What You Need to Know About Obama vs. Hu

If you told the man on the street that Hu met with Obama at the White House this week, odds are the response you'd get would be: "I don't know -- who?" And you could go on like that, in a lengthy routine reminiscent of Abbott and Costello.

According to a recent Pew Research Center survey, 65% of Americans see China as an adversary. But few have taken the time to get to know China's myriad political, economic, and social realities. Incredibly, 47% of Americans already believe China is the world's leading economic power, although its GDP is less than half that of its U.S. counterpart, and its GDP per capita is one-tenth that of the U.S.

In fact, China remains a largely poor country with a variety of challenges ahead of it. Still, many Americans view China as a job-stealing, power-hungry monolith -- to borrow a phrase from economist Patrick Chovanec. This is why high-profile meetings like this week's summit between President Hu and President Obama are so important. Not only do they have the chance to build understanding between the two countries, but they are critical toward creating a long-term economic and political partnership that would be mutually beneficial. 

Unfortunately, I don't expect much to get done this week on either side. The issues are too contentious, too politicized, and neither side (wrongly) sees much incentive to negotiate.

On currency
This has been the highest-profile U.S./China issue for the past few years, with Obama having noted back in the 2008 presidential debates that "we should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper." While China does manage the value of its currency against the dollar, the issue is not as black and white as U.S. politicians make it out to be. If China were to allow its currency to strengthen, it would likely lose millions of manufacturing jobs to lower-cost countries in southeast Asia (note that those jobs would not return to the U.S.), creating unemployment and unrest in its massive cities. This is bad for China and bad for the world.

At the same time, China realizes that it needs to let its currency appreciate to spur greater domestic consumption -- a key ingredient to sustaining its economic growth. This is why the government has allowed the currency to slowly strengthen. It wants people to feel richer, but it also wants to give China's manufacturing sector time to adapt. Although the pace is not fast enough for the rest of the world, China will not change its policy.

What this means for investors
Profit by buying exposure to the Chinese consumer, and be willing to hold for the long term. And while shorting Chinese manufacturers such as Nam Tai Electronics (NYSE: NTE  ) may seem attractive, given looming currency pressures, the uncertainty of the timing here makes doing so a dicey proposition.

On intellectual property
One worry U.S. companies have about investing in China is that China will not protect their intellectual property, allowing domestic Chinese companies to copy patented technologies without penalty. While this will be a topic for discussion between Obama and Hu, it's hard to figure out what leverage the U.S. might have in any negotiation. Foreign direct investment into China topped $100 billion in 2010 -- a new record -- despite a lack of protections, and General Electric (NYSE: GE  ) announced a number of significant new joint ventures in China this week, including coal gasification plants and high-speed rail projects, where GE will be contributing breakthrough technology. Clearly, companies see so much opportunity in China that they are willing to tolerate the risk of piracy. With that said, I expect China's intellectual property protections to improve over time, if only because China is diving into creating IP -- and that's something the government will want to protect.

What this means for investors
Multinationals will not stop investing in China, and companies such as YUM! Brands (NYSE: YUM  ) are some of the best-priced ways to get Chinese exposure today.

On China's trade surplus
For those who believe China manipulates some of its economic data, it's not surprising that China's trade surplus dropped in December, ahead of these meetings. But despite that, its surplus against the U.S. continues to rise. That's because the U.S. is not exporting what China needs to import: commodities. Still, as with the currency issue, China will not change its tune with regard to the U.S. until it can be assured that lost manufacturing jobs will not lead to unemployment and unrest.

What this means for investors
China will continue to import commodities in 2011 and beyond, and investors should look at the companies that enable this trade. Loan volumes at Latin American trade bank Bladex (NYSE: BLX  ) continue to rise, and the bank is one of my top picks to benefit from Chinese growth.

On North Korea
The U.S. would like China's help in isolating North Korea and putting pressure on the current regime. And while the WikiLeaks cables back in November revealed that China might be open to a unified Korea, the revelation this week that a Chinese company had signed on to potentially invest $2 billion in North Korea looks like a clear stumbling block. From the Chinese perspective, I believe the government is concerned about one thing: 20 million refugees flooding into China, should the North Korean government collapse and leave a vacuum of power. This is why they're willing to perpetuate the status quo, and why they won't be willing to abandon North Korea until a clear solution for a controlled transition is in place.

What this means for investors
It's unlikely that China will let North Korea engage in full-scale war on the Korean peninsula, meaning that panic drops in South Korean stocks when North Korea rattles its saber -- such as when POSCO (NYSE: PKX  ) plunged at the end of November -- are buying opportunities. That said, don't expect resolution to this tense situation anytime soon.

The global view
China and the U.S. will soon be the world's two largest economies, and our evolving relationship will go a long way toward determining what happens next in global politics and the worldwide economy. Unfortunately, despite lip service, neither China nor the U.S. view one another as partners today, and continue to avoid compromise on critical issues in order to pursue their own self-interest. Collaboration will have to happen at some point, but it won't be this week.

Get all of Tim's global stock pick and research by joining Motley Fool Global Gains. Tim's "Global View" column appears every Thursday on Fool.com.

Tim Hanson is the advisor of Motley Fool Global Gains. He owns shares of Bladex. Banco Latinoamericano de Comercio Exterior and Nam Tai Electronics are Motley Fool Global Gains choices. The Fool owns shares of Banco Latinoamericano de Comercio Exterior and Yum! Brands. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (17)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2011, at 9:10 AM, OneLee wrote:

    Thank you for interesting article.

  • Report this Comment On January 24, 2011, at 8:50 AM, JBKirtley wrote:

    If China is intent on keeping their currency artificially low in order to keep its citizens poor and products cheap, then why don't we tariff their incoming goods to a create an artificial cost parity with other manufacturers and tax US dollars leaving the country to make our currency functionally equivalent to the Yuan? Could this not eliminate the trade deficit and allow us to pay down our debt to them while essentially forcing them to reinvest in American projects that create American jobs? We are currently China's largest consumer. Why shouldn't the transaction include some benefit for us?

  • Report this Comment On January 26, 2011, at 10:06 AM, FutureMonkey wrote:

    Listened to the interview with Andrew Liveris (CEO Dow Chemical) yesterday morning. He had some very interesting (mostly self-interested) things to say about US manufacturing base still being the central hub of the world wheel. Worth a listen if you can find the mp3 link.

  • Report this Comment On January 26, 2011, at 5:35 PM, TheSecretHistory wrote:

    For more information on actions that the Chinese government will take in managing their economy in the future take a look at the ruling party's website:

    http://english.cpc.people.com.cn/

  • Report this Comment On January 26, 2011, at 8:17 PM, xetn wrote:

    JBKirtley:

    We are installing tarrifs and the consequences are that Americans are paying more for products they want and need. Great right?

    As a matter of fact, no country is manipulating its currency than the US. The reason is, since it is the reserve currency of the world, it can and does continuously inflate (create money out of thin air) the US dollar. That results in a reduction in the purchasing power of the dollar. As a matter of fact, since the founding of the Federal Reserve System in 1913, the dollar has lost over 95% of it value.

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