If you are going to take them on, now is the time to take them on.
That was a prevailing sentiment I got from a surprising number of people in the tech world who do not like President Trump but do endorse his policy to get China to play fair or risk the consequences of losing our market to sell its wares.
Given the timing -- Sunday night we learned that China's exports were down 4.4% in December while imports were off 7.6%, the worst since 2016, while the trade surplus with the U.S. hit a record in 2018 -- I think this harsher-than-expected-view may be more realistic than most investors think.
Now I want very much to make clear that the stakes are higher for some than others -- and the companies that have a terrific business in China believe that there can be a positive resolution for both, something that I certainly subscribe to. There are companies that, through sheer ingenuity, have been able to sell well there. These companies do not deserve to have what they have built in China sacrificed. They should be rewarded for their efforts, not punished.
But there are many execs that just don't think it is possible to continue like this, with such a terrible imbalance not just with the United States and China but China and the world. Too much of your ethic, too much of your hard work, too much of your ingenuity has to be sacrificed to make money in China these days.
It is time to challenge China, not so much on world hegemony, but just on plain old-fashioned fairness.
Why are so many willing to say "enough already?"
I think it's because China has never been more vulnerable and we have rarely been as strong as we are right now.
Yes, last week, decamped in a part of the nation notoriously known as anti-Trump, I was repeatedly shocked at how many execs, off camera, said the same thing: if the Fed doesn't try to stop our economy, we could be strong enough to take on the Chinese and end these dubious joint ventures that represent ridiculous technology transfer and outright theft.
No one wants a recession. But almost everyone realizes that China is, right now, an outlaw that should not play differently from anyone else, IF they want to avail themselves of our market, or any other market for that matter. Yes, they are concerned that if the Fed keeps tightening and there is no movement by the Chinese, we will not be strong enough to take on the Chinese.
But as this economy is currently configured, there is hope that China has to cave because of the $500 billion vs. $100 billion trade figures -- how much they have to lose versus how much we have to lose. The answer? Not enough to make it, so it is worthwhile subsidizing their intellectual theft and their stifling joint ventures.
Why do they feel they can do it now? Here's what I am hearing.
1. Their economy is much weaker than we think, with everything being used from one-year junk bonds -- yes, that's their desperation, one year junk bonds -- to any sort of ridiculously injudicious, risky lending that the government favors just to keep things alive. This is the China-is-teetering insight that just kept coming up in behind-the-scenes discussions with those who examine China from a financial angle.
2. Our nation holds more cards than we think: If China loses our market, its country could be pushed into actual recession, something the Party may not be ready for. If we lose their market, we might not even notice.
3. There will be no time better than now. The Chinese economy is so debt-laden that if it is to continue to expand the middle class, it must do so by exporting, because the nation's consumer economy is saturated and there are far too many empty buildings of all sorts to continue as the current seat-of-the-pants, build-it-they-will-come-and-live-in-it strategy. I don't think people are aware of how over-levered so many Chinese companies are and how precarious many of their lending institutions happen to be. Or, to put it another way, it's not about soybeans, it's about balance sheets and, believe it or not, we have the better one.
I do believe that things have become too heated. There's not enough constructive sentiment to get something done before the automatic hiking of the tariffs. But, again, a surprising number of execs accept the pain, BECAUSE there can be real gain when the Chinese open their markets, with the operative term being when, because of how much weaker the Chinese are than so many realize. They want to press the bet; I agree with them.
