"The Race In This Cold War Is Not About FX Devaluation; It's Technological - Like The Ones Before"

By Marcel Kasumovich of One River Asset Management

“Membership in the WTO, of course, will not create a free society in China overnight or guarantee that China will play by global rules,” President Bill Clinton said in pitch-mode. “But over time, I believe it will move China faster and further in the right direction.” Leadership requires risk. Being in a position of command demands that you adjust to the new realities decisively, tossing ego aside. WTO may have been the inevitable start of the next cold war. Or it may have been, as Clinton intimated, the alternative was worse. No matter - a strong China is a reality.

China seized its moment with rapid export growth, a well-narrated story. The world economy has advanced at a 5% annualized pace since 2000, growing to $100 trillion last year. China’s goods exports, at $2.7 trillion, may not seem particularly exciting as a share of world GDP. But the growth since 2000 has averaged 12% per annum. And China exports share of world GDP leapt 4x since then. It is not nuts and bolts, either – it is higher value-add. China export complexity is now 25th place, on par with rich European countries and up from 54th in 2000.

“I believe that my bilateral meetings served as a step forward in our effort to put the US-China relationship on surer footing,” Yellen said after two days and ten hours of meetings. “We believe that the world is big enough for both of our countries to thrive,” the Secretary of the Treasury emphasized in a clear effort to deescalate tensions. Yellen is left to navigate growing frictions, inheriting a shaky position. She also left plenty of those behind. That’s the job – decide to take the pain today for better outcomes tomorrow or punt it forward.

China has a voice again. And Beijing is using it – mostly through actions. Yellen’s visit follows the China Commerce Ministry imposing export restrictions on two key inputs for semiconductor production - gallium and germanium. Those start August 1. It’s not a ban - Chinese exporters will now need licenses to explain how the metals are being used by importers. But it is a clear warning shot. The political playing field is more level than in 2000 or even 2018. Yellen getting on a plane to visit Premier Li already made that point, emphatically.

Royalty? China’s launch up the value curve is evident in subtle ways - like royalties and licensing. China came first in nuclear fusion patents on a careful survey by Japanese researchers. Patent trade has exploded - China royalties’ exports are up nearly 100x since the start of WTO. It has never been about FX devaluation as the path to prosperity. And now it is explicit - China policy is setting CNY to higher valuations against the USD than where it trades in the market. The race in this cold war is technological - like the ones before.