Trump’s Ultimate Secret Weapon Against China
Let’s talk about the ongoing trade war between the U.S. and China.
On a fundamental level, there can never be a legitimate deal that addresses the structural issues between the two economies.
Reason being, most of China’s economic gains have come via intellectual property (IP) theft from their U.S. counterparts. CNBC reports that issue is so endemic that nearly one-third of American firm CFOs say that Chinese firms have stolen their IP in the last 10 years.
Nearly one in three.
President Trump won’t sign any trade deal that doesn’t require China to honor U.S. IP law. And China can’t afford to honor U.S. IP law as doing so would end one of their biggest sources of innovation/economic development.
And that’s just one of the key differences between the two countries.
Put simply, there can never be a real trade deal. Yes, there will be concessions here and there, but a legitimate trade deal that addresses the real issues between the two countries is impossible.
So where do we go from here?
The Trade War Enters the Next Chapter
President Trump has figured out that playing hardball with China greatly benefits his re-election campaign for the U.S. 2020 Presidential election. With that in mind, there is next to no incentive for him to rush the negotiation process.
Meanwhile, Chinese leadership is hoping (and likely making moves behind the scenes to ensure) that President Trump loses the election in 2020. If this happens, China can go back to stealing IP and taking economic advantage of the U.S.
With that in mind, the Trade War has entered its next chapter in which both sides are hoping to “run out the clock” until December 2020.
Does this mean that the Trump administration will be taking the pressure off of China? Not in the slightest. Indeed, late last week the Trump administration signaled that if push comes to shove, they’re ready to deploy the “nuclear option” against China.
That nuclear option?
Kicking Chinese companies out of the U.S. market indexes.
The U.S.’s Nuclear Option for Winning the Trade War
This move would greatly hurt China because China is starving for capital – particularly capital in the form of U.S. dollars.
All told, Chinese companies have roughly $2 trillion in U.S. dollar-denominated debt owed to international investors.
Because this debt is denominated in U.S. dollars, the companies need to pay both the principal AND the interest payments to their lenders in U.S. dollars. However, China cannot print U.S. dollars.
So these firms need to gain access to U.S. dollars through other means – such as by issuing equity or debt on U.S. stock exchanges.
When a Chinese company enters a U.S. stock exchange, its stock becomes available to U.S. investors. Investors all of whom would potentially buy shares in the company or the company’s debt using U.S. dollars.
This is the secret backdoor though which China imports U.S. dollars to the mainland. Without access to this ocean of U.S. dollars, Chinese would soon run out of the currency.
And the Trump administration knows it.
Which is why on Friday, the Trump administration floated the idea of stopping Chinese firms from gaining access to U.S. stock exchanges.
This was the equivalent of the Trump administration walking up to China’s $2 trillion U.S. dollar-denominated debt bomb with a box of matches and asking, “Would you like me to light the fuse?”
So… what does this mean for the markets?
The Opportunity Lies in the Currency Markets
The trade war is now officially getting serious. Tariffs hurt China, but not in a way that could cause its financial system to collapse. Cutting off Chinese firms’ access to U.S. dollars via stock indexes does.
The biggest impact will be felt in the currency markets. That’s where we’re going to see real fireworks as the two countries go head to head. And with the right trading strategy, you can use this to generate a LITERAL fortune.
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