Will Xi’s Agreeableness Translate Into Trading Advantages?

Xi Jining the head of the Chinese Communist Party and leader-for-life in China met with Joe Biden ahead of the meeting of leaders of the Asia Pacific Economic Cooperation group. He was much less brazen than he had been in recent years, more conciliatory. It appears that the US will get the military communication channels its wants and even help stamping out the flood of fentanyl coming into the US. Xi is being agreeable because China has a host of problems and Xi is not dealing from strength at this point. The question for options traders is this. Will Xi’s agreeableness translate into trading advantages?

What Does the Stock Market Think About Xi and Biden’s Meeting?

The stock market has headed higher over the last three weeks. However, this has been because the elusive soft landing sought by the Federal Reserve may actually happen. Inflation is down and edging lower and the Fed is likely to pause interest rate hikes. Whether or not we are in for a period of higher rates or rate decreases in a year or so is not an issue with the market right now. It is happy with a rate hike pause. And, miracle or miracles, the US House of Representatives, its new Speaker, most Republicans and a whole bunch of Democrats voted to avert a government shutdown by raising the debt ceiling into 2024. It looks to us like the market’s reaction to Xi being so agreeable was a big ho hum.

Does China Ever Keep Its Promises?

China got into the World Trade Federation two decades ago. The basic agreement was that China got to sell stuff everywhere in the world in return for playing by a set of basic fair trade rules that everyone else followed. They have not done that. The Information Technology & Innovation Foundation detailed their shortcomings a couple of years ago labeling them false promises.

China’s state-led economic model, driven heavily by innovation-mercantilist practices, stands at odds with the foundational WTO principles of pursuing market-oriented policies while providing non-discrimination, national treatment, and reciprocity.

China has failed to meet numerous WTO commitments on issues such as industrial subsidization, protection of foreign intellectual property, forcing joint ventures and technology transfer, and providing market access to services industries.

China’s behavior toward the WTO and its trading partners is that of a nation that knew what it had to promise to enter the organization, but its subsequent actions have demonstrated it never intended to keep those promises.

Decades of gaming the global trading system and failing to meet WTO commitments have enabled China to accumulate tremendous trade surpluses and foreign currency reserves, which it uses to pursue domestic and foreign policy objectives.

The bottom line is that China always pursues its own objectives and only keeps its word when doing so prevents more pain or provides an advantage. The market knows this. Thus we see a ho hum response to Xi Jinping’s and Joe Biden’s meeting.

Are There Tradable Aspects of China Being More Agreeable?

Xi told Joe that although China’s goal is to bring Taiwan under mainland Chinese control that they would not use force to accomplish this. Nevertheless, there were no promises in regard to they expansion across the South China Sea. Military analysts had been saying that China was going to have a sufficient military advantage in the area in a few years that they could probably invade and take Taiwan. Biden’s resolve in confronting this and export controls on high tech computer chips also have had something to do with any changes in Xi’s thinking. What is potentially tradable is any reduction of risk for Taiwan and its industries, US investments in China like Apple, and possibly any easing of the ability of US companies to do business in China.

The bottom line though is that Chinese promises are good as long as they are good and then they go away.