A Busy Week in Washington
A very important visitor from abroad came to Washington, DC last week—and we aren't even referring to the Pope. Of course, il Papa's visit was important, as it included the first-ever papal address to a joint session of Congress. However, given all the attention to the Pope's tour of the United States, the other important visitor tended to get lesser notice than one might expect.
Xi Jinping, the President of China, began a week-long tour of the US in Seattle with a tour of Boeing facilities, followed up by meetings with US technology leaders, and concluded the week with meetings with President Obama and a state dinner at the White House. Wisely, President Xi waited until Thursday to arrive in Washington, after Pope Francis left town.
We Come Bearing Deals
Xi's trip began with commercial considerations. On Wednesday, China agreed to buy 300 aircraft from Boeing for a reported $38 billion, while Boeing completed an agreement with China's Commercial Aircraft Corporation to build a completion facility in China for 737 aircraft. The facility will rival one created by Airbus in 2008.
Boeing has projected selling 6,330 planes to the growing Chinese commercial aviation market over the next 20 years, which would bring in an estimated $950 billion to Boeing's coffers. Since Boeing was a primary recipient of assistance from the now-defunct Export-Import Bank, this deal provides Boeing with a huge boost in its battles with Airbus in the lucrative Chinese market.
Critics claim that the Chinese Boeing facility is part of an effort to intensify longer-term competition between Boeing and Airbus to squeeze prices—but what's wrong with that? It's a refreshing bit of true capitalism within the Chinese system. A greater concern is that China will be using both plants to eventually learn enough about manufacturing planes to ditch both Boeing and Airbus and create their own company. That's certainly possible over time, but it's a risk Boeing is willing to take in the short term.
Earlier in the day, Cisco Systems announced a $100 million joint venture with the Chinese firm Inspur to sell various networking products and technologies within China. Again, a US company decides the potential risk of intellectual property loss is worth the entry into the Chinese market, slowdown or no slowdown.
Clearly this flurry of economic good news set a positive tone for Mr. Xi’s visit, ahead of potentially contentious discussions with President Obama on such prickly items as theft of American intellectual property by Chinese hackers and human rights.
President Obama has taken a lot of flak in certain circles for his engagement policy with China and failing to take a more aggressive stance on these and other contentious issues—including China's military expansion in the South China. Obama attempted to reverse that trend with a tough stance prior to and during the meetings.
Threats of economic sanctions in retaliation for Chinese governmental and industrial cyberattacks produced a series of meetings between senior officials of both countries to avoid an embarrassing announcement prior to Xi's arrival, likely laying the groundwork for the various agreements and understandings that followed.
The two presidents agreed that neither government would support hacking efforts to steal proprietary business information and corporate secrets, but did not extend that to traditional espionage between government organizations for intelligence reasons.
Climate change was perhaps the most significant area of agreement, at least in principle. President Xi announced a nationwide cap-and-trade system to provide economic incentive to move away from fossil fuels. China has been experimenting with pilot cap-and-trade programs in specific areas since 2012, but creating a nationwide cap-and-trade structure is a daunting task for an economy so dependent on fossil fuels.
The White House Fact Sheet on the visit touts other areas of agreement such as military air safety and crisis notifications, humanitarian assistance, and peacekeeping. Any mention of the South China Sea and China's expansion efforts was noticeably absent.
There is still considerable skepticism as to whether China will succeed in following up on their words, or even make a serious effort to try. In the words of President Obama, "The question now is: are words followed by actions?"
The agreements about cyber espionage and the cap-and-trade announcement have potential for long-term economic effects, especially if China proceeds with a true cap-and-trade system. The cap-and-trade system may turn out to be like the claims of a 7% growth track, where economists take the numbers with a grain (or block) of salt while they try to see the real Chinese economic picture. Similarly, failure to take actions against cyberattacks and commercial espionage may result in sanctions that can prohibit US companies from doing business with some Chinese entities.
However, the shorter-term issue for investors to consider is the openness and capability of the Chinese market to buy American products. The deals with Boeing and Cisco will certainly improve their bottom lines, and while the other tech companies such as Apple, Google, and Facebook have had their issues with China, all realize that the Chinese market is essential to their growth.
Keep an eye on any of your holdings that depend on China and how they react over the next few months to any new trade agreements and developments in the Chinese economy, whatever the growth number turns out to be. Poor Chinese growth may affect your holdings, but it does not necessarily have to—for example, the Boeing and Cisco deals are likely to remain in place unless the Chinese economy tanks in spectacular fashion.
On the broader scale, it's useful to compare the two visits. Pope Francis left Washington with a stirring message of cooperation, compassion, economic justice, and consideration for both mankind and Mother Earth. Despite constant attempts to create political scorecards regarding the Pope's statements, many considered it relatively apolitical and a sincere plea for all to make the world a better place.
Meanwhile, the two Presidents laid out a series of tentative agreements that outwardly show cooperation, but are clearly rooted in questionable trust levels. We'll see whether the leaders of America and China, as well as Congress, can follow up on the Pope's inspiring message.