Multiple pieces in the US-China chess game are moving…and a lowly pawn can checkmate the king if strategically placed.

Forecasting the game’s outcome is problematic in a linear written format, so please bear with me.

The Chess board

  1. 2020 US presidential election is the immediate end-game
  2. Trump must win another 4 year term to make America great again
  3. Xi must see that Trump loses – an unknown Democratic President is the better outcome for Xi
  4. Trade wars, financial wars, currency wars, debt wars, oil wars, are some of the chess pieces.
  5. So are Iran, Russia, Venezuela, South China Sea, Taiwan, North Korea, India/Pakistan/Kashmir and now Hong Kong
  6. Allies are to be used. But as Henry Kissinger once said, “America has no permanent friends or enemies, only interests.”   Ditto for China.
  7. There can be only one “top dog” in this world…modern history and human nature proves it.
  8. There is no effective umpire. Trump-Xi need to sort out their differences or risk an out-of-control escalation via progressive plausibility that leads to MAD…(mutually assured destruction)…outcomes
  9. It’s not a game.

How it will be played

Trump’s view

  • Trade deal under my terms so I will win the election. See 2 above.  Don’t want them cranky when they suffer a bit of pain from a slower US and world economy
  • After I win, I can overturn the deal, so as to contain China, (see 7 above) with new 25% tariffs …and blame the deal failure on them.
  • Before the election, a No deal/25% tariffs outcome is also fine…as long as China crashes far more than USA…with additional trade/investment sanctions to push China’s weak financial markets over the cliff. US winning and China losing means I can win enough votes.  See 2 above
  • Nearly all economic problems started in the financial markets. Global Financial Crisis, Asian Financial Crisis, 1987 stock crash, Dot Com crash, 1929 crash etc.
  • So China is ripe for a financial crisis – they have too much debt and too much non-productive assets
  • Elevate nationalism so the electorate has a single common enemy… China, to boost my election mantra that I am the only leader who can take on China

Xi’s view

  • Trade deal under my terms so my export industry can continue to generate jobs, especially in subsidized SOEs.  I am looking at the 30 million single men with too few women to marry, not enough wealth to be middle class, no unemployment benefits, and too much time on their hands if they are jobless. Don’t want them upset like in Hong Kong.
  • Then a few months before the US election, I can overturn the deal with the US and blame the deal failure on them. Blame the resulting US chaos on Trump so he loses the election. See 3 above
  • We can live with a 10% tariff to buy time. (we’ve devalued currency 2%, Chinese exporters can take a 3% hit to their profit margins, US importers get hit 3% and US consumers cough up a 2% price rise)
  • No trade deal/25% tariffs is also fine…as long as US crashes far more than China…with us dumping USD and US debt. (see my article last week…China short squeeze only a brass monkey can withstand).
  • For decades, despite the persistent US current account and budget deficits, the US has monopolised the world’s reserve currency and safe haven status.
  • So the US is ripe for a financial crisis – China has enough US Dollars and US Debt to sell to cause a crash. US Fed buying while we sell is them issuing more IOUs.  Who would trust these US IOUs when China, responsible for one fifth of buying, has stopped.
  • Elevate nationalism so the people have a single common enemy… USA, so the people are more ready to ‘eat bitter’ as our Chinese economy weakens, while the US crashes

If it sounds infantile, it probably is.   But it gets worse.

Pieces on the chessboard

  • Hong Kong protests are morphing to reflect the anger of the young middle class and poor whose hope for a brighter future have been crushed by persistent sky-high real estate prices, poorer quality of life and competition from their mainland counterparts for nearly everything.
  • Will China enter Hong Kong to quell the protests? My guess is no.  A city of 7 million ‘lost in chaos’ for several months is a small price to pay for China staying out of the fray and out of international condemnation.  (the Northern Chinese have to stop the urge to look down on the Southern Chinese…and vice versa…as they have done so for centuries)
  • But Hong Kong’s $425b in foreign exchange reserves are a nice asset should China ever need extra firepower if it starts selling dollars and upends everything including the Sino-British Joint Declaration
  • Russia. The biggest strategic mistake by the US (not by Trump but by the Democrats) was not to become friendlier with Russia (even if temporary…see 6 above).  It would have isolated China by driving a wedge between Russia and China.   Trump was keen to be friends with Putin but was stopped by the Democrats.
  • South China Sea – I have a cartoon coming on this –stay tuned.
  • North Korea, Taiwan, India/Pakistan/Kashmir. ‘Grey rhino’ risks to keep all on their toes.  Can be played by either US or China
  • Iran, Venezuela. Oil suppliers to China now cut.  Increases China’s reliance on Russian oil (thank goodness for iv. above says Xi) and Saudi Arabia, a US ally that accepts payments in USD.

Last week I covered the scenario of a China short squeeze that only a brass monkey can withstand.

Next week, I will drill down to the impact on Australia, how investors and businesses can operate in this climate, and look on the bright side for ways to safeguard our future.