Will President Obama Be Able to Stand Up To China?

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While U.S. Presidential headlines dominate the airwaves this week, there is another "election" under way thousands of miles from our own shores that may be even more important when it comes to your money.

The 18th National Party Congress is now underway in Beijing. Attendees are girding for a week of symbolic posturing and speeches, the culmination of which will be a new set of Chinese leaders and a new Chinese President for the next 10 years.

While this is a complicated process when things are running smoothly, this particular Congress is really critical. China is a mess. Recent economic challenges and corruption on a scale that has boggled even the most jaded of insiders are at the top of the "fix it" list.

Outgoing Chinese President Hu Jintao's replacement and China's presumptive new leader looks to be a man named Xi Jinping.

At 59 years old, he's a power player with close ties to the People's Liberation Army (PLA).

While he's not a military man per se, as the son of a revolutionary general he currently holds several significant offices that give him wide-ranging and very significant exposure to both the State and Communist Party.

What's significant about this is that there are three parallel strands in Chinese government structure: the Communist Party, State, and Military.

The Party and State are deeply intertwined, but the military is less so, except at the top levels of leadership. Consequently, China's new leader is intimately familiar with the Chinese military and also the likely new head of China's Central Military Commission.

I'm not so sure we've ever seen this exact combination before and I think it's going to challenge President Barack Obama in ways that he hasn't thought through yet.

China's Drive For Respect

China is not only more powerful economically, but the nation has grown significantly more confident in recent years, especially as it fills the tremendous gaps created by the Global Financial Crisis.

China is notoriously secretive about its intentions, but there are a few clues to what President Obama and his advisers will have to contend with.

For example, Mr. Xi spoke in Washington earlier this year at a luncheon for executives and diplomats as part of a five-day tour.

In his remarks, which were viewed as a major policy statement, Xi explicitly said that there should be "respect" for both Chinese and United States interests.

He also noted the need for "increasing mutual understanding and strategic trust."

That sounds innocuous enough if you take his remarks at face value in English. But if you translate them into Chinese diplomatic speak, a very different message was delivered.

I've talked about this before in Money Morning, highlighting the cultural context behind key phrases and language delivered by Chinese and Japanese diplomats for international consumption.

And that's really what Xi's statement was, a carefully worded, exquisitely postured message. His presumptive appointment is also a warning of sorts.

I say this because the words "mutual" and "respect" are about as loaded as they come, especially when they are used in the same sentence.

Mr. Xi was not playing to the American media nor even our leaders. What he was counting on was that his message would be re-translated into Chinese.

He knows that respect in the Chinese sense of the word involves the mutual acknowledgement of position and, more importantly, status.

According to Chuck Gitomer, a policy and political expert who has spent decades studying the Chinese, there's a sense of victimhood that the Party has cultivated over the decades that China was subject to foreign slights and indignities when they were weak.

In conjunction with the nationalist card, which is recently particularly visible in China's irredentist position taken over the Diaoyu/Senkaku Islands, Gitomer notes, "this demand for respect will be reciprocated only when the foreigners meet that demand."

I agree.

So, in as much as Mr. Xi made a statement in Washington, what he really did was put Washington on notice that China expects to be treated as an equal on the world's stage.

Very shortly, we're going to see what exactly he meant by that.

On the one hand, Mr. Xi and President Obama have a golden opportunity to put the currently strained relations between the United States and China back on track. His remarks were intended to convey his willingness to work with the United States.

On the other, he's got precisely the wrong background if that's the case. What China needs is a leader with the authority to make great leaps in progress by taking bold chances to move things ahead, rather than risk being trapped in problematic posturing.

In that sense, Obama's not the guy, either. He is woefully unprepared to move away from the heat of politics and engage in true bridge building.

Instead, what China appears to be choosing is a man who spent the bulk of his career in the Zhejiang and Fujian provinces fostering industrial relations with Taiwan before moving for a few years to Shanghai's political structure, then on to Beijing's political "mother hive."

That means he's had very little international exposure until becoming Vice President. Evidently, though, in his defense, he's making the rounds. The New York Times recently reported that Mr. Xi has visited more than 50 countries since becoming Vice President.

Personally speaking, we know relatively little about him.

For example, Mr. Xi apparently loves American movies. He has visited the United States six times. His daughter, Xi Mingze, studies at Harvard under an assumed name. His wife, Peng Liyuan, is a famous folk singer. But that's about it.

So what does all this mean?

Assuming Mr. Xi does, in fact, become China's next leader when the Congress concludes next week, I think we'll see a few things happen.

We will see posturing internally but not a lot of action nor reform. Mr. Xi's status as a "sent-down" youth is extraordinarily important, notes Gitomer. It buys him significant political capital. His past dealings with high-profile corruption scandals gives him the air of an incorruptible official.

Of course, we know that's not true since his family has accumulated multiple billions of euros worth of investment holdings, but it makes a nice story domestically, especially when the great firewall keeps the masses from finding out too much.

Expect China to continue to buy global resources companies. China's growth will continue on a pace that's faster than the United States, Europe and likely Japan combined. And it needs fuel quite literally to pull that off.

Mr. Xi will aggressively encourage offshore globalization. The nation is anxious to flex its economic muscles.

Unfortunately, China is also anxious to flex its military muscles. That means we'll also likely see more nationalistic posturing in international trade and politics. The Diaoyu/Senkaku Islands are but a small insight into how mainland China views the world. Similar disputes with the Philippines, Vietnam and even Korea offer a glimpse into an increasingly hawkish contingent that's coming to the top with Mr. Xi.

Since China believes it is a rising power while the U.S. is a declining power, the danger is growing that China will actually use military force to protect its interests. Taiwan is not the prize, as most Westerners believe; being able to engage American carriers in deep water while forcing them to "stand off" is. Long range weapons systems are a top priority at the moment.

Here in the U.S., this will set off all sorts of alarms in the military industrial complex, not to mention inside the Beltway.

But longer term, it's probably not worth the worry. When China realizes that international behavioral norms are worth more money, they'll come to their senses. They're as pragmatic as any capitalist in that sense.

And finally, pay careful attention to regional economics.

China is openly seeking regional economic domination while courting long- held U.S. alliances with Singapore (wary of the communists), Australia (wary but hopeful of the economic hegemons), and South Korea, (they understand what being forced into vassal state status is about) for example. Even Japan is viewed as a resource behind closed doors, rather than the enemy, as is commonly perceived by citizens around the world.

An Investor's Guide to the New Chinese Leadership

When it comes to your money there are a couple of key takeaways.

First, while investing in China directly can be great if you've got a long enough time horizon and a willingness to tolerate volatility, the better plays are going to be big, state- involved entities, particularly if they're energy related.

CNOOC Ltd. (NYSE ADR: CEO) is a good example. It's China's third- largest energy player and a leading offshore/onshore producer that accounts for nearly a million barrels a day of production. It's got emerging markets exposure and, with close ties to Beijing, is a likely avenue for overseas acquisitions.

Second, U.S. and European defense contractors may pick up significant business if China does, in fact, become more aggressive in the region. I particularly like Raytheon Co. (NYSE: RTN) because of its diverse offerings and advanced weapons platform logistics.

The key here is that investors can play China's emergence while enjoying the benefits of stricter reporting requirements and a greater probability of honest balance sheets.

Third, consider the Chinese Yuan itself. You can open Yuan- denominated savings, time and demand based accounts directly through Bank of China branches in the United States, Canada and Europe. Or, perhaps an investment in the Chinese Renminbi deposit account through Everbank is more your speed. There are also RMB Exchange- Traded Notes.

China wants the Yuan to be a hub for international trade and considers Yuan- denominated accounts an important component of that process.

That's why the nation has already signed 1.3 trillion Yuan of currency swap agreements with 14 nations, including Russia, Japan, Brazil, Australia, and Turkey to name a few, according to Forbes and The Wall Street Journal. These agreements make it increasingly powerful at a time when Western fiat currencies are failing.

In closing, the situation is obviously fluid. However, I'll do my best to update you on what's important and what's new.

I'll also continue to identify what I believe are the best investment opportunities created by circumstances like this that are not yet understood in the Western world.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Deborah G Flynn | November 9, 2012

    Obama can't stand up to his wife or David Axelrod what makes you think he can stand up to China? He's a limp wristed left wing Ideolog that doesn't have America's best interests at heart. In fact he will cave to any Communist or Soicalist dictator because he has unresolved issues regarding his Communist father who abandonded him. He will continually seek favor with them and in the process sell America down the river.

    • 000054699603 | November 9, 2012

      Obama is destroying this country. Period.

    • Fred | November 9, 2012

      You obviosly saw that stupid propaganda movie put out by the teabaggers. You're an idiot, but don't worry Obama will help you too.

  2. Rayburn Deville | November 9, 2012

    We all need to pray for our president and our country. This is the times where President Obama will need our prayers and support.

    • Rusty Brown | November 11, 2012

      Imaginary conversations with a non-existent entity. Yeah, sure. That will help.

  3. mark chan | November 9, 2012

    President Obama does not need to "stand up" against China because China is not bullying America. He just needs to deal with his Chinese counterparts politely and on equal footings.

  4. Publius | November 9, 2012

    Mark Chan – so much to learn, grasshopper. Read "The Art of War," and get back to us.

  5. Gus Ortega | November 9, 2012

    We should focus on America, America America

  6. L. David Carlo | November 9, 2012

    Although I am not eligible to cast the first stone nor am I the sharpest knife in the drawer, I would like to briefly share an observation; good , bad or indifferent; I.E. life is somewhat like driving in traffic. There are many makes of cars and many of them are manufactured in foreign countries and many are driven by people of different nationalities.

    I suggest that vehicles being driven along roadways mirrors the course of nations as well as those who would profess to be capable of leading our country. Such leaders can be compared to the drivers we all witness during our daily travels. Have you ever tried to change lanes only to have the adjacent lane driver speed up to prevent your entry in front of his vehicle? Have you ever noticed a driver who has tipped back one to many on the road, or watched the Cops show on television during a car chase with the subsequent crashing of vehicles ? Noticed any of the really large trucks,and buses ?

    I lived in China for nearly six years, which substantiates me with no claim of expertise about China/U.S.A. relations, however I can say that very nearly all of whom I met and worked with were of good character and are similar to all people whom I have likewise been in contact with here in our good old U.S.A. Yet those who would profess to have plans and would be leaders are driven through traffic by chauffeurs in motorcades, and are ready to throw stones at China on their first day in office indicating a complete lack of common sense. Where's Will Rogers when he's needed the most ? just like driving through traffic, which incidentally i did while living in China. There's no place better than our U.S.A.

    • mark leonard | November 15, 2012

      Perhaps the use of our peteochemical industry to export the technology to convert methane to driving fuel

  7. dourdan | November 9, 2012

    Dr. Hong Kong @ 410-938-3800

  8. James | November 9, 2012

    China is not aiming to go to war with any country.

    On my trip to China in 2009, our Chinese tour guide said, " Chinese are basically peace loving people." This theme rings true when you observe what the Chinese are doing in China and internationally, except for Japan, which China detests. The country will not let Japan forget the atrocity of the Nanjing Massacre in 1937 when 300,000 Chinese people were slaughtered. This is the predicament Japan finds itself in its trade relations with China.

    Our Chinese tour guide shared another enlightening piece of insight to China. He said, "you see in front of buildings in China the statue of the lion with his paw on a ball. Do you know what it symbolizes? The lion is China and the ball is the world. China's aim from ancient times is to dominate the world."

    Wow! That was my reaction. It is something to think about. China has taken all kind bumps and twists and turns the last serveral centuries by other countries and itself, but it finally is in a position to become a world power.

    The 21st century is China. It has come of age to become a dominant force. The rest of the world must come to terms with China, like it or not.

    And don't discount the U.S., the land of the free and the home of the brave. The recent presidential election was something to behold: two strong candidates boldly fighting it out, tooth and nail for their causes peacefully until the very end. It was true democracy at work. I was mesmerized and glued to CNN watching the election results seeing how the different States vote.

    Aren't you glad you live in the U.S. where true representation rules and not in China where the country is run by a special elite group?

    In his victory speech, President Obama said, "…. the best is yet to come." I strongly agree. The next four years are going to be good for the U.S.

    The U.S. was in a civil war the last thirty years between the rich and the middle class. The rich was winning by changing the laws and scheming to suit themselves at the expense of the general public. That has got to change. We are not there yet, but we are getting there. We are heading in the right direction.

    President Obama's home base is Illinois, the land of Abraham Lincoln, the great emancipator, who freed the blacks from bondage to the whites. That was Lincoln's legacy. Obama's legacy is less majestic, but it is appropriate for the times: closing the gap between the rich and the middle class.

  9. Harry | November 9, 2012

    It is one's world view, or you could say one's philosophy that determines how they will rule. this world view is strongly ingrained in our yonger years by our mentors such as parents,teachers,friends, associates and the culture around us.

    In the next four years you will see Obamas world view come into play in a muich stronger way than his first term. Now that he has won the conveted second term, he can go all out in trying to impose his world view and bring about reforms that will have a life changing effect on America for decades. It is here I will list some of the influential mentors in President Obamas life.

    Father -far Left leaning or out right communist
    Frank Marshall Davis – a card carring communist brought into Obamas life to mentor him for 5 yrs. by his father
    Bill Ayers – who had planned to bomb the pentagon and did blow up a police station associated with Obama

    Jeremiah Wright a far left leaning preacher who Obama tried to distance himself from in his first term. It was determental to have an association with him now that he was President

    In University one of his professors (can not recall his name) was a far left socialist who took Oboma under his wing.

    Now, if you think the influence of those stated above have not had an impressionable influence on Obama , I have a bridge in Brooklyn I will sell you. Check out the above and then sit down and put yourself in Obamas place over these early fromative years of his and draw your own conclusions. If what I have stated here has even just 50% validity, then look out baby you aint seen nothing yet that is going to take place in America to its determent . The year 2016 is going to see changes in America that will have the far left wing smiling. Oboma will have the ball rolling in their favour and over the next few decades it will be difficult to stop America from becoming poorer and depended on big brother gov't. If you are alive in 2050 you will witness a collapsed America. All will be poor and worship big brother gov't if they want any kind of food on their plate. Big socialist America leaders will say jump and the populace will say how high. America will have sold out its heart, soul and spirit and will become puppets to the state.

    You will look back and see the dumbing down of America and to a large extent the whole western world and realize to a large extent the pivotal point to going down this road was the Obama years in the position of power in the USA. Maybe what I have stated above will occur much quicker than I expect. or maybe Americans will and see what is happening to them and in a panic elect some kind of far right dictator that will also have a disasterours effect. Wake up America you have become a bunch of brain dead sheep that are being led to the slaughter. I fear you are going to be whipsawed to the left and right extremmes over the coming years; America will be left in ashes. Right now Ameicans are going down the path of increasingly far left socialism that promises to meet everyones needs for a paradise. America is about to reap the rotten fruits of that path they have chosen to take.

  10. major | November 10, 2012

    NO……..China applauded his re-election becuase they know he is stupid and can be manipulated to do what they want. Obama is a pawn and a puppet whose strings are being pulled behind the scene. He never could have gotten where did without the huge cast of behind scenes players who were put there by his handlers.

  11. Nick | November 10, 2012

    L. David Carlo | November 9, 2012 , I percieve you are indeed a great man of wisdom and have no doubt about your comment about Chinese people being correct , however Communist dictatorships sometimes fall into the wrong hands and thats when things can get dangerous .

  12. Martin | November 11, 2012

    Thank you for another fine article. But I don't think Obama or the US have much to worry about. The general culture in China and other Asian societies is far more regimented than in the US, where free-thinking, inventive individuals will continue to produce the marvellous innovations that will keep the world's largest economy ahead. Show China respect, of course, as the world's most ancient civilisation. And remember that although they see themselves as the center of the universe (the coryphaeocentric posture) , it's been a long time since their army attacked anybody else and I doubt that they will do so again any time soon. Islands near Japan will only become dangerous if the US overreacts and fails to broker a sensible deal for both sides. But stop worrying about losing control or the dollar's demise versus the Yuan. What sane individual would put their trust in an artificially controlled currency in a political system without checks and balances and that's a whole lot more corrupt (yes, it's true!) than the west.

  13. ned | November 14, 2012

    Wakeup America.//.. Only Dead fish go with the Flow..//… Bility is a good thing but Stability is even Better..

  14. Don Moseley | November 16, 2012

    Fitzgerald,
    I bought NetQuin a year or so ago when you recommended it. Are you still holding it? Or, did I miss a note to dump it? I'm still holding several hundred shares and am a little nervous.
    Don Moseley

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