks who isn’t happy with that relationship?

 

CB: I think a lot of folks broadly. The business community. I think there’s a growing sense that they are effectively a Chinese colony. One Pakistani I know who described it as such. So I think there is very broad discontent. And as we all know, Pakistan has quite the lengthy history of governmental instability.

 

So similar to what you’ve seen in other countries in the region, it’s very easy to paint a picture, a scenario where the current government remains compromised and under the thumb of the CCP for years to come. I think it’s also plausible that a new government or some type of political instability happens in Pakistan. And all of a sudden, there’s an about face on how to manage relationships with China.

 

Generally speaking, though, I think there is going to be very tight coordination between Beijing, Islamabad and Kabul because those… Pakistan, I mean, almost anything that happens in Afghanistan is going to be maybe not controlled by Pakistan. I think that overstate it. But there’s going to be large amounts of information flows and influence back and forth happens over what happens in Afghanistan.

 

TN: Yeah. Okay. That’s all really interesting. I think we could spend a long time talking about China, Pakistan, Afghanistan, India, Russia, kind of where all those countries come together, Central Asia. But I want to end on this.

 

We’ve seen, a lot really changed with US standing in the world over the past couple of weeks over Afghanistan. We’ve seen a lot change in the US China relationship over the past year with the new administration. And so let’s talk for a minute about the overall US China relationship. What’s your thought there? Are they getting along? Is there a constructive dialogue? How do issues like Taiwan fit within that discussion? Can you just help me think about some of your thoughts there?

 

CB: So I was talking to someone, and I think they put succinctly the way that I would characterize the Biden administration’s record on China. You can’t criticize them for what they’ve done on China because they really haven’t done anything at all. Okay. Other than adding a couple of names to the Sanctiosn books, there really has not anything taken place.

 

They promised that they were going to get out their China strategy plan in June. Then there were rumblings that might happen in July, where now at almost rapidly approaching September 1. And now there’s not even talk of when it might be released. So really, nothing has been happened except for the Alaska meeting, which apparently went over like a lead balloon.

 

Everything right now just seems to be a stalemate. And the Biden administration is worrying, and that China is still moving forward, and the Biden administration is basically doing nothing.

 

The most telling point to me about the by administration approach, and I think this is something I think you should fault in. In fairness, Trump for is look, we can talk about values and do the right thing and all this kind of good stuff. But the United States, at some point has to actually put resources into this effort.

 

And the Trump administration, other than political capital with allies or other countries, never put any real hard resources or assets into these issues. And the point I would make is the Biden administration has made a point of spending literally trillions of dollars. And to the best of my knowledge, there has been almost zero spending passed that has really anything to do with China. Okay.

 

We cannot continue to talk to countries like Vietnam, Malaysia, South Korea, Japan. You cannot talk about the threat China poses and never spend any money on the issue.

 

TN: Sure.

 

CB: Okay. And look, this doesn’t have to mean we go out and increase military spending by 20%. This could simply mean we’re going to go into Vietnam and say, we want to have a development program and, you know, help solve issues. This can mean capitalizing the Development Finance Corporation to help countries like India and Malaysia and say, look, there is a real opportunity that does not involve the Belt and Road, where there’s going to be green standards or these non-corrupt standards and things like this to make sure that this money is really helping your country. You know, and it was probably something that was negotiated could be all the way back to the Obama administration.

 

There was some type of military center opened in, I believe, Jakarta with the Indonesian government that was supposed to have other governments. It’s a small center. Even those types of things. There’s simply not the resources being dedicated. And I think that’s indicative of where this ranks within the Biden administration priorities.

 

TN: I’ll be honest, Chris, it sounds like a mess. It sounds pretty bleak to me.

 

So great. I really appreciate this. I think if anybody knows has an idea of what China is thinking, I think you’re the guy. And I really, really appreciate your time.

 

Everyone watching. Please please subscribe to our YouTube channel. The more we have, the more we can bring to you as a part of our videos. And, Chris, thank you so much. And thanks to everyone. We’ll see you on the next interview. Thanks.

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QuickHit

QuickHit: Will China Invade Taiwan? (Part 1)

Albert Marko and Christopher Balding are back for another #CageMatch special episode for QuickHit, where the two experts discuss the million dollar question: Will China invade Taiwan? Tony Nash is hosting this episode with Marko and Balding sharing what they think the two countries will do. Does China have the capability (and money) to invade Taiwan? If ever, will Taiwan ever retaliate? Can they afford to go to war? And how will the US fit in all these? Will this be another war waiting to happen?

 

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The China-Taiwan relations was briefly discussed in the first ever #CageMatch episode. Watch the Part 1 here. 

 

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This QuickHit episode was recorded on January 26, 2021.

 

The views and opinions expressed in this Chinese invasion of Taiwan QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: We’ve seen some build up of China’s activity toward Taiwan especially over the last month and we wanted to have a deeper discussion about one of the big questions that is out there which is “Will China invade Taiwan?” and is that a viable likely possibility or is it just saber-rattling to shake things up a little bit. With the new Biden administration and the change over there, there is potentially an opportunity for China to take a more aggressive stance toward Taiwan, the region and, the U.S.

 

We’re joined by Chris Balding and Albert Marco to talk about this. Let’s go through your basic thesis. Chris, what’s your position China preparing to invade Taiwan? Do you think it’s something that is possible and or likely?

 

CB: I would put what we think of as a full-scale invasion, where there’s soldiers and rubber rafts storming the beaches of Taiwan. I think that is relatively unlikely as a scenario. But I do think what is much more likely, and I would put it above 50% is some type of escalated conflict either in the East or South China Sea over the next 18 months as distinctly possible.

 

And when I say that, let me emphasize, we’re talking a range of possibilities. This could be everything from a PLA navy boat ramming a Taiwanese fishing boat. It could mean blowing up a shoal or something like that they’re fighting with Vietnam about. There’s a range of possibilities, but some type of conflict within the next 18 months is distinctly possible.

 

The reason I say 18 months is Xi will be going up for election of his third term in about 18 months. That is a very important time period. And I guarantee you, Xi and those around him know what basically they’re looking to accomplish within those 18 months. You have a number of complicating factors. It’s not uncommon for Chinese leadership to say: “Hey there’s a changeover in the U.S. Let’s see what we can get away with”. That’s not why they would do it. The timing is fortuitous.

 

So, I do think some type of escalation in the East and South China over the next 18 months is likely.

 

TN: Okay. Albert, what do you think?

 

AM: China likes the poke and they like the prod and they like to test the perimeters of defenses like most nations. When it comes to offensive capabilities, they want to test their adversary’s defensive capabilities.

 

Do I think that there’s going to be some kind of escalation? Well, I kind of agree with Chris there. Something might happen along those lines. But I don’t think it would be anything very serious. China would need an assurance of a quick and decisive victory if they were to attempt something like that. Obviously, a full-scale invasion is definitely not going to happen.

 

But even blowing up a shoal or taking out a couple fishing trawlers or whatnot, they certainly don’t want to sit there and affect their shipping lanes. Taiwan straits in that entire region, is the world’s biggest trading lanes for ships. You can’t have the United States running there with an armada just to protect Taiwan. It would adversely affect the Chinese economy. Xi at that point in 18 months, like he’s running up for election like Chris said, he can’t afford any kind of hiccups right now in the Chinese economy. And most of the CCPs elite are ingrained with Taiwanese companies. So, for them to sit there and disrupt that wealth, I just don’t see it happening.

 

TN: We saw over the last week where the Chinese government said that they can now defend itself in its claimed territorial waters. And with China expanding its claims, whether it’s with India, South China Sea, wherever it is, it seems to me that they’re telegraphing a more aggressive stance. Do we expect that as a warning? That is fairly hollow but they just want to put it out there or is that something that we believe they’ll act on against the Philippines, Vietnam, Taiwan, Japan or something like that. Could we see the claim over, maybe, the Senkaku Islands go hot at some point for some phosphorous hills or whatever?

 

CB: A lot of this follows a very similar pattern of what we call “salami slicing,” is over the course of a couple years, they just continue to slice away and slice away and slice away, until the last logical step in progression of some type of escalation. That’s a similar type of strategy. That’s part of why I say a full-scale invasion of Taiwan, likely no, I don’t think it is. I generally agree with Albert in that sense that I would put it as a very low probability type of event.

 

Are there other types of conflicts that may take place? Whether that is Taiwan or Chinese navy and fishing vessels circle islands and stuff like that. Absolutely. I think it’s relatively likely 50 percent over the next 18 months.

 

There’s been very under-the-radar moves in the sense that within the past year, maybe 18 months, Xi replaced key generals that oversaw the southern and eastern areas, which are very closely tied to Taiwan.

 

If there’s not some type of conflict, they’ve taken all the move that seemed to indicate signal that yes, they are at the very least they want to stick out their chest a lot more in these areas. And I think probably the one area where I would fundamentally disagree with Albert is that I think he’s perfectly right on “why would China do this this? This could mess up their shipping lanes they’re invested in Taiwan.?” And the reason I disagree is not that I think Albert is wrong. But I think, it’s the wrong type of rationale.

 

If we look at why is China picking a fight with India in a frozen ground on the Himalayas at 25,000 feet? It makes no sense. I mean there’s little logical reason. They’ve successfully turned India against. They’re kicking out in India. They’re kicking out Chinese apps as fast as they can find them. And they’re looking to start an Indian smartphone market. Very little action is proven has provoked a very large reaction from India. Albert’s rationality, in a way, is perfectly accurate. I don’t think that necessarily captures the reality of what I would call Chinese rationality of the logic that they’re using to make those decisions and the risks they’re willing to take.

 

TN: If we take the Hong Kong scenario and we talk about the salami slicing that Chris talked about. After the umbrella revolution in 2014, intel I was hearing out of China was that the decision was made in Beijing that Hong Kong would lose its status as a global financial center. And it was just a matter of time, right? And we’ve hit that point effectively. Okay? Hong Kong is not a place where you, unless you want risk, where you’re going to necessarily park your assets. It’s taken five years. They were patient and it seems to me they’re beyond the tipping point. It was that kind of salami-slicing approach to taking away the credibility of Hong Kong, but also injecting the inevitability of Chinese ownership. Is it possible that can happen with Taiwan?

 

AM: Well, of course, it is certainly possible. There’s no question about that. Do I think it’s possible in the next 18 months? Absolutely, like even Chris agrees. I don’t think that’s going to happen in 18 months.

 

There’s no Chinese build up militarily for Taiwan invasion. If you were to look at every single military offensive project has logistics involved. There’s just none piling up. The United States would see that in satellite images well in advance.

 

However, back to the Himalayas, which I think is something we should rather key on. If you want to talk about India’s slicing away stuff, there is a rationale for the Himalayan conflict. It’s the watershed. They need that water and they they’ve been piping that water into agricultural areas in China for years now and they haven’t done too much of it because it’s going to really upset India. You have a billion people in India versus a billion people in China that needs fresh water. It’s going to be a problem. They’ve built mountaintop bases. They have built up a military presence there. That’s where I would actually focus in the next 18 months as a real skirmish.

 

This Taiwan thing, I completely agree. It’s well within the Chinese game playbook to slice away and just wait for their time. But a Taiwanese invasion would be extremely costly for the Chinese. The risk-reward for the Chinese right now to even think about adventuring into Taiwan would cost them significant military losses, significant economic losses. It would ruin some BRI projects. It would ruin the perception of China as a growing superpower. There’s just so many negatives that I can’t see any real generals in the PLA telling Xi that this is a good idea. Now that’s not to say that Xi won’t do it anyways because…

 

CB: Tony, let me ask a question. So, Albert, 70 people I’ve talked to say they actually see the military risks increase significantly to Taiwan based upon hardware that’s getting onboarded in the PLA. They see the risks to Taiwan’s increase significantly post about 2022. Okay. Would you share a similar outlook?

 

AM: You have to understand, when it comes to offensive versus defensive capabilities, the defense always has a clear-cut advantage, right? Offensively, it takes seven dollars per one dollar of defense of offensive spending to actually take over. Now without a doubt, China would win over the long term. But at what cost will the PLA navy take? The Taiwanese defenses are no joke. They’re well equipped to at least hold them off for quite a long time and invading. Even the PLA. The PLA officers, that’s a social structure. That’s a social ladder realistically. How would it look like for Xi if the firstborn son of some of these elite families are coming home in body bags?

Categories
QuickHit

QuickHit: The Great Decoupling and the Future of US-China Relations (Part 2)

This is Part 2 of the first ever QuickHit #CageMatch with political-economic advisor Albert Marko and China expert Christopher Balding on the great decoupling of US and China. The second part of this is on the Belt And Road Initiative and the answer that the US may have to the BRI. We also talked about the corporate activities — are the US and China targeting corporates? How does that work and how would that play within the environment of decoupling.

 

For the first part, we’ve covered the US foreign policy, looking at Latin America, Africa, and parts of Asia. We looked at US-China trade and a number of other aspects around the US-China relationship. 

 

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This QuickHit episode was recorded on October 14, 2020.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

SHOW NOTES

 

TN: Now let’s let’s move along a little bit more into economics and talk about the Belt and Road Initiative, which something that I actually worked on for about a year and a half. There’s been some talk in the last few months about the anglosphere and will the West have an answer to the BRI. Does the US need a response to the BRI as a government initiative and if so, do you think they can do it? That question is from @Sw33tYams.

 

CB: Just as rappers get shown to the VIP room, if you’re a country and you are offering goodies, you’re gonna get shown to the VIP room in whatever country you go to. That doesn’t mean it has to be the Trump and air initiative. We do need to think about and we should absolutely put effort into how can the US provide positive things to countries.

 

Why don’t we set up an office that says, I have a company in China that makes XYZ product and they want to move out of China. We have a database of where to go. I know bankers in Vietnam that we’re like, “hey we’re just getting slammed. Why doesn’t the US have an office of infrastructure for emerging markets like Vietnam to help get migrating Chinese companies, those types of goodies, even in a lot of different forms it could take, are going to open a lot more doors than just saying it’s the right thing to do.

 

AM: I agree. But it’s also gonna need a little bit of help from our partners specifically Australia, the UK plus Japan. Basically five I’s plus Japan. It’s going to need shared cost. Supply chains have to move. It’s going to take a little while. It’s going to take a little bit effort from everybody.

 

TN: So it’s basically a government kind of somewhat directed but not necessarily directly involved. What you’re saying is Americans will take a a little easier hand than the Chinese kind of very direct hand in say
these multilateral or multi-country activities. Is that fair to say?

 

CB: I can give one example I was told about and this is something I’m surprised hasn’t gotten more attention. The Commerce Department apparently has a tariff waiver program where if you say, “look, we have this plant in China. It’s facing tariffs. Here’s our 180-day plan to get to move our production to Vietnam, Sri Lanka, Africa wherever.” The Commerce Department will give you a waiver for, whatever time period if you give them a plan. That’s the kind of stuff that should be more publicized and the US government is taking an active role to partner with business to say, “you take the lead and if you’re doing it, we’ll help you.”

 

TN: Let me throw you the next question, Albert. This is from @Ellis_Greenwood. How long will it take the US to decouple from China? So if we assume what Chris just talked about with some of the say Commerce Department activities, these other things, does the US really wanted to decouple from China fully and if so, how long will it take to get either to that level or to say a desired level that that US companies would want to?

 

AM: A desired level is the right term. We’re not going to fully decouple from China. That’s just absurd. When they’re talking about moving supply chains, I’ve heard all sorts of 15, 20 years to one year and it actually depends on each sector. It’s a lot easier to move a software gaming company rather than a pharmaceutical manufacturing company. It can take anywhere from one year to ten to fifteen years.

 

TN: What do you think about that, Chris?

 

CB: I think that’s generally accurate. A lot of the stuff that China was known for over the years, like let’s say low-wage manufacturing, assembly, that type of stuff… I mean Apple set up, a plant in India, which can make iPhones in about 18 months. As Albert pointed out, people think of decoupling as there’s not going to be trade between the US and China. I think what you’re really seeing is this move to bipolar supply chain worlds especially in tech. So there’s going to be a China-specific manufacturing world for tech stuff and a non-China because, you can already see the US government and other governments and even companies saying, “hey, your tech is not been touched by China.”

 

TN: Frankly, I believe that’s what China has wanted all along is their own Chinese ecosystem and then a rest of world ecosystem so they can control that technology and the messaging over that technology. That’s what they had 20 years ago, and there’s been the things overlapping for the last 10 years and I believe that deep down, they really want a separation of those things.

 

This is @candideXXI, “what will be the political and economic pressures outcomes produced by the ending of Chinese investment and the debt expansionary cycle,” which is an interesting question but maybe going to one or two things. Underlying that question is, is that expected to happen? A lot of people have this question on their brain but I don’t necessarily see that happening in the next three to five years. These things tend to go a lot longer than many people assume.

 

CB: Let’s assume that China went to 0% debt growth right now. Honestly, China would be in flames by the end of the day. It would explode. Xi would be lynched by the end of the day. The number that I saw and it’s a staggering number, is debt to GDP in China this year is going to increase by upwards of 30%. So it’s going to go from 300% to 330% in one year. That’s a staggering number. I don’t see they’re going to keep this going as long as possible. For them to get this under control is going to be at least a 10, 20 year cycle at best. And in all likelihood, they’re headed for North Korean financial system with Japanese debt. That’s the only logical outcome. Because if they were to open up the capital markets, the RMB would drop 50% easy.

 

TN: So what you’re saying is, there’s a possibility that CNY could be a global currency?

 

CB: That’s exactly what I’m saying, yes. Exactly what I’m saying.

 

AM: Yeah I agree with Chris here. China’s well within the Euro Dollar system. They need dollars. They can’t get away from Dollars. They need it for their debt. They multiply it out to issue more Renmimbis out to the emerging markets. They’re not leaving and they’re not getting out of the system.

 

TN: Let’s take it more into the corporate realm as well. When we look at like Huawei and Tiktok and some of the Chinese companies that have a large international presence, given the dynamics at home, if the US continues to cut off these companies and some of their crucial activities overseas, how does that bend back onto China? How dire is it? Is it not a big deal or is it pretty dire not just in terms of acquiring technology but in terms of actually making money and keeping the home markets floating?

 

AM: That’s the name of the game is making money for them. They need dollars from overseas desperately. Without that, their entire financial system implodes. They go out to Africa and then they loan out Renminbis and they expect money paid back in dollars at all times. So without the dollar, they’re just buying time.

 

CB: Especially in the tech sector, these are guys that maybe have been abroad for a fair amount of time. They want to emulate the Googles. They want to be international. They think of themselves as cosmopolitan even if they grew up in the system. And so, even though they might be pro-China, which is different than like pro-CCP, they want to be a part of that global tech scene. To have those limitations on them is a constraint that they don’t necessarily like. But that’s the reality of the system that they find themselves in.

 

TN: So will they change their behaviors to align with the constraints outlined by the US or will they remain true to what the CCP tells them to do and their business will suffer internationally?

 

CB: Business will suffer internationally because the reality is, as a Chinese business, you can’t get away from that. As soon as Jack Ma says I’m gonna obey the SEC and file this type of audit, they get blown up in China.

 

AM: They can walk a tight rope until they absolutely get pressured by the Chinese government and then they have to fall in line. There’s no other choice for them.

 

TN: We’ve seen more Chinese IPOs in the four years of Trump than we saw under the eight years of Obama. First of all, why is that? Are they just trying to cash in and get dollars into their companies or is there some other reason? Is it possible to continue that pace?

 

AM: I think they’re just taking advantage of the market and being able to cash in and cash out as fast as they possibly can. Do I think it’s sustainable? Absolutely not. This market’s overbought and eventually there’ll be a correction and on top of that I think that the US government needs to have some reasonable accounting standards for Chinese companies that refuse to open their books for transparency. It boggles my mind. At this point, why should I just go to China, buy a company and list it on the NASDAQ for some absurd amount of money. There’s nothing saying that I need to open my books. It’s absolutely crazy.

 

CB: This is one of the most frustrating arguments by the China apologists because when you make the same argument that Google, Goldman whoever is not subject to the SEC or US jurisdiction on US financial markets, you make that argument, then I will entertain your argument about Chinese companies. Until then, it’s nonsensical.

 

TN: Okay. So let me just sum this up. China is the biggest US foreign policy issue. China is in an untenable position of having their companies locked down or some of their companies locked down by the US. They have a shortage of dollars. They have unsustainable debt and if the current US policies continue, at least Albert thinks that Chinese leadership is in peril. So, what glass half full view am I not seeing?

 

CB: This is in a way very predictable in the sense that they sit down in November, December and they say, “Okay this is our target for 2021” whatever it is. And because you can see that those numbers are almost so stunningly predictable and what’s amazing is they have a very good idea of what their leakages are going to be. That money that gets leaked out in Macau gaming chips or Bitcoin and all that other good stuff, they know what they have to hit. My favorite thing of all this is that almost nobody knows that they’re already rationing US dollars. Most banks in China have the one-to-one rule that you have to bring in a dollar to send out a dollar. As long as they can continue to balance those books through, it can keep up for a while.

 

AM: I’m at a loss for words almost on that one. For the Chinese, you would hope that they understand how bipolar systems work and understanding the Apple versus Microsoft component as like let the one guy be big and you fill in the gaps and everybody be copacetic. I don’t know if I can buy that for very long. But
that’s my only hope is Xi, if Trump is elected, which I am speculating that he is, comes to this realization and says, “let’s tone down the pressure. Let’s fulfill the Phase One Deal, Phase Two Deal” whatever they want to go into. Make inroads and just ratchet down the tensions.

 

TN: Last question guys. Albert, I know you’ve done a lot of forecasting for the presidential election. What do you think is going to happen? You have some really interesting views and I’d love to hear why and Chris also as he’s talking, it’s your first time to be back here. What are some of your observations and expectations as well.

 

AM: I know we’re seeing all sorts of polling numbers that are just eye-popping and just I cannot believe publishers actually put this out to print. 15 points for Biden. 11 points for Biden.

 

CB: Just today, I actually saw this poll saying Biden up 17.

 

AM: It boggles my mind how these people just either they miss statistics class or just don’t know how to add. But for Biden to be up 17 points, you would have to assume the Democrats come out in some kind of record 80 turnout and on top of that have the republicans, 15 of them either not show up or vote for Biden.

 

TN: But even Reagan’s 84 blowout wasn’t a 17-point win, was it?

 

AM: No. This is what’s boggling to me. I just don’t understand it.

 

We know what California is going to do. We know what New York’s going to do. We just toss those aside. If you look at Florida, North Carolina, Pennsylvania, Michigan, Wisconsin and Arizona, those are the states that you really have to look at and in almost every single state, the Republicans have gained hundreds of thousands of new registrations. And even in the polling that’s done out there, there’s a few pieces of data that 96 or 94 of Republicans have an approval of Donald Trump. How do you get to 17 point lead, when 94% of Republicans support Donald Trump. That’s just unbelievable to me. The Economist has been my favorite lately of the 99.9% victory for Joe Biden over Donald Trump.

 

These are just silly numbers people throw out there. Coming out of lockdowns, they’re doing 100 phone polling so they have no opportunity to go out to the public and see who they’re talking to. And study after study has shown that Republican voters have been not just shy vote, but actually spiteful of the pollsters and purposely saying that they’re going to vote for Biden. That’s how you get to these 17 point numbers.

 

CB: I try to stay away from politics as much as possible especially on China and stuff like that because whether it is Trump or Biden, I see what we’re in with China as a 20 to 40-year type of challenge. So at some point, there’s going to be Republicans, at some point there’s going to be Democrats. Just from a social perspective and Tony I think you can identify with this. Man, America’s crazy.

 

TN: Democracy is messy, right?

 

CB: I’m a live and let live kind of guy. So if you’re a Democrat, if you’re a Republican, if you’re a Green or a Libertarian, I don’t really care. We can still sit down and smoke a cigar. And I think the thing that just amazes me is America just seems angry and it seemed really angry for a long time.

 

We can all talk about Trump, but both parties can point to things that the others have done that is unethical, that is abnormal. We need to be better citizens to each other. We need to accept losses that, it’s not going to be our time all the time. The political golden rule is don’t advocate a policy that you don’t want used against you.

 

AM: I attribute the hate that we’re seeing now, the polarization, squarely on the weaponization of social media. Completely. Because we can sit there and put out a viral post of someone, take a phrase taken out of context and making that person look like just a demonic figure and then dox the guy, show him his address and have 15 people show up to the house with pitchforks and and torches. It’s just insane. There’s got to be some kind of accountability on social media by either the government or social media standards themselves.

 

TN: Social media doesn’t have standards, Albert, because I know you’re both active on social media.

 

CB: The way I always think about it is, a country or a political party is like a family barbecue. We’ve all gone to those family barbecues and go, “who are these losers that are at this family barbecue?” And if you aren’t going to your own political party or your own country and going, “dang these are some losers I’m hanging out with,” okay I mean, you’re doing it all wrong.

Categories
QuickHit

QuickHit: The Great Decoupling and the Future of US-China Relations (Part 1)

This is the first ever QuickHit #CageMatch with a returning guest, political-economic advisor Albert Marko, and China expert Christopher Balding with us for the first time. This is Part 1 of a 2-part discussion. Visit this page for the second part.

 

Albert Marko helps a couple of financial firms, members of congress, and a couple governments  to manage and navigate their way through the beltway and the legislative issues and the politics and how the economic, how the federal reserve and all the economic policies filter down. Albert is also the co-founder and COO of Favore Media Group.

 

Christopher Balding spends most of his time on the phone talking to people about the data about China. He is a two-time winner of Lifetime Achievement awards and a Professor at Fulbright University Vietnam.

 

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Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Albert on Twitter: https://twitter.com/amlivemon

Follow Chris on Twitter: https://twitter.com/BaldingsWorld

 

This QuickHit episode was recorded on October 14, 2020.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: We’ve got a bunch of questions off of Twitter and the first one is from @AxeRendale: If you were in charge of U.S. foreign policy. What are the top things you would change from the status quo? They asked about five things. I don’t think we have that much time. So, what are a couple things? Let’s say two things in terms of U.S. foreign policy that you would change. Of course we have the election coming up but regardless of the individual. We’ve seen some status quo upheaval over the past few years but what would you really change not just the top line but the way the U.S. acts?

 

AM: I would immediately start looking at South America and Africa and identifying and eliminating or at least hampering Chinese and Russian interests there, specifically Venezuela would be my number one choice right now. The Chinese and the Russians, they have a field day there. There’s almost no U.S. intervention in there and the same goes for parts of Africa. I know we have troops in Mali and Niger and a couple places to deal with terrorism but just solidifying some of the countries out there like Morocco, Angola and preventing the Chinese from making inroads. I would put make that a priority.

 

CB: So I would agree with Albert in general terms but maybe take it in a slightly different direction. The Trump administration has done a good job shifting the focus to the larger problems and China and taking those policy steps that are well within their grasp.

 

What needs to be the next step, and whether this is under a Trump administration or Biden administration, is the reality is that you can’t handle these issues on the cheap. The Germans and Asian countries are not just going to be persuaded by the moral rightness of confronting China.

 

Just to give you two examples of where you might see something. If the U.S. was to offer even to European countries to fund 5G rollout at like 0% interest loans because that what China is doing. This the way they run the finances is basically giving away the 5G gear. If the U.S. made like 0% interest loans, you could fund that if it was in some type of like a levered development finance corporation structure, where with a couple billion dollars a year honestly, globally. You could do that entire project globally and on the U.S. budget, a couple billion dollars a year is almost couch cushion money.

 

TN: Right, and this is similar to how Japan is competing with China for infrastructure in parts of Asia, right? They’re giving no interest or extreme like 0.3% interest loans for infrastructure, right?

 

CB: Yeah, exactly. Like in Vietnam, where I can speak a little bit more authoritatively, they’re not fans of China. At the same time, they recognize they have to work with China. It’s a very pragmatic approach. At the same time, they we want to give the French certain pieces of the pie, also the Americans. Vietnam is actively trying to balance where their economic investment comes from so that they don’t become too dependent on any one source.

 

TN: Yep, it’s smart.

 

AM: The only issue I have with that is that you’re absolutely correct and that’s exactly what should be done  but it’s depending on the European partners to even come to play ball. Because, within the European Union themselves, there’s competing interests on all sides. And it’s difficult for the United States to try to compete with the Chinese who give 99-year loans for infrastructure in Africa to dictate which European Nation gets a slice of the pie when they’re all conflicting with themselves to begin with. So that’s the only thing I’d have to
say about that.

 

TN: That’s an interesting point. China is very successful in terms of foreign policy by peeling off one member of a block at a time and there’s no better example than the way they peeled off Cambodia from ASEAN in order to break the voting block that’s necessary to get anything through there. They’ve done the same with the E.U. with say Portugal or Greece, right? Do you see the U.S. being able to do that, go and interrupt a block by getting say a single or a couple of allies there? Because I haven’t seen the U.S. do that all that successfully say for 20 years. Do you think we can do that successfully again?

 

AM: I think that we absolutely can be that successful if we actually had the will to do it. The problem is the Chinese are just literally filling in the gaps. The vacuums that the United States have left, and this is something that the United States just needs to get over the dirty word of intervention and just get on with business and solidify U.S. interests abroad.

 

CB: I would actually slightly differ from Albert on this and I see it in a very structural in a very structural way. If you take the E.U. to basically take to move against Chinese interests in Europe, there’s an asymmetry here. The U.S. has to get everybody to agree. China only has to get one to disagree, okay?

 

TN: Why does the U.S. have to get everyone to agree?

 

CB: Because basically, if the E.U. for instance is going to pass a let’s say a regulation blocking Huawei gear, it’s a unanimous vote, okay? That’s the only way it gets through the E.U. is through a unanimous vote. So the U.S. has to get everybody to agree. China only has to get one to disagree.

 

If you look at like the U.N. with the human rights council, we can talk about the U.S. should do this or that with the human rights council. The reality is that China till the end of time is going to have enough votes to put Russia, Venezuela, Libya, etc. on the human rights council because of the the number of countries that there are in the number of countries that they can get to agree with them. So people talk about, “well, it’s a Trump issue.” No. That’s the reality that’s the systemic nature of the international system.

 

AM: And one of the things that the United States has absolutely not done is use the United States Dollar as a weapon to combat that. But that’s a whole different topic and we can get all sidetracked on that one but…

 

TN: Yeah, we can spend a lot of time on that. Here’s a question from @RemaniSrikanth: How much is China policy hinged on who wins the U.S. election? Do you believe that fundamentally the democrats and republicans would have different China policies?

 

CB: After the Russian debacle that they had in the Obama administration and the people that came out of that, I would be surprised if they did like a complete reset, okay? I don’t think democrats really have any real agreement about what they want to do with China. Even within people within the Biden administration or what would supposedly be a Biden administration. You have people that are people that honestly I think would be, if they weren’t democrats, would probably fit well within a Trump administration and you have people that would practically be German in their approach in that there’s no concession. You’ve heard things about well they want to focus on climate change and this 2060 promise is great. We have something to go with here. I don’t think anybody really has a good idea.

 

My own personal suspicion would be more than anything the Trump administration has actually been very deliberate in turning up continuing generally speaking across policy domains and turning up continuing to turn up the pressure slowly, like a pressure cooker. I don’t think you would see that under Biden administration. I don’t think necessarily you would see a rollback of most Trump policies.

 

TN: Albert, do you agree?

 

AM: Yeah, I agree with Chris wholeheartedly. Xi is at a do or die moment with Trump being re-elected. If trump is re-elected and the pressure’s maintained or even raised, I do not think he lasts two or three years in there. As for a Biden presidency, what it would look like? All we have to do is go back to the track record of the Obama presidency and see what they’ve done. They just ignore whatever China does and let them run around the world and do whatever they want. We sat there for two years in 2013 watching China militarize islands while there was absolutely no response. Having Samantha Power back, Valerie Jarrett, Susan Rice doesn’t give me any confidence whatsoever into dealing with dealing with the Chinese.

 

TN: I was in Asia during that time jumping up and down and was told that I was overly aggressive so I share your frustration. Here’s a question from @JamesRoberta7: What does a Xi Jinping and China situation look like if Trump is elected and Pompeo stays at state? What does that look like the first say 24 months of of that type of situation?

 

AM: It really depends on the actions of the Trump administration. Do they ramp up tariffs again? Do they start pressuring them in China? Do they pressure them in Vietnam, in the Philippines? I think they do.

 

The Chinese are going to have to respond to safeguard their own interests. What do they do? Maybe cause a skirmish with the Indians again. Threaten the Taiwanese a little bit more. They can’t really act militarily. They just don’t have the capacity to do that and they’d be completely embarrassed. That’s a whole different argument to itself but like I said, the days are numbered, if Trump is reelected, for Xi. I don’t think the elite families within the Guangdong province would put up with further losses of their wealth.

 

TN: I think that’s something that’s lost on a lot of the American analysts. There is not a monolithic kind of Chinese Communist Party. There are facts within the CCP. There are different power centers. A lot of even the think tankers in America act as if there is this single head at the CCP. He has definitely solidified some power but there are still some very powerful factions. Chris, what do you think about that if there’s a kind of a Trump-Pompeo, that partnership continues, what do you think that looks like for China and the CCP?

 

CB: So, I’m going to slightly diverge from from Albert here in that what we’ve basically seen in the first four years of Trump, especially in the past two years is that Trump is taking a lot of things that are well within the executive purview that he can do. Whether that’s sanctions of different kinds. Although you know in a way the amount of pain that he can cause China within that basket of tools is at this point, it’s increasingly limited. In different ways probably, the biggest thing that he could do is do something that really blocked like IPO or really crimped dollar access.

 

Crimp dollar access is an enormous weapon. But I think the next step is, and you’re actually seeing a lot of groundwork being laid is and you just saw for instance some comments out of India where the U.S. state department is talking about really ramping up its alliance with India. And you’re starting to see a lot of these very foundational type of stuff. So whether it’s increased congressional spending to military things, alliances, different stuff like that, that would be likely where you would see a lot of the focus, especially, legislatively to get authorization to do those types of activities.

 

TN: Okay, that’s a great point as you bring up India to ask this question from @dogthecynic: “How durable do you think the China-Russian alliance is?” And I bring that up because India and Russia traditionally have had a strong alliance post-war. If the U.S. and India continue to get closer at some point, will Russia have to choose between China and India as an ally? Is that even a choice? Let’s start with how strong is that China-Russia alliance? Is it just a resources for weapons type of alliance or is it really a tighter alliance?

 

AM: If you look at it historically, it’s nothing more than cyclical friends with benefits, if you want to call it that. It comes and goes. Their interests are aligned in one area, they conflict on another. Right now, they’re conflicting in Africa quite a lot more than people understand. The Indians, they’ve used Russia as a counter balance to the to the Chinese for decades. It’s quite clear.

 

I don’t think the Chinese and the Russians trust each other. They never will. The Chinese have been encroaching on their borders. Is it strong? No. Can India-U.S. alliance possibly tip it more in their favor? I really don’t think so. I don’t think the Indians are ignorant to the fact that they need Russia as a counterbalance just as much as they need the United States security blanket.

 

CB: The way I would phrase it is that there is what is the honor among thieves. They clearly are frenemies. The Russians know that China is stealing plane designs and engine designs and all this kind of good stuff at the same time, Huawei is working with Russia to hire local hackers and setting up things in Russia to engage in cyber warfare and whatnot because they have a very common enemy. As long as there’s a common enemy for them to focus on and it benefits them to fight that common enemy, I think absolutely that partnership is at least to a plausible degree is going to exist for the sake of the kids, for lack of a better term.

 

TN: Okay, I’ve got some very similar questions from @gabrielfox1 @jschwartz91 and @americacapitalone about Taiwan. So China, Taiwan, U.S. pretty delicate relationships and a lot of the questions are really about the kinetic conflict but also the business aspect of China-Taiwan relations and increasingly Taiwan-U.S. relations with some of the semiconductor activity that the U.S. has undertaken against China. So can you open that up a little bit for us?

 

First of all do you think a China-Taiwan conflict in the next say 24 months is more than say 30% possible? Which it’s just a hedge right? I mean is it realistically possible? That’s kind of a yes or no. But do you think there will be more difficult commercial relationships between China and Taiwan or do you think this is just something that is kind of window dressing and they need each other?

 

AM: Do I think there’s a conflict brewing in the next 24 months? Absolutely not. I don’t think the Chinese have the capabilities. I don’t think they want to be embarrassed furthermore. The Chinese elite, they have money wrapped up in Taiwan. They’re not going to sit there and cut off their their money supply just because Xi wants to prove a point that I don’t believe they can win a war quickly. It would hurt.

 

CB: I will disagree with with Albert here. My understanding of the military capabilities actually align with Albert and what the people I trust have basically said, it’s really going to be 2022, 2023 before they probably have the capabilities necessary.

 

Albert said something very interesting, which I think is worth repeating. They don’t want to be embarrassed. Well let’s look at how China’s behaved in the past year, okay? I don’t think you can project that level of rationality on Xi Jinping. Why the hell are they fighting over some frozen tundra in the Himalayas? It logically makes zero sense, right? I’m not saying that there’s going to be a war. It could be some type of low-level conflict. There’s a lot of different ways that it could be. This doesn’t necessarily mean full-scale invasion
but I would definitely put some type of event conflict distinctly higher.

 

TN: I think it’s unlikely but given my exposure to mid-levels of Chinese ministries they are not the rational, thoughtful, wise organizations that many Americans think and Xi Jinping as you say Chris, why are you fighting over some icy hills in northern India? It’s just stupid, right?

 

So I don’t believe the Chinese government is as thoughtful and wise as many westerners suspect. They make stupid mistakes like everyone else. I’m not saying they’re more stupid than anyone else. I think they’re just as they’re human beings.

 

Now let’s move along a little bit more into economics and talk about the Belt and Road initiative, which something that I actually worked on for about a year and a half. There’s been some talk in the last few months about the anglosphere and does the west have an answer to the BRI? This is really aN eight-year-old question, but my first question is, does the U.S. need a response to the BRI as a government initiative and if so do you think they can do it?