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The mainstream media paid scant attention to it, but the recent naval standoff in the South China Sea could define the relationship between China and the United States for years to come.
On March 11, five Chinese ships maneuvered dangerously close to a U.S. Navy ship, the USNS Impeccable in the South China Sea near Hainan Island.
It was in the same area in 2001 that a Chinese fighter plane collided with a U.S. Navy spy plane, killing the fighter pilot and damaging the Navy plane so badly that it was forced to emergency land on Hainan Island, where the crew was held captive for 11 days.
The recent confrontation was a result of the USNS Impeccable getting too close for Chinese comfort to its new nuclear submarine base at the southern tip of Hainan Island. The Impeccable is equipped with sophisticated sonar/surveillance equipment that is used to track submarines.
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Simply, we want to know what the Chinese nuclear attack submarines are up to, and the Chinese want to prevent any country from gathering such intelligence.
Confrontation Is A Test
Of Obama Foreign Policy
More importantly, my contacts tell me the real reason for the provocative action is a carefully orchestrated test of how tough or how soft President Obama’s foreign policy nerve will be.
Regardless of your political affiliation, the Chinese believe Obama will be mostly talk and little action when it comes to foreign policy.
We’ll find out soon enough if this is true because Chinese President Hu Jintao and President Barack Obama are scheduled to meet at the G20 summit meeting in London April 2.
China has not been vocal about the naval incident, but despite official statements that U.S.-China relations have gotten off to an excellent start, there are points of friction …
Don’t Mess With China #1: New Treasury Secretary Tim Geithner accused the Chinese of “currency manipulation” during his confirmation hearings, greatly upsetting the Chinese. “These comments are not only out of keeping with the facts, even more so they are misleading in analyzing the causes of the financial crisis,” said Vice Governor Su Ning of the People’s Bank of China.
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| President Barack Obama will meet Chinese President Hu Jintao at next week’s G-20 summit. |
Don’t Mess With China #2: Obama’s first stimulus proposal included strong anti-trade Buy American language in it. Last week, China showed Obama that it too could play the protectionist game by denying Coca-Cola’s $2.4 billion purchase of Huiyan Beverage, China’s largest juice producer.
Don’t Mess With China #3: Chinese Premier Wen Jiabao, speaking at the closing press conference of China’s National People’s Congress — China’s annual legislative session — dropped this verbal bomb on the Obama administration last week.
“To be honest, I am definitely a little worried. We have loaned huge amounts of money to the United States, so of course, we have to be concerned.”
“We hope the United States honors its word and ensures the safety of Chinese assets.”
In my opinion, those words are a clear message to the Obama administration that it needs to kiss some Chinese butt.
Regardless, China will certainly use its favorable economic position to further its national goals. Since China has plenty of cash reserves ($2 trillion) on hand to stimulate and support its economy, it will try to use that to its advantage when dealing with U.S. policies.
China’s Leverage Resides
In Its Trade Surplus
Unlike the Cold War Russians, China’s global political power has grown not from the power of its armed forces but from its huge trade surplus and the trillions of dollars it generates.
Other countries understand that, and they’re trying their best to kiss some Chinese butt. That’s because they know the Chinese have lots of money to spend. These countries are counting on China to fuel their growth.
- Japan’s export-driven economy is in its worst recession since World War II and needs to tap into the Chinese market to replace what the United States used to buy.
- Australia and New Zealand are some of the most resource-rich countries in the world, and they are itching to provide the resource China needs to grow.
- Indonesia, the Philippines, Malaysia, Thailand, and Vietnam are begging for more low-cost manufacturing assembly business from China.
What do China’s new global power and willingness to challenge the Obama administration mean to investors?
Put Your Money
Where The Growth Is
First, we may never hear about the USNS Impeccable again, but it is your long-term warning to become more of an international investor … especially Asian. The fastest growth in the world is still happening in Asia, and your equity portfolio should include a heavy weighting on Asian stocks.
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| As the world shifts away from dollar-denominated assets, you’ll be better off with more Asian exposure. |
Second, a byproduct of the world’s butt-kissing shift from the United States to China is going to be a drop in the U.S. dollar. And when the dollar is dropping, you don’t want to own dollar-denominated assets — such as U.S. stocks and U.S. bonds. Not only will increasing your allocation to Asia expose you to faster growth, it will also protect you against a falling dollar.
Lastly, consider adding a little haywire insurance to your portfolio. I’m talking about gold. In the old days, gold was primarily an inflation hedge, but its role has changed to haywire insurance.
Gold should do extremely well if:
(a) the stock market gets clobbered,
(b) the value of the U.S. dollar collapses,
(c) the rampant government spending turns into rampant inflation, or
(d) the global recession turns into a global depression.
I am convinced that (a), (b), and (c) are almost sure thing, and I am very worried that (d) is a real possibility.
Regards,
Tony
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{ 2 comments… read them below or add one }
Rigth – on Tony,
In the past I have been a quiet observer but I must applaude your thoughts about China. Myself and Bob Tooke used to have lunch in Palm Beach with Martin’s Father. He once said, ( and I have not forgotten ) that we will someday have to deal with the eastern-asian countries on an economic – financial competition basis entwined with military challenges.
I think we have good cause to believe that China, Japan and South Korea anticipate forming a joint ” Oriental ” currency like the european -Euro . This will weaken the dollar , force the US to back off of it’s military defense of Isreal ( Iran-China-Russia power move). What do you think? MJ
If this is a printout of your video, then Thank You!, Tony.