Credit: Shutterstock photoPresident Trump's national security strategy is drawing sharp critiques for its pointed challenge to China's economic policy and geopolitical ambitions. But a forceful new stand by China's leader two months ago may have paved the way for a run-in, with huge stakes for America's world standing, businesses and investors.
[ibd-display-video id=2102289 width=50 float=left autostart=true] China's party congress, the huge meeting of Communist Party members held every five years in Beijing, is usually a boring affair that passes with little notice. But this year President Xi Jinping declared at the congress that China should "take center stage in the world." He also made clear the days of political liberalization are at an end.
That puts Xi Jinping and China squarely on a collision course with Donald Trump and the U.S. - an inevitable clash of "Make America Great Again" against "Make China Great Again."
"One result of this strengthening of state intervention is a worsening environment for American investors in China and greater barriers to American companies exporting to China," said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies (CSIS) in Washington.
Besides trade, Xi's policy shift raises new questions about intellectual property, data security, censorship and treatment of U.S. companies in China vis-a-vis Chinese companies. Among those with big stakes are giant technology stocks like Apple ( AAPL ), Google, Facebook ( FB ) and Microsoft ( MSFT ).
The one softening influence on China's tone may be its dependence on exports to finance its economic goals.
China's State Control Of Economy
Still, China's freewheeling brand of capitalism, officially encouraged since Deng Xiaoping's years in the late 1970s, may be over.
Xi's attention-grabbing move to put his official stamp on the nation's future, dubbed "Xi Jinping Thought," embraces greater political power for Xi and his fellow party rulers, and increased centralization of state control over the economy.
The New York Times called Xi's new philosophy "a flattering echo of 'Mao Zedong Thought,'" named for China's xenophobic first, and most totalitarian, communist leader.
Trade and economic conflict seem inevitable. Friction is especially likely over U.S. tech and internet companies, which increasingly find themselves hemmed in by China's ubiquitous rules that favor local companies over foreign ones.
The U.S. last year ran a massive $347 billion trade deficit with China , which President Trump has attacked as a sign of unfair trade. That deficit is also a major source of China's wealth, which now totals $1.2 trillion of U.S. treasuries.
Trump's National Security Strategy
Like Xi, Trump articulated his own tough vision of U.S. and China ties as he unveiled his national security strategy Dec. 18. It boldly reasserts U.S. global leadership, particularly in the economic realm.
Not mincing words, Trump portrayed China as a "challenge (to) American power, influence, and interests, attempting to erode American security and prosperity."
"Whether we like it or not, we are engaged in a new era of competition," he said.
Because of this, Trump said his new strategy "calls for trade based on the principles of fairness and reciprocity ... for firm action against unfair trade practices and intellectual property theft ... (and) for new steps to protect our national security industrial and innovation base."
U.S. investors have reason to be wary of the new Chinese model.
"Japanese and Korean firms have already felt the pinch, as rising nationalism has sometimes gotten out of control and led to protests against their brands and even some destruction of their property in China," said Salvatore Babones, a sociologist and China specialist at the University of Sydney and author of " American Tianxia: Chinese Money, American Power and the End of History ."
How Chinese Exports To U.S. Affect Politics
Last year, China sold some $463 billion in goods and services to the U.S., a sore spot with Trump but a huge boost to the Chinese economy. The silver lining: Xi can't afford to rile the U.S. too much.
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"The Chinese government won't let anti-U.S. feeling get out of hand in a way that would lead to real U.S. retaliation," Babones told IBD. "So the main impact on investors is likely to be low-key regulatory interference of the kind that makes it difficult for U.S. internet companies to succeed in China."
Already, the Chinese government competes directly with big tech businesses from abroad, including the so-called FANG companies , through its recently acquired investments in some of the most successful Chinese tech companies , including Alibaba ( BABA ), Tencent ( TCEHY ) and Weibo (WB).
U.S. companies that compete with those fast-growing Chinese internet giants may find a less-welcoming attitude from the government in the future, particularly as it steers away from its reliance on foreign investment and exports toward a more domestic-growth orientation.
Does China Treat U.S. Companies Fairly?
The same day Trump spoke on national security, Chinese regulators at a Geneva technology conference said companies like Alphabet (GOOGL) unit Google, Facebook and Twitter ( TWTR ) that don't operate now in China would be welcomed back - but only if they accept censorship and strict laws governing online use.
"The condition is that they have to abide by Chinese law and regulations," said Qi Xiaoxia, a top official at the Cyberspace Administration of China. "That is the bottom line. And also that they would not do any harm to Chinese national security and national consumers' interests."
Given China's 750 million-plus web users, big U.S. internet companies will be tempted to accept such limits to operate within China's so-called Great Firewall.
Alphabet has dipped a toe in the water, with the announcement in mid-December that Google will open an artificial intelligence center in China .
But Google's signature search engine, YouTube and Gmail services will continue to be blocked.
Meanwhile, Apple already operates in China but does so under heavy censorship - for which it has been sharply criticized in the U.S.
In the future, the price of admission to China may be too steep for some.
Increasingly, U.S. companies are required to give up their trade secrets or patents as the price of admission.
Are U.S. Tech Companies' Data Secure In China?
China's new cybersecurity law, passed just last June, requires that foreign tech firms store their data inside China and allow the government to keep tabs on how they use it.
China is also encouraging U.S. companies to set up research and development operations there.
Apple, Amazon (AMZN) and Microsoft already have cloud-computing operations in China. And of course, there's Google's new AI center.
But it isn't only technology, strictly speaking, that gets this treatment.
Current Chinese rules require foreign companies that want to enter industries such as energy, autos and telecom to do so through joint ventures.
These ventures often lead to Chinese companies gaining U.S. technology and manufacturing know-how on the cheap.
In addition, the CSIS' Kennedy said, "The Chinese are using their advantages in their home market to compete head to head with the U.S. in third markets."
Impact Of China Protectionism
Kennedy believes this has established an even more damaging dynamic, one in which Chinese protectionist policies and subsidies in coveted high-tech markets will cripple U.S. competitors' business models, which are based on heavy R&D and intensely competitive markets.
"Although consumers in these sectors benefit from lower prices now, productivity in these sectors will decline and the benefits ... for the rest of the global economy will fall as well," Kennedy said.
With $75 billion in direct investment in China as of 2015, the stakes for U.S. companies and investors in China's recent political changes are enormous.
Then there's the elephant in the room: The so-called Silk Road Initiative, one of the biggest infrastructure projects ever, and the linchpin in Xi's plan to leapfrog the American economy to make the Chinese economy No. 1 in the world.
That trillion-dollar road-and-sea port project will eventually tie China's heartland to a wide swath of countries and regions, ranging from Southeast Asia to the Middle East and into Russia and Europe.
McKinsey & Co. estimates that the project will eventually span 68 countries. It could include 65% of the global population and as much as a third of global GDP. While China will itself spend $1 trillion or so, it expects to finance anywhere from $2 trillion to $8 trillion in new infrastructure in dozens of countries, helping to fund everything from roads and warehouses to ports and freight-loading facilities.
China's Standing In The World
It's not altruism. It's all about geopolitical clout.
As the British magazine The Economist recently noted , "Its ultimate aim is to make Eurasia (dominated by China) an economic and trading area to rival the transatlantic one (dominated by America)."
When it's done, China, which insulated itself from foreign contact for much of its nearly 5,000 years of existence, will for the first time ever be intimately connected with its Asian neighbors and Europe. It would tower as an economic superpower with direct links to some of its biggest markets.
But here's the rub: To build this massive project, Xi will need to run massive fiscal deficits for years, if not decades. One estimate from Hayman Capital Management LP already shows total deficit spending both on-budget and off-budget of 14% - greater than the spending "stimulus" China applied during the financial crisis.
Even if it's half that, it will be hard to sustain.
That means China will have to continue exporting to the U.S. to finance its big plans - or squeeze more from its domestic economy. And all this comes as the U.S., under Trump, slashes corporate tax rates , another challenge to China as it seeks to finance its future growth.
What Trump Says About China Trade
None of this seems to be lost on the Trump administration.
During his recent trip to Asia, President Trump went out of his way to show a friendly face toward China and its leader. But he has since shown he's willing to challenge Xi Jinping, particularly on economic and trade matters.
In late November, Trump's administration surprised some by arguing before the World Trade Organization that China's bid to be declared a "market economy" should be rejected.
China had maintained that it had an implied deal when it joined the WTO in 2001 to automatically gain long-sought "market economy" status 15 years later. But the Trump administration cites Xi's backsliding on democracy and free markets in opposing changing China from "non-free market" to "free market" status.
There might be a strategic reason for Trump's move.
Once China gains status as a market economy, it would legally be much more difficult to bring a WTO case against it for dumping and other trade violations. Trump wants to keep that as negotiating leverage in the new era of "Xi Jinping Thought."
Can Trump Keep China Markets Open?
Trump's move to keep China from being declared a free-market nation, the New York Times said, could "shape the global trading system for decades to come."
More likely, Trump will use it as a crowbar to keep Chinese markets open to U.S. goods and investment. That could be seen in China's recent cuts in tariffs on U.S. goods.
China's economy has had an incredible run, growing at an official rate of close to 10% per year since the early 1980s, after China's capitalist experiment began.
But even China says that growth is over . The question is, what will China become: A protectionist hegemon, or an open, market-oriented economy with increasing political freedom?
"Now with omnipotent power firmly in his hands, Xi Jinping wants to do something neither Mao nor Deng has done - he wants the combination of Mao's totalitarianism and Deng's crony capitalism," Helen H. Wang, a Chinese-born, U.S.-based business consultant, recently noted.
If so, this could herald a new era of government control, with the Chinese regime more involved in directing the business sector and cracking down on those that conflict with Xi's desire to push China to the center stage in the world economy. Entrepreneurs and foreign businesses beware.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
