Article / 13 December 2016 at 14:00 GMT

Trigger-happy Trump stalks baffled China

Former managing editor, TradingFloor.com / Saxo Bank
Denmark
  • Donald Trump has continued anti-China criticism since victory last month
  • President-elect has deliberately damaged carefully crafted One-China policy
  • China is baffled and furious at Trump's embrace of Taiwan
  • Pivot towards Moscow could spell danger down the line
  • China not likely to be too forgiving if Trump gets cornered
  • Key geopolitical relationship has implications for all markets, including USDCNH
  • READ MORE ON OUR DEDICATED US ELECTION PAGE
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 Diplomat supreme Henry Kissinger (right), pictured here with ex-president Gerald Ford, 
painstakingly engineered the conditions for the One-China policy that president-elect
Donald Trump has, perhaps irrevocably, undermined. Photo: Thomas J O'Halloran

By Martin O'Rourke

Does Donald Trump have it in for China? Whatever the cause and potential outcome of his recent attacks on the world's second biggest power, one thing is for certain — the onslaught is not random.

From the moment Trump took that phone call from Taiwanese counterpart Tsai Ing-wen last week, he set US foreign policy on a collision course with Beijing. As if the message wasn't sufficiently clear, and China's leadership certainly offered him a diplomatic path out of escalation by suggesting Tsai had lured the president-elect into a trap, Trump made that collision even more inevitable when he questioned the whole point of the One-China policy.

In one fell swoop, a carefully crafted pillar of US foreign policy written in stone from 1979 onwards was ripped apart. The process had been set in motion by diplomat supreme Henry Kissinger at the start of the 1970s in partnership with president Richard Nixon and not only helped pivot China away from the Soviet Union, but, through its implicit threat to Moscow via the back door, played a key if perhaps underestimated role in the collapse of the empire at the start of the 1990s and the end of the Cold War.

It is not without some irony then that the volley of criticism aimed in China's direction runs parallel to a distinctly different tone when dealing with the Kremlin. Trump made numerous pre-election promises that he would like to reconnect with Russia which would involve a recognition of the annexation of the Crimea in Ukraine, a search for a solution in Syria and, like manna from heaven, even question marks over the future funding and nature of the Nato alliance that has caused enormous disquiet in Eastern Europe and particularly in the Baltic states.

Putting aside some of the speculation that Trump is somehow beholden to the Kremlin and that the latter actively pursued his victory by hacking into rival Hillary Clinton's emails, are there good strategic reasons for Trump to take what seems a reckless course of action?

China bashing

China-bashing was of course a useful tool in the election given the swathe of American jobs that have disappeared and, as one of the more obvious homes of many of these jobs, it helped Trump capture that disaffection that swept him to power. Appeasing his constituency is no doubt playing its part in the wall of criticism (Trump has a thing with walls) and it's a box ticked off at little immediate cost to the incumbent as he eyes the White House entrance.

The devaluation argument was also trotted out again and again during the campaign despite the clear evidence that the People's Bank of China has been trying to prop up the ailing yuan — to the tune of $88 billion in September-October, according to The Financial Times — against an ever shifting trajectory towards the 7.0 handle.

The legitimacy of Trump's devaluation argument of course rests on the infamous 'fix' that set the USDCNH rate at 6.3305 on August 11, 2015 as China looked to boost exports, get the currency ready for entry into a key IMF basket and allow market forces to interact with the rate. The ensuing carnage left a near permanent scar and directly led to Black Monday on August 24.

That has set in motion a path for USDCNH that has taken it to within striking distance of what would be a landmark breakthrough for an appreciation of around 12% in the last 18 months.

USDCNH was at 6.9277 at 0755 GMT today.

For Trump, it has become a key part of his armoury in his protectionism-led platform that has targeted China above all (Mexico of course might beg to differ on this one).

If anything, it is all too reminiscent of The Police classic, Every breath you take — as clear and uncomfortable a homage to stalking as you ever likely to hear.

The devaluation of USDCNH in the last 18 months gave Trump plenty of ammunition
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Source: SaxoTraderGO

Hotspot realities

It's not as if China does not recognise clear hotspots in its relationship with the US. The stealthy buildup of China's military in the South China Sea as it flexes muscles over strategic territories and oil resources has long been a source of consternation in the US and Beijing knows this is a battle down the line that is definitely coming.

It is not purely for trade reasons that China has poured so much effort into the Asian Infrastructure Investment Bank. The soft power spread of China's influence through the regional banking system certainly irked the Obama administration, particularly when the UK signed up, and there is some irony that one of Trump's immediate targets is the ripping up of the Trans-Pacific Partnership which might play further into China's hands.

But these are diplomatic skirmishes consistent with great-power politics. It would probably never have been assumed among president Xi Jinping's cohorts that the battle could ever possibly extend into something of a more extreme nature. But with Trump in power, that assertion probably can't be made with quite the same confidence even if the alternative is unthinkable.

It's led to China issuing the sort of warning to Trump that is usually reserved for long-standing enemies (read Japan) or admonishing a smaller nation that has dared to step on China's toe. 

Foreign ministry spokesman Geng Shuang Monday said: "Adherence to the One-China policy is the political bedrock for development of relations," as reported by The Financial Times. "If compromised, there will be nothing to discuss on cooperation in major fields."

China clearly views Trump's message as part of a horsetrading game, but is neither willing to participate, nor will be cowed, after an editorial in The Global Times warned that China "cannot be bullied easily."

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Chinese men pride themselves on being able to retain full heads of hair well into old age so it might seem reasonable to hope Trump might at least  find some common ground. Photo: iStock


Enemy mine

So, will the realities of power see a different stance from Trump a few months down the line? It's difficult to say. US foreign policy has often been defined by its perceived enemies (perhaps this is true of all foreign policy) and once it was clear, for example, that the Soviet Union was on the decline in the late 1980s, Japan for a brief time slotted into the enemy role.

At the time, Japan was perceived to be a significant threat to US economic might. A quick flashback through history will unveil all sorts of cultural references to Japanese hegemony and its insidious influence. 

The Alien Quadrology of films provide one useful context. It was no accident that Weyland-Yutani Corporation, the anonymous and sinister company pulling the strings, was shown to be dominated by Asian faces in the third film's end-scene, released in 1992. The previous two films released in 1979 and 1986 respectively made no such link even if the Yutani name was there and the implicit criticism of Japanese style corporate culture was evident.

Similar sentiments could be found in Michael Chricton's bestseller The Rising Sun, and Tom Clancy's novel Debt of Honor. What's the point? Namely that once the surge of anti-Japanese sentiment subsided, and don't underestimate just how strong it was over perhaps a 10-year period, relations between Japan and the US once again found an even keel in a different type of world emerging through the 1990s.

Ironically, China's emergence and phenomenal GDP growth rates played no small part in that realignment with Japan and perhaps, once the dust settles on the US election campaign and the cold, hard realities of power come home to roost in the White House, we can expect similar from Trump and his cohorts towards Beijing.

But this is no certainty. The pivot away from Beijing and towards Moscow is a worry and has been crystallised as a definitive strategy just this last hour with the confirmed appointment of ExxonMobil chief Rex Tillerson, known for his close links to Russia and indeed president Vladimir Putin, by Trump, as his new secretary of state.

It would play into Moscow's hands too, which has been smarting at the uneven terms of the multi-billion China-Russia gas deal signed for 30 years in May 2014 when a largely friendless Kremlin bent over backwards to try to end its less than splendid isolation.

It all suggests that Trump has drawn a definitive line in the sand with China and is determined to back it into a corner. Of course, if Washington's relationship with Moscow turns sour down the line, something on which we have speculated before, the one backed into a corner then could be Trump and his seemingly anti-China team.

When Trump comes if not a-begging, at least an-asking, don't expect China to be forgiving. Pragmatic though they may be (A famous Chinese saying goes: "He who seeks revenge should remember to dig two graves"), Trump has really pushed Beijing to the edge of reason. 

If he doesn't understand why, then it would be in everyone's interests for him to do so. It seems somehow unlikely though.

As for China, how it must be wishing for the perhaps harsh, but nevertheless clear certainties of a Clinton administration. At least then, it would know where it stands.
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Trump has railed against the migration of us jobs to other parts of the world. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank
2y
Juhani Huopainen Juhani Huopainen
I remember the Land of the Rising Sun and the first Die Hard-movie as important clues suggesting that Japan's bubble was almost over. Hollywood is a great contrarian indicator, just as newspaper headlines are.
2y
Martin O'Rourke Martin O'Rourke
@Andy Hedges, @Juhani, it is also interesting to see how more nuanced film and TV in particular has become in the last 10-15 years to reflect more complex times. Enemies are found both within and without and no longer fit into ready-made pigeon holes. A quick glance at the likes of 24, Homeland and many others reflect this. Maybe we're moving back to a time where enemies are more clearly defined. That makes for much simpler foreign policy but not necessarily better. Syria today might be seen as a casualty of such realpolitik thinking.
2y
Martin O'Rourke Martin O'Rourke
And on it goes after this weekend's drone affair draws yet more barbs from Trump's rapier like pen (aka Twitter feed) https://www.tradingfloor.com/posts/morning-markets-trump-spells-it-out-to-china-8330704
2y
mandyspak mandyspak
This comment has been redacted
1y
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