The Market volatility continued this week. Volatility is the theme for 2018. It doesn’t just apply to the Stock Market. Volatility applies to politics and geopolitics. Heck, it applies to the Golden State Warriors season too. With all of these, you have an idea what could and should happen. But these days, it’s anyone’s guess. You just have to prepare yourself for anything and see how it goes. We don’t think the correction is over quite yet, and are still of the defensive mindset. However, there is a lot to like once the correction finally runs its course. It’s getting there.
An important speech was given this week, which went a long way to ease some tensions on the prospects of a full-blown trade war. The speech was given by the President of China. It was made in front of a rather small audience on the island province of Hainan. It was directed at the US and the rest of the world. On Tuesday, President Xi announced a “new phase of opening up” its economy to global trade, something the Market didn’t expect but embraced. Xi used the platform to address the criticism from the United States, as it pertains to trade and the simmering tensions of a trade war. Was this a blink on a potential trade war with the US or something different?
Xi outlined a plan to increase imports by “significantly” reducing tariffs on certain goods, including cars, as well as strengthen the protections on intellectual property. Those are really big issues for free trade and the US specifically. The tone was very positive from China regarding adjustments in policy to enhance free and fair trade. However, details were scarce. President Xi, the most powerful leader since Mao, has seemingly secured his position for the rest of his life. Xi has big plans. He is an engineer by training, having attended Tsinghua University, which has been called the MIT of China. Xi, who assumed power in 2013, wants China to be the innovative leader in the 21st century. He has a plan. It’s called “Made in China 2025.” The plan identified 10 industries that China wants to become globally competitive in by 2025, and dominant for the century. The success will be tied to China’s advancement in Artificial Intelligence and the industries range from Biotech and Aerospace to Software, Shipping and Renewable Energy. China thinks big. China thinks long. China is investing heavily.
The problem is, the rules aren’t the same for everyone. China is providing substantial support to its own Titans of Tech while making it more difficult for foreign companies to compete. Xi saw an opportunity with the Trans Pacific Partnership, and asserted his leadership on the global stage, when the US decided to leave. According to a tweet this week, the US is perhaps re-thinking TPP. The race for 5G has begun. The prize is substantial. China is in it to win it.
Hearing Xi’s speech this week reminded me of an interview I saw with former Treasury Secretary Hank Paulson a decade ago. He said that Chinese leadership seeks stability above all else, which requires a strong and growing economy for its population of 1 Billion plus. As the nation emerged economically, it has quickly become the second largest economy in the world. The Chinese government essentially made a pact with its people to provide and support prosperity for continued political power and power Xi has. Embracing global markets is essential to achieve this goal as China matures. Its approach has been quite different than that of the United States. Both combine to account for 40% of global economic output. For the Free Market to work, the US and China need each other. It’s debated who needs who more. China could surpass the US as the world’s largest economy within 2 decades.
If the United States indeed re-engages the Trans Pacific Partnership, China’s growing influence will be checked. Trading nations like Japan and Australia have embraced TPP, but reluctantly so with the absence of the USA. America’s leadership is needed on the global stage and in global trade. Clearly not everyone wants it, but pretty much everyone knows it. The issue is that American political leadership has been as volatile as the Stock Market for 2 decades. China is in mid transition from an exporting economy of cheap goods to an economy of consumption with its vast population and new wealth creation. They can’t go backwards and the needs have changed and will continue to do so as new generations emerge.
If China wants to dominate in the Digital Age, it needs to embrace and protect intellectual property and trade secrets. President Xi knows it. Silicon Valley knows it. The Market knows it. The speech given on the small Chinese island this week could lead to really big things across the Pacific and beyond. Where it goes is anyone’s guess. We are prepared for anything and will act accordingly.
Have a nice weekend. We’ll be back, dark and early on Monday.