China Hasn't Copied the 'Soft Power' Blueprint – Yet

A quick quiz... More about 'soft power'... The U.S. is still on top... Why China stopped the world's largest IPO... 'Inside every innovation is a small rebellion'... China hasn't copied the 'soft power' blueprint – yet... Dan Ferris answers your questions...

Ask yourself these three easy questions...

They're all you need to know (for now) about China's quest to replace the U.S. as the global superpower...

1. Who or what is your favorite Chinese rock star, actor, TV show, or movie?

2. Can you speak a word – other than "ni hao" (hello) – in Chinese?

3. What are three Chinese companies whose products you've used in the past week?

If you're like almost everyone outside of China who isn't of Chinese descent – or maybe if you're a Sinophile (a big China fan) – you probably drew a blank on all of these questions.

That reality carries huge implications about China's place in world order... for America's continued "winning," as I (Kim Iskyan) described two Fridays ago... and for your portfolio.

Let's look at China's 'hard power' first...

China has the world's largest army (50% more troops than the U.S.), four times the population of the U.S., and the third-largest number of nuclear warheads.

Depending on how you tally it, China's economy is either the world's largest or second-largest (behind the U.S.) – and it has been doubling in size every eight years for decades...

And China's share of global economic output has risen around 10-fold since 1980... It's the biggest trade partner of around two-thirds of all countries on Earth.

Based on China's rising economic and military might – what's called "hard power" – it looks like just a matter of time before it overtakes the U.S. on many fronts... and in turn, sits at the head of the world table.

But China's Achilles' heel – as it seeks to deepen and broaden its geopolitical, economic, and military influence throughout the world, and challenge America's world-leading position – is "soft power."

The soft power of the U.S. ensures that it will keep winning as the global superpower for now...

Meanwhile, China will keep struggling to catch up.

As I explained in the October 30 Digest, soft power is how a country's ideals and values are conveyed, transmitted, and spread... how a nation's government, companies, and people treat their friends and enemies... and how it does business in general.

It's "cool kid" charisma... It's what attracts people and makes them want to work with you and be on your team. Soft power is the flip side of what the bully uses to get his way – fighter jets, steel-toed boots on the ground, and bullets.

The most enduring empires over time have cultivated – and maintained – their position with a deft combination of both soft and hard power.

The British Empire was on top of the world for so long because it was the home of industrialization, the world's largest navy, and the currency that everyone wanted in their pocket... And at the same time, it also had the royal family, Shakespeare, the English language, and a unique brand of corporate imperialism.

A rare blend of soft power and hard power continues to ensure that the U.S. is on top of the world... for now, at least.

It has the world's reserve currency, the U.S. dollar (again, for now)... Hollywood... the world's most powerful military... George Washington... Amazon (AMZN)... prosperity... the New York Stock Exchange... Tom Cruise... and the language that an estimated 1.5 billion non-native speakers are learning.

But as I wrote previously, the American soft-power brand has taken a beating over the past four years. It remains to be seen if a new president will be able to put the pieces of America's soft power back together.

With that said, China has all the ingredients to become a soft-power superpower...

It has 4,000 years of imperial history and the Great Wall of China. Plus, it's the cradle of Taoism and Confucianism.

Video-sharing social networking service TikTok, which is used by nearly one-third of Americans, is one soft-power success for China.

Entertainment and social media company Tencent (TCEHY) is another... It's by far the biggest player in the global gaming industry. China has also made some inroads into artificial intelligence and other technology (though admittedly, often on the foundation of stolen intellectual property from the West).

The country's Belt and Road Initiative – through which it's pumping hundreds of billions of dollars into infrastructure and development projects to create a 21st-century Silk Road in roughly five dozen countries – is like a reimagined Marshall Plan on steroids.

And Chinese food – though very different from the real thing – is a staple of strip malls, fine dining establishments, and street food stalls the world over.

But the pieces of China's soft power aren't fitting together...

An early October poll by the Pew Research Center concluded, in formal terms...

Views of China have grown more negative in recent years across many advanced economies, and unfavorable opinion has soared over the past year.

The sharp, recent decline in how people around the world see China is largely due to its handling of the COVID-19 pandemic. But China's reputation and influence – key soft power ingredients – were punching well below their weight long before a guy ate a bat in Wuhan.

One big challenge is that the values and beliefs that China is conveying don't have a lot of natural buyers.

Authoritarianism as a political strategy isn't a magnet of hearts and minds. Neither is cracking down on hundreds of thousands of pro-democracy protesters in Hong Kong, which the New York Times in August called a "soft power failure."

Democracy, opportunity, and freedom of expression attract and compel... but banning Winnie the Pooh because of memes likening Chinese leader Xi Jinping to the pudgy pretend bear (as China did in August 2018) does the opposite.

Similarly, barring the National Basketball Association from Chinese airwaves for a year (as the Chinese government did last year) over a tweet by an American basketball executive in support of Hong Kong protestors repels as well.

So does the perception abroad (or reality domestically) of what might have stopped what would have been the world's largest initial public offering ("IPO") ever, Ant Financial, just recently.

As Stansberry NewsWire analyst Nick Koziol reported last week when Ant shares were delisted in Hong Kong and Shanghai...

The suspension comes after Chinese regulators summoned Ant's management team for a last-minute interview yesterday.

My friend and True Wealth Opportunities: China analyst Brian Tycangco talked more about this ordeal with our colleague Jessica Stone recently, as you can see right here. (It's also featured below in today's video section.) Brian said that Chinese regulators want new fin-tech companies to "start sharing in the burden" of a growing number of consumer loans.

The rigidity and conformity extolled by the governing Chinese Communist Party is bad for soft power...

A longtime China watcher recently told me...

Inside every innovation is a small rebellion, and that's a cardinal sin in today's China.

That also helps explain why homegrown international Chinese brands rarely exist. You won't find any Chinese versions of McDonald's (MCD), Amazon, Tesla (TSLA), or Netflix (NFLX) that beam out to the world.

At least as importantly, China just hasn't mastered the seduction of soft power. This explanation in a 2017 article from Foreign Policy magazine has aged well...

China has nearly all the characteristics to lead effectively... despite all this, China still isn't beloved abroad, at least not to the extent that America is...

Few people in those developing nations [which have received Chinese aid and investment] have fallen in love with China the way they might fall in love with the United States. This is largely because China's pop culture lacks emotional, artistic, or sex appeal.

Or as the New York Times wrote in August 2019...

President Trump isn't going to win any trade wars because people in China love the "Transformers" movies or watch "Game of Thrones," but American mass media and other cultural exports increase people's familiarity and warmth with the country's ideals.

China doesn't understand soft power – yet...

But it has been watching – and China has repeatedly proven that it's really good at copying others.

At least as importantly, China has time – and is planning accordingly. While American politicians think in terms of electoral cycles and Western companies are heavily focused on the next quarter, China plots in calendar blocks of centuries.

And as Brian wrote as part of our colleague Steve Sjuggerud's excellent China research service, many of Asia's economies are dominated by businessmen (and businesswomen) who can trace their roots back to China. A thriving diaspora population is a potent tool of soft power.

Similarly, a Chinese political risk analyst in Shenzhen told me last week...

China is learning that soft power is one of the few things it can't buy. It won't be overnight, but it will get it.

Here's the thing, though... Once China does master soft power, there won't be any space left for the U.S. at the head of the table.

Want a few signs that this move is getting closer?

You'll see schoolchildren all over the world – in government-supported schools, rather than only private ones – learning Chinese... movies produced by Chinese studios will regularly make it to the local theater (once we can go to the movies again)... and China will be able to attract the best and the brightest brains to support its investments in technology.

The power to import talent from the rest of the world is what historian Niall Ferguson calls America's "secret sauce"... It's what makes Silicon Valley so powerful. The day that China is able to replicate that – not just the shiny buildings, but also the spirit and brainpower – is when the U.S. will have a real soft-power challenger.

At that point, it will become an even more attractive investment destination than it already is (which is why we have an entire research service focused on China)... as it continues to improve its ability to more effectively compete in the global marketplace of ideas, products, and innovation.

Let me be clear... America's soft power will have a long half-life – that is, it will be a while before aspiring millennials from Bangalore to Buenos Aires stop watching the sitcom Friends and internalizing the American ideals it conveys.

But in the meantime, China is making up for lost time.

Why Beijing Is Blocking the World's Biggest IPO

Jessica Stone checks in with Brian Tycangco of True Wealth Opportunities: China for his analysis on why Beijing shut down hopes of Ant Financial's potential record-setting IPO...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

And if you are interested in more research on China, we suggest you consider a subscription to True Wealth Opportunities: China. Click here for more information.

New 52-week highs (as of 11/9/20): Analog Devices (ADI), Cresco Labs (CRLBF), Corteva (CTVA), Curaleaf (CURLF), iShares China Large-Cap Fund (FXI), Green Thumb Industries (GTBIF), Ingersoll Rand (IR), KraneShares Bosera MSCI China A Fund (KBA), Match Group (MTCH), CloudFlare (NET), Intellia Therapeutics (NTLA), ResMed (RMD), Starbucks (SBUX), Trulieve Cannabis (TCNNF), ProShares Ultra FTSE China 50 Fund (XPP), and Zebra Technologies (ZBRA).

In today's mailbag, Dan Ferris' answers questions stemming from his trade idea in Friday's Digest, and we share a note about Kim's previous "soft power" essay. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Hey Dan, I love listening and learning from you but in your topic regarding the dollar rising in the short term period and buying TLT or investment grade bonds... Wouldn't a rising dollar cause yields to go up causing bond prices to come down. I know it should be rising yield that's causes the rise in dollar due to currency demand.

"Thanks, love listening to you." – Paid-up subscriber Jed G.

Dan Ferris comment: Great question, Jed. If a lot of folks want to borrow, that could push interest rates up as investors compete for available funds... but there's no shortage of available funds, and the Fed is committed to its policy of low interest rates.

If investors want to own U.S. dollars more than borrow them (which is what I'm betting on here), they'll purchase U.S. dollar-denominated financial assets. Demand tends to push prices up, pushing yields down.

"Dan, not to sound too dumb, but if you invest in a 20-year bond such as this, do you have to hold it 20 years or can you sell it in 6 months as it increases in value? I am new to investing on my own so I am still learning. So far I have just invested in typical stocks." – Paid-up subscriber Pat M.

Ferris comment: Not dumb at all, Pat. Thanks for the question... No, you don't have to hold them for 20 years. You can hold them for 20 seconds if you want. I'm figuring it'll be more like 20 days or more for this particular trade... But we'll see how it plays out. So far, it hasn't been so great, but we'll see how it goes over the next month or so.

Those longer-term bonds in TLT tend to jostle around in price more than shorter-term bonds. That's why I recommended them instead of the shorter-term Treasurys.

"A quick note to say thank you to Dan and his team. I have migrated 50% of my stock + assets to align with Dan's portfolio and recommendations. That half of my portfolio is outperforming the other half. In particular, I have seen great benefit in Dan's buy and hold forever recommendations. My stress is more than cut in half.

"As for the latest feed that includes this short-term opportunity with U.S. currency, and more specifically Dan's expanding incorporation of macroeconomics, [it] has me quite interested.

"Full speed ahead Dan!" – Paid-up subscriber Scott R.

Ferris comment: I'm glad it's working out for you, Scott. Thanks for becoming an Extreme Value subscriber. Reducing your stress levels in 2020 is quite an achievement!!

"Thanks for your reference to Kim Iskyan's piece on soft power. I have assigned it as required reading to my Columbia class on American foreign policy in the section discussing the possible decline of the global power of the United States.

"P.S. I've made a modest amount of money on your suggestions and will probably follow suit on TLT." – Paid-up subscriber Roy L.

Good investing,

Kim Iskyan
Dublin, Ireland
November 10, 2020