The Trump presidency – China a winner

Rhetoric vs Reality

Donald Trump wants to take on China. The president’s winning campaign promised to impose heavy tariffs on imports of Chinese goods and brand the Asian superpower a currency manipulator. Several analysts subsequently forecast that it would make the Middle Kingdom one of the biggest losers from his presidency. And yet, counterintuitively, this column believes China looks likely to be a winner.

The world has indeed gone topsy-turvy when President Xi Jinping appears on stage at the World Economic Forum defending globalization. The vacuum left by a lack of US leadership is rapidly being filled.

At an economic level, China’s rise is visible in trade and treasuries, as well as the renminbi’s increased importance and enhanced profitability of the country’s banks.

First, the US-led Trans-Pacific Partnership, from which China was excluded, looks dead. Both Trump, and the Republican Party, which dominates both houses of Congress, have expressed opposition to it. As a result, in December, US ally Australia spoke out in support of the Beijing-directed Free Trade Area of the Asia-Pacific (FTAAP) proposal, as well as Beijing-supported regional trade pacts, which exclude the US.

Second, given that a Trump government plans to increase spending while lowering taxes, larger borrowings will be needed. China has been by far the largest foreign owner of US treasuries for several years. This amounted to $1.185 trillion – or over 19% of foreign-owned treasuries – as of August 2016, according to estimates from the Federal Reserve. China’s goodwill is crucial to issuing more debt, although, as usual in these cases, Beijing’s ownership of such a large stock of US government bonds ensures the relationship is one of mutual dependence.

There is a third area, foreign direct investment. Data from 2015 shows Chinese investors bought a record $15 billion worth of companies and real estate in the US, a figure which is set to be doubled in 2016, according to data from the Rhodium Group and the National Committee on US-China relations. Late in 2016, Dalian Wanda, China’s largest real estate company, acquired the US company behind the Golden Globe awards for $1bn. Around 90,000 people are employed by Chinese-affiliated companies across more than 80% of congressional districts – a handy lever for China if relations deteriorate.

Additionally, China could prove an important ally in improving ailing US infrastructure, a $550m Trump promise and one that all parties can agree on. The Chinese are master builders and their experience in Africa – where they have built roads and bridges in exchange for minerals and land – will stand them in good stead. (Your intrepid correspondent recently witnessed this for herself, driving along the asphalt roads of Tigray in Ethiopia, all built by the Chinese.)

The dollar’s status as the primary reserve currency remains. Yet last year over 22% of China’s external trade was settled in RMB, well up from zero in 2010, while HSBC estimates it will shoot up to 50% in 2020.

Among other effects, this will give a funding cost advantage to Chinese banks who had been labouring under the disadvantage of Western banks’ greater access to US dollars for trade, writes research boutique Redburn. The report outlines why Chinese banks look likely to increase their profitability at the expense of their Western counterparts.

China, the great imitator, a country accused of illegally copying Western designs, broke the record for patent applications last year. Granted, there was government pressure on companies to file and not all will stand up to international scrutiny. Still, well over a million patents were filed, more than those in the US, Japan and South Korea combined.

Underestimating China is as foolish as believing pollsters can predict who will win the US presidency…

An anti-globalisation duet: Trump & Corbyn

Why domestic bank M&A is set for a boom

As Donald Trump and his toupee continue to ride high in the US presidential opinion polls, I find myself musing on his fellow jockey, UK Labour Party leader Jeremy Corbyn.

Mirror images of each other on the political spectrum, they will never lead their respective countries. Yet the unelectable duo are worth listening to, for they represent large elements of the population that are opposed to the globalised world we live in.

Take their attitude to free trade. Trump calls for a 15% tax for outsourcing jobs and a 20% tax for importing goods, and sees trade deals as “killing American jobs.” He believes trade negotiators are a bunch of “saps” and says he would appoint corporate leaders to do the job properly. Corbyn warns that TTIP, the prospective trade deal between the EU and the US, is nothing but a capitulation to “greedy bankers and multinationals.”

His refusal to campaign for Britain to stay in the EU has, ironically, withdrawn a major weapon from the Conservative government’s armoury for its future referendum. Corbyn and his allies, who embody the discarded remains of the Left’s 1970’s euro scepticism, see the EU as representing the interests of big capital. Rather paradoxical, given that big business sees the EU as excessively defensive of workers’ rights and the progenitor of too many regulatory burdens to protect citizens.

Trump and Corbyn, one 69 years old and the other 66, both fail John Maynard Keynes’s three imperatives for a balanced government. The economist and statesman wrote: ““The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty….the third needs, tolerance, breadth and appreciation of the excellencies of variety and independence, which prefers, above everything, to give unhindered opportunity to the exceptional and aspiring.”*

For Corbyn, social justice can be achieved without economic efficiency and individual excellence. This would result in a country with not enough profits to pay for a safety net for the disadvantaged. The reality for Trump, who would lay claim to both economic efficiency and individual liberty, is a country where protectionism kills efficiency and individual liberty applies to some, but not all. And certainly not to the roughly 11 million illegal immigrants who water his many lawns and serve in his many restaurants.

Just as surprising as their similarities, are their allies in the anti-globalisation movement. Joining them in the stop-the-world-I-want-to-get-off gang, are financial regulators on both sides of the Atlantic.

The European Central Bank’s post-crisis conventional wisdom is that geographical diversification of multinational banks does not protect against risk and adds a layer of complication. Long gone are the days when banks followed their corporate clients abroad and then proceeded to buy local entities and grow. The European Central Bank “comes out in a rash” when a Spanish bank mentions buying bank assets in emerging economies, affirms a bank CEO. The Federal Reserve in the US takes the same position, according to most accounts.

Regulators learned a lesson from the last financial crisis. It may, of course, not be the right lesson, for every crisis is different – the drying up of wholesale bank funding markets in 2007/2008 was very different from the run on the deposits of 37 banks in the Japanese Empire in 1927.

With foreign expansion off the cards, cost cutting reaching its finale, new digital entrants threatening the traditional business and financial supervisors breathing down their necks, banks will focus on local acquisitions to grow their profits. A domestic M&A boom is forecast for 2016.

Regional movements like those in Cataluña and Scotland are part of the anti-globalisation trend. Allied to the sense of alienation from their existing rulers is an almost blind belief that raising the barriers will lead to paradisiacal economies with full employment.

To these misguided idealists I would add proponents of Brexit, the exit of the UK from the European Union. The world is moving into ever larger trade groupings. Being outside is not a reasonable option for a major country – unless there is an appeal to being emailed instructions from Brussels without having a seat at the table. Norway pays a heavy price for its nominally freestanding position since it is forced to incorporate EU legislation into its own.

In 1944, Keynes warned in the House of Lords against “little Englandism” which pretended that “this small country” could survive by a system of bilateral and barter agreements or by keeping to itself in a harsh and unfriendly world. His words continue to ring true.*

Both Trump and Corbyn remind me of the rutting impalas I saw in Zambia this summer. A fresh male impala, the handsomest and most macho, fights off the others to breed with the herd of females. After around three weeks of non-stop sex, with no time to feed or groom himself, he is weak and easily taken out by a challenger, a young buck from the group of male impalas. If he’s lucky, the exhausted male impala might then re-join the all-male herd or, just as likely, be eaten by a herd of lions.

The only question about the future disappearance of fraternal twins Corbyn and Trump is whether they slip back into their old lives or are gobbled up by the forces of globalisation.

*Universal Man: The Seven Lives of John Maynard Keynes by Richard Davenport-Hines