Background: I spent a year in Beijing, speak Chinese, lived with a Chinese family for several months, and have an advanced degree in Chinese Studies from a top-3 international affairs institution in the U.S., and have followed China related news closely for the past 8 years. I have called China ‘right’ to friends and family for two years now and am finally going to put my money where my mouth is. I am sitting on 75k in cash and will be buying a list (bottom of the post) of stocks at the floor of the trade war.
TL/DR : **The trade war is going to hit it’s peak in January – April 2020 and recover after the election**. China will use a variety of tools to punish U.S. businesses and dim global economic outlook in order to influence the U.S. election and get rid of Trump. They’ll do this before the race heats up to either (1) get a ‘good’ deal signed (for them), or (2) get rid of trump– even if it’s a Pyrrhic victory. Through the election China will refuse to sign a good deal (for us) and will continue to destabilize our economy. If Trump wins, they will likely sign a relatively ‘good’ deal, thereby pumping the market. If Trump loses to one of the top 3 currently polling democrats, it is likely the trade war will rapidly deescalate and a mediocre deal will be signed, pumping the market. If Trump signs a shitty deal prior to the election, it’ll be in May – August 2020–he won’t capitulate early. In each scenario, the market bottoms out January – April 2020 and rebounds after the election.
While Trump was initially welcomed by Beijing because he discredits U.S. style governance, he is now seen as a huge destabilizing factor due to his bold unilateral sanctions, arms sales to Taiwan, his willingness to double-cross agreed upon deals, and his personal affronts to Xi. China wants him out–not only to save face for Xi, but because China doesn’t have the economic ammunition to easily-sustain the trade war for 5 years without major domestic risks. China wants a democrat who will refocus on domestic issues (wealth cap, single payer, etc) and let China continue to do what it’s been doing for 20 years: stealing IP and pumping it’s domestic economy and infrastructure. Therefore, for a variety of strategic / economic and social (face saving for China / Xi) reasons, China is going to try and use the trade war to unseat Trump in 2020.
However, Xi DOES face risks and NEEDS a deal in the next year. A pronounced Chinese recession greatly raises the possibility that their banking sector will continue to suffer collapses (3 major banks so far), and there ever-present specter of the housing crunch that people have been predicting for 10 years. Issues like these have always been the harbinger of domestic unrest and revolution (internal to the party–forget massive peasant uprisings). The Party is hyper-sensitive to domestic disturbances, especially in light of how the Arab Spring went. With HK in uproar, a recession could easily spark a “Chinese Spring”. Worse, a recession will embolden Xi’s domestic Party rivals )who still exist regardless of the crackdowns). There is truth in the accusation that Xi was ‘too bold’ with (1) Made in China 2020, (2) OBOR, (3) South China Sea claims, (4) Taiwan pressure, etc. Xi moved away from the Deng Xiaoping consensus of ~~develop quietly and pull a fait accompli once you are stronger than your enemy~~. A major Chinese recession could lead to Xi’s rivals to use assassination and co-opting the military (via bribery, and a promise to returning to the days where the “anti corruption drive” (kill your competition drive) wasn’t proverbially hanging over every party-man’s head). Just because Xi appears rock-solid does not mean that he doesn’t lose sleep over the implications that a major Chinese recession would have for him. I see that theory thrown around a lot and think its patently false. Any cursory study of authoritarian regimes shows how hyper-sensitive they are to social disturbance, optics, economic destabilization, etc.
What Trump (1) wants or (2) thinks he needs to get reelected is not a core part of this analysis and here is why: China will take actions to unseat him SOONER than he would either (1) accept or (2) reject a shitty-deal the Chinese will put forward (that would pump the economy for him leading to the election). He has staked his ego to this and he’s been anti-China for decades. If he signs a ‘shitty’ deal, it will only be a last-resort prior to the election, AFTER my estimated time frame of ‘max trade war bullshit’ in January – April 2020. There are 3 basic scenarios. (1) Trump signs a shitty deal in mid 2020, claims victory over China leading into the election. The market goes up as a result. (2) Trump rejects a deal in mid 2020, goes into the election and wins. In this scenario, China will eventually sign a decent deal because Trump will be emboldened to continue the trade war, won’t face reelection, and China doesn’t have the ammunition to continue the fight. The market goes up as a result. (3) Trump rejects a deal in mid 2020, loses the election, and a democrat gets elected, who will summarily sign a shitty deal so they can pump the market and focus on domestic programs (see below), the market goes up as a result (dependent, ofc, on what that democrat is doing domestically). In any of these scenarios, the market hits the floor in my timeframe and recovers at the end of the year.
The current leading democrats are very likely to sign a shitty deal with China. Biden has signaled he wants to deescalate the trade war. Ignore his words about other-solutions–the TPP failed, and any regional economic framework is likely to fail again for a variety of reasons I’m happy to discuss if someone wants to. Warren is anti-China but more so for humanitarian reasons rather than trade, economic, and strategic reasons. She and Bernie (who I won’t even waste time covering because it is self evident he doesn’t care about China) are both therefore unlikely to continue to keep the trade war going. It is an EASY win for them to sign a shitty “good” deal, pump the market, and rain tendies on the people during their first administration (This theory does not play out if Booker wins the nomination–be aware) while they pursue social programs and cut military spending.
While U.S. imports to China don’t offer much room for vertical trade war escalation, there are many non-trade ways China can fuck with U.S. companies and the economy writ large leading up to the election. Expect to see certain companies banned from China (or) their assets seized / nationalized. This would freak the market out, as it’s one thing to levy seemingly-temporary import duties vs deploy police and seize your offices and factories. Expect China and their proxies (North Korea, Iran, etc) to saber rattle and spook global geopolitical tensions. They could outright ban U.S. imports, pull the rare-earth one-time-lever, and pressure the region to follow their lead economically (Southeast Asian countries, etc). All of these factors and even ones I can’t even dream of will happen in tandem in January – April 2020.
I plan on buying dips in 20% increments between January and April (edit) every time there is a major dip. Because the Chinese are going to use a variety of tools to punish us, these tools won’t all occur on the same day. Tariffs, seizures, saber rattling, etc, it will all occur gradually. I will wait until we have days like Friday where the market drops 4% or so. Every one of these instances I plan on buying SOXX (SOXX is a semiconductor ETF with holdings that is a whose-who list for top Chinese exposure companies, I.E. semiconductors), WYNN, AAPL, and TSLA. However, this list is not concluded yet. The real target here is SOXX. My rationale here is that I want to buy stocks that have big China – exposure, but I want to avoid over-weighing myself in certain sectors. It’s impossible to know what components will get big-tendies from a trade deal (superconductors, cars, consumer electronics, etc). Any input on this is appreciated.
Disclaimer: Consult your financial professional before making any investment decision.