China Takes The High Road

Includes: FXI
by: John M. Mason


Chinese president Xi Jinping gave a supportive speech in Davos, Switzerland looking to take over the leadership of economic globalization.

As the United States appears to be backing off its leadership in world trade, the Chinese see an unexpected opening they can just not refuse.

China has been working for years to play a major role in world economic affairs and now may have been given, as a gift, the chance to grab it.

Who could have imagined a year ago that Chinese president Xi Jinping would be in Davos, Switzerland talking up the benefits of globalization and placing China in the leadership position of future global trade?

Well, Mr. Xi did that very thing.

While proposing that the global governance system needed some reworking, he indicated that "China will keep its doors wide open" and will work within the system to bring about the updates that are needed.

Mr. Xi added,

"Countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others. We should not retreat into the harbor whenever we encounter a storm or we will never reach the opposite shore. No one will emerge as a winner from a trade war."

Peter Goodman writes in the New York Times

"That a leader of the People's Republic of China can stake a claim to the mantle of leadership in the realm of free trade speaks to the unforeseen, even surreal alteration of the global order in recent months."

Mr. Xi "used his moment to make an expansive case for globalization as a source of prosperity."

China has been waiting for this opening for decades.

For years, leaders of China have moved into world markets and have attempted to make their institutions and internal markets competitive with nations from the Western world. The move to position the Chinese currency, the renminbi, as a reserve currency in the financial system overseen by the International Monetary Fund finally achieved success and has moved forward.

China does not focus on the short term; its plans take in much longer horizons. As I have mentioned before, one of the best pieces of advice I ever received in terms of trying to understand Chinese behavior is this: "Chinese leaders think in terms of decades while leaders in the West think in terms of years."

Consequently, Chinese leaders are poised to take advantage of situations that are handed to them on a silver platter.

China wants to be a major force in world markets. Almost everything it does is focused upon this goal. To have the United States step backwards from its world leadership position can't be seen as anything but a gift.

Over the past two years, the United States has given China another gift. China proposed and then organized the Asian Infrastructure Investment Bank, which began business in December 2015. The AIIB has 50 members and aims to support the building of infrastructure in the Asia-Pacific region. Many Western countries joined the AIIB, even though the United States did not.

Many saw this effort as a reaction to the United States-led effort to create the Trans-Pacific Partnership (TPP), which is now failing to become a reality. The incoming administration is not expected to continue efforts to keep the TPP alive.

I have expressed my own view on this several weeks ago. To me, globalization is just a part of what I call the spread of information, something that has been going on for a long, long time. And, it is something that cannot be reversed, although many have tried to do so throughout the ages.

Knowledge becomes available to more and more people. New knowledge results in people asking more and more questions. Questions lead to innovations. Innovations lead to better, cheaper ways to do things. Cheaper ways to do things lead to more and more trade and more and more migration. And, this spread of trade and this spread of people lead to a further increase in the spread of information.

The spread of information is cumulative.

Still, Mr. Xi must be ready to deliver on his words and that is where some people raise questions. These people point to the fact that Mr. Xi has not really acted in the same way his predecessors did to move China into a more open society. They believe that he will not follow up on his words because it would be counter to other things he has attempted to achieve.

Yet, Mr. Xi may find this opening to be too promising.

Here the West is backing off from leadership, which will possibly result in a vacuum at the top.

My question is… can Mr. Xi really ignore this opportunity?

I don't think he can… and, I don't think that he will. I think that Mr. Xi will test it for all it is worth.

The world just shifted.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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