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China's Secret Weapon



  • China vs. U.S. on trade is a no-win war neither wants to play.
  • In an all-out trade war, the U.S. wins.
  • Measures China could take to even its score with the U.S. and what U.S. companies that could get hurt the most if relations sour to the extreme.

China's Plan to World Domination

The Chinese government wants to control its future and that of everybody else at some point in the future. Its leaders are patient enough and smart enough to methodically gain dominance of the global economic order, one industry at a time. Let's review:

China requires that foreign companies desiring to invest in its economy must create joint ventures with Chinese-owned companies and allow access to IP (intellectual property) over the course of the contractual arrangement. At the end of the joint venture, the Chinese company is supposed to relinquish the IP and not use it. But that is not what happens. In practice, the Chinese companies continue to use the IP gained from joint ventures and compete against the foreign companies. The Chinese government looks the other way, thereby indirectly condoning the theft and illegal use of IP worth hundreds of billions in dollar value each year.

Reviewing the China Miracle

The Chinese government also subsidizes Chinese companies in order to allow those companies to offer lower prices, both in China and abroad. The government picks strategic industries to subsidize at the various points in its economic development. First, it was heavy manufacturing, steel, aluminum, construction, and everything else related to infrastructure because China needed to build its own infrastructure of roads, railways, ports, etc. in order to build a foundational base for future economic growth. It brought in the know-how from foreign companies initially, using limited contracts and joint ventures, controlled by Chinese companies for the more technically complex projects until the domestic companies had gained the skill and expertise to build anything. Then, the building began in earnest.

And, of course, all of the huge projects required labor, something of which China has in abundance. But the culture had to be transformed from a rural, agricultural one to

This article was written by

Mark Bern, CFA profile picture

Founder of Bern Factor LLC, an independent research and publishing firm located in Virginia, and CEO of Friedrich Global Research, an equities research firm covering over 20,000 companies in 36 countries worldwide . My association with the Marketplace subscription service, Friedrich Global Research, is a collaboration with Mycroft Friedrich, another contributor on Seeking Alpha. Together we have nearly 80 years of investing and analysis experience. I am a former CPA (1990 -2017) and became a CFA charter holder in 2000. I consider myself an expert in Quantitative and Qualitative analysis and have extensive experience in Technical Analysis. I also have a deep interest in stock market history and hold degrees in Economics (BS) and Management Information Systems (MBA). I have been actively involved with investment analysis since 1985 but have been a student of investing since the 1960s. I owned my first individual stock position while still in high school. I am a student of Benjamin Graham and Warren Buffett. I have achieved a uniquely diverse experience from multiple careers that has allowed me to develop a broad perspective enabling me to look at the big picture of macroeconomics all the way down to the detail of a retail unit or factory floor. In my youth I was in retail, then served in reconnaissance during my tours in Vietnam. I have been a blue collar, union worker in a factory and a manager in services, hospitality and transportation as well as a manager of professional staffs. I have more than 20 years of experience each in both the public and private sectors. I have personal points of reference that many analysts will never have. I bring more to the table than just the theories and models I have studied or built. To understand more about my investing philosophy please visit my website.

Analyst’s Disclosure: I am/we are long BA, AAPL, UTX, BABA, YY, TXN, YUM. 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.

DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (430)

DING. profile picture
More and more foreign businessmen are investing in China.
johndoe1400 profile picture
My thoughts exactly. Well done in putting them in writing.
Your macro analysis has one flaw. When/if China dumps its treasuries the value of treasuries will go down due to supply and demand, as in supply will be massively higher than demand. That’s all well and good except the US govt has to sell $90B in new treasuries every month plus new debt to cover all retired treasuries during the month. That may well drop the value of the dollar but it’s also going to cause an enormous spike in treasury yields. That will crash the stock market, put the government in a debt squeeze that makes Tesla look solvent, cause all existing bonds to drop precipitously in value etc - essentially all of the foolish debt spending for porkulus and so-called entitlement programs will come home to roost. In the short to medium term that will be incredibly painful for a lot of people in the US. In the long term it would likely be a positive thing since people might realize how stupid we’ve been and get on a path of fiscal responsibility, and crush China as an added bonus. But it will never happen because the US govt is structurally incapable of long term thinking. That’s why we’re in the mess we’re in now. Without the intestinal fortitude to weather that crisis, the US cannot play a trade war all the way to the end game, and that’s the only way to beat the Chinese. Therefore, we’ll fold on the flop. And the Chinese know it. If we don’t fold, then the place to be is in non-dollar denominated assets. Not stocks not bonds not treasuries not USD cash. Wait for the blood to stop flowing and then the buy in at that point will be the biggest profit opportunity the world has ever seen. But don’t get excited because we’ll fold.
For some of us like me, you should have "folded" when the big crash happened in 2006/7/8 and done a big nationwide restructuring like what the PIGS countries went thru, esp. entitlement reform.

That would have freed USA of being reliant on China and others to keep feeding the UST bloat, and likely also robbed the world of massive opportunities in the USA and indeed, around the world on a huge infrastructure build programme that the world had never seen.

It all seems too little too late, but then again, could this time, with your current POTUS, could he "not fold?"
D-inv profile picture
"When/if China dumps its treasuries" U.S. imports from China STOP, Fx rates fluctuate wildly, China attempts to direct those exports to other markets antagonize other countries, bankruptcies and unemployment soar in multiple countries. Everyone loses, INCLUDING CHINA.
Mathieu Malecot profile picture
it is not a fact that supply will outstrip demand, especially considering a generation leaving a volatile stock market and looking for guaranteed fixed income. if the US people buy these bonds, then the amount due is paid to future generations. Again, anything the US does that is "long term" is discounted or called out for it's impact in the short term. Any mistake China makes get the "long term" label applied to it, even when the long term ramifications are at best unclear.

VIEs are a terrible detriment to China, and keep its people unproductive. See per capita GDP.
Nice article Mark. Thank you.
Also price of bonds go down which represents a loss to the seller. A big sale of bonds doesn’t affect the interest actually paid on the bonds. The yield at any given time reflects the ratio of that interest to the price paid for the bond. A fire sale by China diesn’t affect the interest the USA must pay, but it could affect the US’s ability to borrow addional money and have to pay a higher interest rate on future bonds. There would not be a big advantage to China if they would sell US bonds at less than face value.
Mark Bern, CFA profile picture
Absolutely true, imho, Old Wizard. And I don't thing that the impact would be that great or long lasting. The bond market is about double the size of the stock market and the daily dollar volume of bonds traded daily is about $700 billion. U.S. Treasury auctions are generally unable to meet demand so I would expect the sale of bonds by China to be absorbed in a relatively short period of time. Also, it would not solve China's problem in that it would still own US dollars received in exchange for the bonds. After taking a loss on the bonds it would then own non-interest bearing currency that, if it converted that to other currencies would then weaken the USD relative to other currencies making U.S. products cheaper to export on the world market; something China would not want.
Mark , can I ask you the rudimentary of economics in this article. If chin sell us bond , bond price will be lowered then bond yield will be higher . US burden will be higher on their debt . Can you enlighten me on this ?
Mark Bern, CFA profile picture
You make a good point. If they cannot find buyers the bonds China would be selling would have to be discounted which would raise the yield. China would have to take a huge loss to sell the bonds.
I suspect that the Fed would step in as a buyer if the price dropped enough. It would enable the U.S. to buy back its debt at a steep discount. The excess interest income earned by the Fed would be turned over to the Treasury. I also suspect that when the bonds mature the Fed would collect the full amount but then turn around and return the excess to the Treasury reducing the U.S. debt in the process.
I can't imagine that the Fed would not step in to maintain control of interest rates if necessary. However, there is still such strong demand for U.S. Treasuries that I doubt the supply would overwhelm the market. I suspect that the bonds would be absorbed by the market in a matter of weeks. Then all would go back to normal for the U.S. In other words, I believe the volatility in yields would be very temporary.
D-inv profile picture
heung, China runs a massive trade deficit with the U.S. and in doing so accepts $U.S. in payment for their exports. As long as that continues, the Chinese exporters have the choice of investing in $US-denominated assets, using the $US in purchasing imports or converting their $US into other currencies (including their local currency (Yuan/Renimbi?)). Converting their $US into other currencies puts downward pressure on $US exchange rate and upward pressure on the purchased currency.

Where chinese exporters want to convert their $US export revenues into local currencies, Chinese authorities can neutralize $US. exchange rate pressures by purchasing and holding U.S. Treasury securities. Should China decide to stop buying U.S. Treasuries or to dump their existing Treasury holdings on the market, the $US would depreciate relative to the Chinese and other currencies. Assuming markets are allowed to operate Chinese exports to the U.S. would fall, U.S. exports to China and China-linked economies would rise and U.S. imports would decline.

China cannot change it's U.S. Treasury security investment/holdings policy without affecting international trade patterns and it's own domestic economic performance.
Windwood Trader profile picture
Institutional and mutual fund ownership is 99.3% of the float of $YY.

T. Rowe Price and Black Rock alone have 11% of the outstanding. If one of those whales decides to sell or buy the boat will rock.

Mayascribe profile picture
seyi23600: YY and pretty much every China equity is suffering from sentiment change. Suggest for you to take a gander at $KWEB. It's holdings, which include YY, are pretty much all down.

Then there's chips/card, all suffering the same. Bargains coming, maybe, but for now, at least for me, I'm staying away.
Mark Bern, CFA profile picture
Maya - Your sentiment is what I am trying to explain. Thanks for sharing. One reason YY is down is due to investor sentiment in the U.S. since it is listed here.

seyi - I am not saying that the companies listed in the article are to be avoided forever, merely that if a trade war were to break out that these are stocks that could get hurt. My point is that caution by U.S. and other investors could hurt these stocks until the political and trade climates settle down.
yy has nothing to do with trade. tell me how does a chinese Live streaming company that only operates in China be affected by trade wars.
Mark Bern, CFA profile picture
If you go to slide 15 of the company presentation you will see that the company intends to expand overseas. A trade war could hamper such ambitions. One of its greatest strengths is its scalability.
Trades for Tomorrow: Micron Stock

$50 was a key level in Micron Technology, Inc. (NASDAQ: MU ) that many investors were watching. It looked like an obvious bounce trade in early April after a selloff from $62 despite strong earnings. The bounce played out early, sucking in new investors looking for a payout. The market (as if on queue) flushed out a number of traders by plunging MU stock down to $48, running stop-loss orders all along the way.

What now? As you can see at the bottom of the chart (in yellow), momentum is starting to turn, favoring the bulls. Micron's strong rally on Wednesday pushed the stock above $54, a critical move now that shares are above that level of resistance (blue line). The hope for bulls is that Micron stock is flat or higher on Thursday and eventually finds $54 as support rather than resistance
Zhe, you are living in a parallel world. When I point out that China has consistently hacked into the R&D of our technical companies and has a virtual monopoly on heavy earth element and processed cobalt supply you don’t seem to process those implications at all. Heavy earth elements and processed cobalt are very important in the manufacture of batteries and energy conversion for windmills and hybrid cars. If we couple the supply of these two commodities with a world dominant supply of steel, China has an ominous position relative to high tech and defense/ aircraft based commodity supply.
Further, our high tech driven economy must produce product domestically in order for this democracy to be stable. It must put our people to work and provide socio economic mobility tip and down the classes lest there be a larger and larger segment of our population trapped in the lower class. This is both economically an unsustainable state given our welfare system and not consistent with what has separated the USA from much of the rest of the world.
Lee Briggs profile picture
Chinese baby formula producers were replacing soy protein with melamine powder an extremely potent poison plastic material used to produce Melamine dishware. The baby formula was sold mainly in Asian countries and all over the world. Some of it almost made if into the American market but it was stopped and tested at the border with early news that babies in China, Vietnam and Cambodia were dying and linked to the formula.

Recently there was Chinese rice sold to Vietnam, Cambodia, Laos, and Thailand that looked and cooked like rice but also was melamine. Many adults got sick and were diagnosed with kidney failure and other problems, the lucky ones died quickly. Some of this rice supposedly made it into the Los Angeles Asian community here in the USA.

Sounds like China's business ethics are learning from US companies like Monsanto but aren't going about things quite as smartly.
Kiisu Buraun profile picture

"Chinese baby formula producers were replacing soy protein with melamine powder an extremely potent poison plastic material used to produce Melamine dishware."

=> Your comment triggered memories of articles I read a few years ago ...

(2007 / 2008)

"Diethylene glycol, a poisonous ingredient in some antifreeze, has been found in 6,000 tubes of toothpaste in Panama, and customs officials there said yesterday that the product appeared to have originated in China.
Diethylene glycol is the same poison that the Panamanian government inadvertently mixed into cold medicine last year, killing at least 100 people. Records show that in that episode the poison, falsely labeled as glycerin, a harmless syrup, also originated in China.
Two weeks ago, The New York Times reported that a Chinese factory not certified to make pharmaceutical ingredients had sold 46 barrels of syrup containing diethylene glycol that had been falsely labeled as 99.5 percent pure glycerin. That syrup passed through several trading companies before ending up in Panama, where it was mixed into 260,000 bottles of cold medicine.

At least 100 people died as a direct result, according to Dimas Guevara, a Panamanian prosecutor who is leading the investigation into the deaths."[1]

Also ...

"Toxic syrup [diethylene glycol] has figured in at least eight mass poisonings around the world in the past two decades. Researchers estimate that thousands have died. In many cases, the precise origin of the poison has never been determined. But records and interviews show that in three of the last four cases it was made in China, a major source of counterfeit drugs.
Beyond Panama and China, toxic syrup has caused mass poisonings in Haiti, Bangladesh, Argentina, Nigeria and twice in India.
When at least 88 children died in Haiti a decade ago, F.D.A. investigators traced the poison to the Manchurian city of Dalian, but their attempts to visit the suspected manufacturer were repeatedly blocked by Chinese officials, according to internal State Department records. Permission was granted more than a year later, but by then the plant had moved and its records had been destroyed."[2]

Here in the US ...

"Federal drug regulators, in announcing Wednesday that the mystery contaminant in heparin was an inexpensive, unapproved ingredient altered to mimic the real thing, moved closer to concluding that Americans might be the latest victims of lethal Chinese drug counterfeiting.

The finding by the Food and Drug Administration culminated a worldwide race to identify the substance discovered early this month in certain batches of heparin, the blood-thinning drug that had been linked to 19 deaths in the United States and hundreds of allergic reactions.
The F.D.A. said it had found the contaminated heparin at Changzhou SPL, the Chinese plant that supplies the active ingredient to Baxter. Changzhou in turn buys its heparin from two companies, called consolidators, that gather crude heparin from workshops that make it from pig intestines.
So far, Ms. Gardiner said Baxter’s investigators had been denied access to the consolidators and workshops. “We will continue to seek access.”"[3]

And ...

"China has in recent years exported poisonous toothpaste, lead-painted toys, toxic pet food, tainted fish and now, contaminated medicine.
China has lurched between defensiveness and cooperation on issues of product safety. Last year, it initially blocked the F.D.A. from investigating tainted pet food and accused foreign forces of exaggerating the issue. Then in July, China said that it had executed its former top food and drug regulator for taking bribes and promised reforms.
At its present inspection pace, the F.D.A. would need at least 27 years to inspect every foreign medical device plant that exports to the United States, 13 years to check every foreign drug plant and 1,900 years to examine every foreign food plant."[4]

More recently (2016) ...

"Using a stringent two test method, researchers have found that 32 out of 32 traditional Chinese medicines tested were contaminated with mercury and arsenic.
The results from these tests showed the presence of arsenic and mercury in all samples. Additionally, the results showed that medicines with identical names but different places of production had considerably inconsistent concentrations of these hazardous elements."[5]

Also in 2016 and related to the death of Prince ...

"“It seems more and more likely that Prince became a casualty of what is being called a new national crisis of deadly counterfeit pills,” the Star Tribune wrote. Synthetic drugs like fentanyl and flakka from Chinese labs have flooded the US in recent years, in part because drug companies in China openly offer the raw materials to make them and drug import and export laws are easy to circumvent.

Illegal Chinese labs have been tweaking chemical compositions of fentanyl and other synthetic drugs to get around China’s export laws and the US’s import rules, by altering the molecular composition slightly. Hundreds of thousands of counterfeit pills containing potentially lethal doses of fentanyl and other synthetic drugs have entered the US, from labs in China that are “mass-producing” the pills, the DEA said last month."[6]

There's more[7] ...

Best wishes,

1. (NYT) https://nyti.ms/2HaIIe5 Similar report from the UK https://bbc.in/2qFGWev
2. (NYT) https://nyti.ms/2HbOVq7
3. (NYT) https://nyti.ms/2HqY15N
4. (NYT) https://nyti.ms/2qL7tqi
5. (AsiaSci) http://bit.ly/2Hv55hv See Toxicological & Environmental Chemistry abstract at: http://bit.ly/2H8Dakc
6. (QZ) http://bit.ly/2HAhukn
7. (OECD) In 2013 more than 63% of fake goods originated in China and more than 21% originated in Hong Kong (totaling nearly 85% of all goods seized) http://bit.ly/2qL7vOW
“China does like to brainwash it’s own people to boycott Korean tourism, big deal!”
It’s a big deal, it’s China’s secret weapon when it comes to trade war or any other conflicts with the U.S. for that matter. The Chinese blogs were plastered with boycotting American product messages when Trump first purposed the 25% tariffs on Chinese imports. Americans would still buy Chinese imports even if they are more expensive after the tariffs are imposed albeit we maybe buying a little less of it, but the Chinese consumers would totally boycott all American products and all American companies that do business in China at the hints (advices) of their government. Korean Lotte Group is being driven to the brink of bankruptcy because of their decision to give their land to install Thaad defense system, all of Lotte supermarkets in China see a drop of 90% in business. I don’t see the benefits of trading with China in the long run.
Yes, China brain washed their own people to boycott Korean goods including touring in South Korea. The government propaganda says Thaad is a powerful missile system that can attack China more accurately. Although Korean consumer products were boycotted, the Korean cars and cell phones are unstoppable in China. People in China dislike Koreans much more than Americans. It’s impossible to boycott good American products. Besides, China cannot survive without US high tech products. Therefore, they will not boycott US products unless US resumes the relationship with Taiwan and supports Taiwan independence. Or open fire on PLA Navi fleets and start a war with China. If so, whoever started the war may be the jeopardize humanitarian of the whole world, which is the most stupid and criminal decision to make. By the way, gaining low tech labor manufacturing back in the States is also unwise. The wise decision should be let China be the word factory, but keep the US a world engineering and high tech center. The lazy US borns who hate study and love being labors can go join China.
You mean China has also copied Fox News!! Who would have thought that? At least they don't have a desk in the WH at least not yet.
Even if your assertion is correct that "The government propaganda says Thaad is a powerful missile system that can attack China more accurately", officers of the PLA wouldn't believe it. They know that THAAD is a defensive weapon that carries no warhead so it could not possibly be used for offensive attacks. They know that it can only knock out incoming missiles on their descent (near their target), not on their ascent (near the launch site).
DING. profile picture
17 Apr. 2018
A business are true Significance with passion and dedication to help other people. In order to get higher quality and accuracy product, it is necessary to improve automatic assembly technology.
D-inv profile picture
Excellent article, Mark.
Windwood Trader profile picture
China a big customer for Micron- Bad news for them if trade war escalates.

Anyone: why hasn’t MU price not rally when nasdaq, Russell averageshave ran up?
You exaggerate the power of China about taking advantages of the global market. If the problem is only about rare earth metals, you can deal with China in regards to the subject. You described China as a powerful and well organized government able to take down any businesses in the world. That is not true. Certainly many big companies love Chinese market as well as their cheap labor so that they love to share their manufacturing technology including IP with Chinese to be convenient. For example, iPhones were made in China, but none of the Chinese phones can compete with iPhones. iPhone also were made by Samsung before, who did steal AAPL IP and had legal issues going on. That means IP issues could happen else where not necessarily in China. China does like to brainwash its own people to boycott Korean tourism, big deal! Your comment on Chinese police panelizes anyone who drives a boycotted car is unreasonable. How could the driver buy the car in the first place if the car is banned in Chinese auto market? Your exaggeration discredited your article, thus it is biased and not convincible.
I was referring to the article you referenced. Your article makes the points that I made when I commented on the article you referenced. Your points are well taken. Whether WTO rules against China or not isn’t significant. What is significant is whether China follows the rules before and after any WTO ruling. The article you referred to didn’t see any problem with ?China producing 62% of the world’s steel, 95% of the world’s supply of heavy rare earth elements, a large part of the processed cobalt and their strategy to build artificial islands that potentially would allow them to claim natural resources in areas far from their home waters and control the sea lanes of trade in the South China Sea,
Hacking into our advanced technology was seen as equivalent to copying our products. I consider that article as really naive.
Mark Bern, CFA profile picture
Old Wizard,

Thank you for confirming what I thought, but I did not want to make assumptions. I wrote this article to shed light on a different perspective of the same problem because, while that other article contain a lot of good information I felt there was much left out that needed to be said.
I read the article and commented accordingly. It did not cover the strangle hold that China has on certain critical commodities and seemed to conclude that when a product became a commodity it was the inevitable result that it would be produced where it was cheapest. I pointed out that the hacking into our companis’ R&D and the stealing of IP are a different issue.
The article supported going to the WTO to get China penalized when they break the rules. I offered the opinion that China has not confiormed to WTO rules since they became a member. I used their hacking into our domestic contractor to get the F35 specifications, in which our country has invested billions and represents leading edge defense technology,
Still the free traders keep saying what we have been doing is better than the possibility of some pain over a possible trade war. I maintain that what we have been doing isn’t good enough and your example of the heavy earth element evolution is a case in point . We didn’t learn anything by signing up to the Paris agreement where we were to commit to even more stringent environmental rules while China got a pass to keep doing what they have been doing. The mining of heavy earth elements carries with it the attendent pollution of large amounts of water. China has a vast lake of polluted water which is growing. If we were to permit large scale mining of these elements we would require much more stringent environmental restrictions and the cost would be so much greater, For readers and commenters of the other article you reference, get the picture as we project the limit in the future. Instead of wringing your hands about a trade war with China, what is your prescription for beneficial change, it clearly isn’t using the WTO and doing what we have been doing.
Mark Bern, CFA profile picture
Old Wizard,

Are you commenting on this article or the one linked within the article? Because this article does not considered following the WTO rules as the solution. I believe I made it clear that the best use of the WTO would be to kick China out which would result if tariffs on Chinese goods throughout the world.

The Chinese have lost in WTO court many times and agreed to change but the changes never come.
According to the following article, what you wrote about WTO complaints is not true/accurate (the third point that is not true/accurate, I pointed out the other two above):


"Trump Wrong About WTO Record

By Robert Farley

Posted on October 27, 2017

When it comes to litigation brought to the World Trade Organization for dispute resolution, the U.S. wins the vast majority of cases it brings, and it loses most of the cases brought against it. That’s generally how other countries fare before the WTO as well."
sonchi: We would not want to confuse the issue with the facts. Shame on you.
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