Common Cents & What Game Are They Playing?

Last year, our Investment Committee produced a 7-part series on our predictions for what ‘The New Normal’ might look like. In Part 5, which I happened to write, I made the following prediction: “despite much wringing of hands and gnashing of teeth, the remainder of the G-7 and other developed economies will be too cash strapped and too focused on their own economic problems to counter China’s growing economic influence around the world.”

Almost 12 months after writing those words, I believe this even more strongly than I did, but I would make a couple of changes which would better reflect my thought process. First, I would remove the word ‘remainder.’ Second, I would include ‘societal problems’ as well.

Yesterday, foreign ministers from the People’s Republic and the United States met in Anchorage, Alaska. These were the first high-level talks between the Biden Administration and Beijing, and, at first blush, they didn’t seem to go very well. In fact, BBC reporter Barbara Plett-Usher had this to say: “It was an unusually undiplomatic sparring match, especially for a meeting called to take stock of the US-China relationship under a new American administration.”

To put it mildly. Let me give you some high/lowlights as reported by Matthew Lee and Mark Thiessen of the Associated Press and as published by the ‘Anchorage Daily News.’

“Each of these actions threaten the rules-based order that maintains global stability,” Blinken said of China’s actions in Xinjiang, Hong Kong and Taiwan, and of cyber attacks on the United States and economic coercion against U.S. allies. “That’s why they’re not merely internal matters, and why we feel an obligation to raise these issues here today.”

Yang responded angrily by demanding the U.S. stop pushing its own version of democracy at a time when the United States itself has been roiled by domestic discontent. He also accused the U.S. of failing to deal with its own human rights problems and took issue with what he said was “condescension” from Blinken, Sullivan and other U.S. officials.

“We believe that it is important for the United States to change its own image and to stop advancing its own democracy in the rest of the world,” he said. “Many people within the United States actually have little confidence in the democracy of the United States.”

“China will not accept unwarranted accusations from the U.S. side,” he said, adding that recent developments had plunged relations “into a period of unprecedented difficulty” that “has damaged the interests of our two peoples.”

“There is no way to strangle China,” he said.

In further reporting, William Mauldin and Chun Han Wong of ‘The Wall Street Journal’ wrote:

“U.S. Secretary of State Antony Blinken, in opening the talks Thursday, read a list of Washington’s problems with China, citing cyberattacks, China’s crackdown on Hong Kong and threats against Taiwan. These activities, he said, “threaten the rules-based order that maintains global stability.”

Yang Jiechi, a member of the Communist Party’s ruling body, shot back that the U.S. should examine its problems with racism and stop promoting its version of democracy around the world. “The United States does not represent international public opinion and neither does the western world,” said Mr. Yang in a quarter-hour-long statement…

Mr. Xi faces a pivotal phase in his nearly decadelong rule of the Communist Party. His leadership team is preparing to celebrate the party’s centenary in July, host the Winter Olympics early next year and consolidate China’s economic recovery ahead of a party congress later next year, when Mr. Xi is expected to seek a third term as leader.

While Mr. Xi and other officials have in recent months played up perceptions that “the East is rising and the West is declining,” citing the Communist Party’s perceived superiority in governance, they have also warned that the U.S. remains a potent long-term threat to Chinese interests and urged party members to be on guard.”

These are just a few passages from the many articles I have read on the meeting(s). When I consider them all together, creating a mosaic in my mind, if you will, I come to the following conclusion: China considers itself negotiating with the United States from a position of strength, maybe the greatest strength it has had relative to the ‘West” in centuries.  This could be a problem, but it was a long time coming.

China, President Xi in particular, has been very clear it intends to be the world’s economic and technological leader. With this will come military strength, and Beijing has been spending increased amounts on projecting might, especially with the recent buildup in the PLA Navy. In truth, the United States is the only power capable of facing off against the People’s Republic in a hot war, but would it or does it have the will to do so?

Consider this advice from Sun Tzu in “The Art of War”:

“If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.

Essentially, the goal is to face an already weakened opponent. One way of doing that is to foment discord between the population and the government (sovereign and subject). Another is to irritate your enemy if he is temperamental, as it clouds their judgement. I think it fair to say the Chinese diplomats were very aware of the societal discord we have been experiencing in this country AND they were ready to irritate the Americans by pointing out their foibles. After all, Mr. Yang all but called the US negotiators hypocrites when he said: ““Many people within the United States actually have little confidence in the democracy of the United States.”

Basically, how dare you lecture me about democracy and human rights when you don’t have your own house in order? Put another way: “how dare you speak to me from a position of strength when you are weak? And how dare you criticize me when your sovereign and their subjects are in discord, and ours are in relative harmony?” At least harmony by Beijing’s definition.

This is important, because China is playing a different game than we seem to be. Not that this should come as any surprise to anyone. President Xi pretty much spelled it out as far back as October 2017 in his speech to the 19th National Congress of the Communist Party of China. Here are a couple of key takeaways as reported by Chris Buckley and Keith Bradsher in ‘The New York Times’:

“Throughout his speech, Mr. Xi described China as a “great power” or a “strong power” 26 times, a clear departure from the days when leaders in Beijing depicted their country as a poor, modest player abroad. “China will continue to play its part as a major and responsible country,” Mr. Xi said.

“A military is built to fight,” Mr. Xi said. “Our military must regard combat capability as the criterion to meet in all its work, and focus on how to win when it is called on.”

And then there is this from the English transcript of the actual speech itself:

“In the second stage from 2035 to the middle of the 21st century, we will, building on having basically achieved modernization, work hard for a further 15 years and develop China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful. By the end of this stage, the following goals will have been met:

  • New heights are reached in every dimension of material, political, cultural and ethical, social, and ecological advancement.
  • Modernization of China’s system and capacity for governance is achieved.
  • China has become a global leader in terms of composite national strength and international influence.
  • Common prosperity for everyone is basically achieved.
  • The Chinese people enjoy happier, safer, and healthier lives.
  • The Chinese nation will become a proud and active member of the community of nations.”

And the following…

“In step with our country’s modernization process, we will modernize our military across the board in terms of theory, organizational structure, service personnel, and weaponry. We will make it our mission to see that by 2035, the modernization of our national defense and our forces is basically completed; and that by the mid-21st century our people’s armed forces have been fully transformed into world-class forces.”

Basically, the Chinese have a long-term vision which it is measuring in decades. However, I would submit they are well ahead of target. Compare that to the disunity we face in this country today, which is all the more compounded by our two-year political thought processes and the dominance of the extreme elements of our primary political parties. How can we get back in power to completely undo everything the bad guys did? In essence, the United States is facing a determined enemy with a common vision who views the world very differently than we do.

Friction is inevitable. However, UNLESS we can all figure out a way to get past our differences, our societal problems, and our economic tailwinds, I am afraid there isn’t going to be much ‘we’ can do about China’s ascendency. As a result, going back to my prediction: “despite much wringing of hands and gnashing of teeth, the remainder of the G-7 and other developed economies will be too cash strapped and too focused on their own economic problems to counter China’s growing economic influence around the world.” How would I grade that?

Feeling good about this one being right, but feeling bad about what it might actually mean. To that end, let’s exploit our commonalities and downplay our differences; it seems to help. More to come.

Take care, and have a great weekend.

John Norris

Chief Economist


As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.