What a Trump Presidency Means for This Investing Megatrend
Editor's note: American investors are worried about the effect President Trump will have on all corners of the market.
That's especially true for our relationship with China... so True Wealth China Opportunities editor Steve Sjuggerud recently sat down with Peter and Tama Churchouse for an exclusive interview.
Peter has spent more than three decades in Hong Kong investing in stocks and real estate as head of Asian research at Morgan Stanley. His son, Tama, spent nearly a decade working for an investment bank in Hong Kong.
In the first part of this conversation – originally published in the January issue – Steve, Peter, and Tama discuss the "One China" policy and the significance of steep tariffs on China...
What a Trump Presidency Means for This Investing Megatrend
An interview with Steve Sjuggerud and Peter and Tama Churchouse
The biggest concern that American investors in China have today is Donald Trump.
So I sat down with two legends of investing in China – Peter and Tama Churchouse – to find out what the opinion is on the ground in China about Trump.
Peter is a New Zealander by birth, but he has lived in (and invested in) Hong Kong and China for 35 years. I first learned about him in the early 1990s when he was the managing director for Asia at Morgan Stanley. He wrote a weekly research piece back then that was fantastic... Porter Stansberry and I considered it required reading when we were starting out.
Tama Churchouse is Peter's son and a brilliant investing mind in his own right. He worked for JPMorgan before teaming up with his father to write an excellent monthly investing letter called The Churchouse Letter. Tama always has a few good investing ideas up his sleeve – and they're typically ones outside of his dad's expertise. They're a great team.
Peter and Tama were in the States for a couple days, and we sat down for a brief chat about Trump and his aggressive stance toward China. Fortunately, I recorded the conversation to share with you in this month's issue...
This is an unusual format for an issue. But their unique, boots-on-the-ground take on Trump and China is too important not to share. And their perspective, as residents of Hong Kong, is one we Americans rarely hear...
Trump and the 'One China' Policy
Steve Sjuggerud: Peter and Tama, it's always a thrill to speak with you. Donald Trump has come out of the gate with some aggressive remarks and actions against China. I want to hear your perspective on Trump from the view of living in Hong Kong and spending so much time in China.
You have been analyzing Asia for how many years? Is it 30?
Peter Churchouse: 35, yes.
Steve: So you have seen a lot of politics come and go in the region. The first place we could start is with Taiwan... Trump immediately took a phone call from Taiwan's leader when he was elected. This angered China's leaders. So can you give us the significance of this from your perspective?
Peter: I think it seems the president is trying to use Taiwan as a bargaining chip when it comes to trade negotiations and tariffs and exports and so on and so forth. I think that negotiating chip is going to go seriously flat. The simple reason is that Taiwan and China have a very, very close relationship these days in terms of economics and social contact.
You are now getting hundreds of flights per week going back and forth [from Taiwan] to China. There is a close relationship between these two countries or these two states. The Taiwanese have invested massively in manufacturing capabilities in China. You have got hundreds and hundreds of thousands of Taiwanese living and working in China.
Now if Trump comes along and starts upsetting that balance, I don't think the Taiwanese are going to support him on any of this. They want the status quo to stay as it is. They don't want the status quo to be upset.
Steve: The Chinese want the status quo... The Taiwanese want the status quo... So Trump trying to use the "One China" policy as a bargaining chip is essentially useless?
Peter: I don't think it is going to be successful if that's what the leadership in America thinks they are trying to do. There are other ways that are probably more productive to get China to come on board and deal with some of these issues that they may be concerned about.
Steve: Do you think this phone call was somewhat orchestrated from the start? He knew what he was doing from day one when he took that phone call, no?
Peter: I'm pretty sure he did. He knew that call would upset the Chinese. This is because China still lives under the promise that it's one country and that one country includes Taiwan. And of course, now China has sovereignty over the tiny little enclaves of Macau and Hong Kong. The big thing that China wants to do over the next five, 10, 20, or 30 years is get Taiwan back in the fold as being part of one nation.
Tama Churchouse: Yes. And also, let's bear in mind this looks like a typical Trump negotiating tactic... which is to come in with an extremely outlandish initiating position. The position he has tried to establish here is questioning the sovereignty of China over Taiwan.
That is not up for discussion by the Chinese. It is not a chip. It is not on the table. It is not there, and it won't work as leverage. As Peter said, the Taiwanese aren't even looking for Trump's support in this regard. So I think that conversation is going to be over quickly.
Steve's Thoughts
The One China policy is the "diplomatic acknowledgement" that there is only one Chinese government.
Because America "diplomatically acknowledges" that there's only one China, we have no diplomatic relations with Taiwan. (A phone call from the Taiwanese leader to the American leader sure counts as diplomatic relations.)
It's all a delicate dance... Taiwan's government claims it's an independent country. And the U.S. maintains a "robust unofficial" relationship with Taiwan. But because of the One China policy, any country that wants diplomatic relations with mainland China must NOT officially recognize Taiwan as a sovereign nation.
From the perspective of an American, Trump is really pushing hard against China. But from the perspective of someone living over there, China isn't worried about Trump.
Trump and the Chinese Tariffs
Steve: The One China policy is issue No. 1. Issue No. 2 is Trump's call for tariffs of 35% or 45% on goods coming into the U.S. from China. When I think of this, the first thing that comes to mind is the Smoot-Hawley tariffs, which many people say were the cause of the Great Depression, as the U.S. essentially kicked off a trade war. It seems like that's what Trump's talking about here. So what is your perspective from Asia?
Peter: Well, I think he is using this sort of total approach... We are going to put tariffs on EVERYTHING from China at 35% to 45%. When in actual fact, I think what will end up happening is that there will be some sort of negotiations on certain products.
For example, steel... Most people around the world recognize that China is dumping steel into the world markets at what you might call unfair prices. So [tariffs on] steel is one thing that I think will get support from a lot of people around the world. But the rest of it? No.
The fact of the matter is, you are buying your TVs and your computers and your mobile phones and everything a heck of a lot cheaper today then you were 10 or 15 years ago. And why is that? It's because they have come from China and other parts of Asia where the manufacturing costs are that much lower.
If you start slapping 35% taxes and tariffs on all this stuff, it means you are raising the price on the American consumer. So in a way, that is hurting the people who voted for Trump. It is not really helping businesses.
The other thing is vast numbers of American companies – auto companies, computing companies – have a lot of business in China itself... either manufacturing themselves or selling into China.
For example, look at aircraft manufacturer Boeing... If the U.S. government suddenly slaps 35%-45% duties on all exports out of China, what are the Chinese going to do? Potentially turn around and say, "Right, we are not going to buy any Boeing aircraft. We are not going to buy this, that, and other products out of the U.S."
This is really dangerous territory. You can focus on areas where there are genuine concerns like steel, but not a blanket tariff across the entire country.
Steve: I wonder if Trump just hasn't been to China in a while... Because when you took me around China a couple years ago and we visited companies making shirts, what did they tell us?
Peter: They told us basically they had moved into Vietnam and Bangladesh where the wages and salaries of workers are a third or a quarter of what they are in China. So in a way, the story about China producing all these cheap low-end goods like shoes and t-shirts and jackets and so on... that story is already gone.
It has gone somewhere else. It has gone to Vietnam, Bangladesh, India... And it will be hitting into Myanmar, Laos, and Cambodia. So that story has disappeared. They are barking up the wrong tree if that is what they are thinking.
Steve's Thoughts
The Smoot-Hawley Tariff Act of 1930 was enacted to protect American jobs from foreign competition. The tariff rate was roughly 60% on 3,200 goods imported in the U.S. At first, it seemed like a success... Then other countries either raised tariffs on us or started trading with other world powers instead of with us. The result was disastrous.
Overall world trade decreased 66% between 1929 and 1934. Unemployment was 8% in 1930 but jumped to 25% in 1932-1933. Not all of that can be attributed to Smoot-Hawley, but it did exacerbate the Great Depression.
If Trump succeeds in enacting tariffs on goods coming into the U.S. from China, it could start another trade war. And prices for consumers purchasing any of those items could rise.
One of his reasons for these tariffs is to entice American companies with plants in China to bring their manufacturing home... returning jobs to America. But if that happens, prices for consumers would likely still rise due to higher production costs in the U.S. versus Asia.
Besides, Americans think that we are importing cheap Chinese goods, which is no longer the case – at least at the level it used to be. The low-cost production we tend to think about is moving out of China and to cheaper places in Asia.
Editor's note: On Wednesday night, Steve is hosting a free live event where he'll explain the incredible opportunity setting up in China. He's calling this story "the investment prediction of my career." And Steve is even giving out a bonus recommendation – live on air – for all attendees. Again, this event is completely free for you to attend. Reserve your spot here.