China
is the world’s largest gold producer and buyer. So President Xi Jinping’s
takeaways in the wake of his recent meeting with Donald Trump, his U.S. counterpart,
have huge market implications.
China,
steeped in a 5,000-year history, tends to think in longer time frames than Western
countries. Their leaders are thus less likely to act impulsively.
That’s
a good thing for Trump. Because in Xi’s eyes, the U.S. President almost certainly
came off as a vacillating showman who acts tough, but lacks an internal core.
To
many Americans, whose opinions about negotiating strategies were formed while watching
The Apprentice, the reality show Trump starred in, first impressions matter.
The
President’s decision to launch missile attacks on Syria during a dinner with Xi,
and to announce it over dessert, thus came off as clever signal that the United States
is not to be messed with.
Trump caves on currency, trade and Taiwan
Xi,
who, however, likely missed many episodes of
The Apprentice, was less impressed
by this brazen insult. His reaction was interesting: Xi smiled, kept his cool
and said nothing (the Chinese condemned the attack after the summit was over).
Worse
for Trump’s image was the fact that during the weeks after his meeting with Xi,
he appears to have caved on his entire China policy.
The
U.S. President started by backing away from his election promise to label China a
“currency manipulator.”
Trump
also failed to use the momentum during his “first 100 days” to enact the trade
measures that he had promised against the Chinese.
Finally
and most important, Trump retreated from his initial “tough-guy” challenge to
the “One China,” policy by ruling out further phone calls with Tsai Ing-wen, Taiwan’s
President.
On
the surface, all of this is good news for China. However, at this point, Xi can’t
even be sure if a weak and vacillating Trump won’t reverse his positions again.
Chinese strategist: the US will go to war to back the dollar
That
said, in a sense it really does not matter. Because (as economist Alasdair Mcleod
recently reminded us) Chinese policy regarding the U.S. dollar was spelled out two
years ago, in a
paper that Qiao Liang, a general,
delivered to the University of Defence, China’s top military academy.
Liang
posited that America’s key foreign policy objective is to enforce the U.S. dollar’s
role as the global reserve currency, which it can then print at will whenever
it needs to buy stuff.
The
U.S. will even go to war to maintain the dollar’s dominance, he concludes.
“America
has become an “empty” state,” Liang writes. “Today’s U.S. Gross Domestic Product
(2015) has reached U.S. $18 trillion, but only $5 trillion is from the real economy.
America’s real opponent is itself. America has shown a surprising slowness in
realizing this point.”
Solid backing for gold
Liang
also provides broad hints about where China comes out on the monetary policy front,
suggesting that “the most important thing in the 20th century was not World War
I, World War II, or the disintegration of the USSR, but rather the August 15,
1971 disconnection between the U.S. dollar and gold.”
That
is some statement.
While
Liang is just one of many People’s Liberation Army generals, for his paper to
be published, it would have had to have been approved by the highest levels of leadership.
Xi
will thus almost-certainly follow Sun Tsu’s advice regarding unnecessary conflicts:
he will avoid direct confrontation and let America continue fighting itself.
Will China’s strategy be correct?
Investors
who want to understand China would do well to remember Chou En-lai, the former
communist leader, who when asked in the 1970s about the Paris Commune’s impact
(which had taken place 100 years earlier), said it was “too soon to tell.”
The
same applies to Xi’s assessment of Trump. While we have clues, it’s really too
soon to tell.
However
Donald Trump and
The Apprentice’s wisdom contrast poorly with that of Xi
Jinping and Sun Tsu.
Shrewd
investors might thus consider hedging their bets.
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Peter Diekmeyer is a business writer/editor with Sprott Money News, the National Post and Canadian Defence Review. He has studied in MBA, CA and Law programs and filed reports from more than two dozen countries.
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The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
