The Ministry of Truth is busy changing history today. And it’s no ordinary day on the path to obfuscation. The ideology swap of the US and China just took a big step.

Do you remember when the US exported the ideals of free trade while Mao Zedong starved his millions with collectivism? Well, times have changed.

China’s President Xi Jinping is set to announce further details of his Belt and Road initiative at a conference today. He pledged $78 billion in funding to a development fund and to nations that support the effort with their own projects.

But what is the Belt and Road initiative?

The aim is a new Silk Road

Dramatic improvements in logistical infrastructure and geopolitical partnerships to tear apart the costs and barriers of trade between Asia, Europe and Africa. International rail, ports, airports and everything else are expected to be on the to-do list.

Britain’s chancellor Philip Hammond said Jinping’s efforts were “truly groundbreaking”, before making the obligatory reference to Britain’s pro-trade position in the wake of Brexit.

Big infrastructure projects around the world funded by China are nothing new. And the country has been benefiting from trade since it started to open up. So what’s new?

Here’s the fascinating bit, from Bloomberg:

The speech built on an image of Xi as a champion of global free trade that he’s sought to hone since President Donald Trump’s election.

Xi’s speech also drew implicit contrast between Chinese- development objectives and those of the West, saying the initiative won’t resort to “outdated geopolitical manoeuvring.”

It’s a straight-up ideology swap. China is now the bringer of trade to the world.

While US President Donald Trump threatens countries with protectionism, China is offering cash to open up markets. Trump wants “fair trade” and has been picking trade stoushes, even with Canada, while Jinping has plans for trade infrastructure, even in hostile places like North Korea, India and Russia. He’s willing to deal with anyone to promote exchange.

This is a very deep change

Here’s how it came about: now that the US has an ideologically anti-trade president, China can be pro-trade without being seen to “give in” to the US’ pro-trade ideology.

But the Chinese are even better than the Americans used to be. They don’t want to blow anyone up along the way, Bloomberg continues:

While Xi didn’t address China’s irksome ally [North Korea], his remarks referred to geopolitical difficulties along the Belt and Road route. “The ancient silk routes thrived in times of peace, but lost vigor in times of war,” he said. “The pursuit of the Belt and Road Initiative requires a peaceful and stable environment.”

Of course, all of this is political posturing. But think about where it repositions China in the world of international trade institutions which are built on such political posturing.

The International Monetary Fund, Asian Infrastructure Bank and many more major players all lined up to support Jinping’s plans.

If China becomes the leader in promoting world trade, it will dramatically grow its influence in institutions originally designed to further Western ideals. Power in these institutions is centred on formerly Western dominated areas – trade and funding. If the same institutions begin to serve Chinese interests instead of Western, there will be political trouble.

China is outdoing us

Just as the Chinese stole our manufacturing base out from underneath us, we stand to lose our international political institutions next. They are playing the game by our rules, and outdoing us.

Now that China can be both openly pro-trade and oppose the US at the same time, it can make trade agreements more freely. The first deal was with the US, to increase trade in a specific list of goods and services.

The US promised to supervise Chinese banks in the US without bias while China agreed to open up to US gas exports and financial services. “This is more than has been done in the whole history of US-China relations on trade,” said Wilbur Ross, President Trump’s commerce secretary. Previously he said China is “the biggest trade cheater in the world”.

Sure, China is still very protectionist compared to the US, UK and other Western nations. But as an investor, it’s the direction of change that should interest you.

If Britain and China both move towards freer trade, that could be great news for a partnership between the two. Britain will be unshackled from the EU’s protectionism and China can be openly pro-trade without losing face thanks to Trump being anti-trade.

Unfortunately, it’s not all good news. China’s direction isn’t just trade but a trade empire. This isn’t the free-market version of trade, but the politically-driven version of it.

That’s nothing new

Britain wasn’t genuinely pro free trade in its boom time either. Our monarchies granted monopoly powers to the likes of the East India Company. As for the US, the famous Boston Tea Party that sparked a revolution was actually a protectionist protest against the opening of trade.

And now China is doing its own thing. The chosen method is ownership of trade infrastructure, just as Britain and the US owned the seas and key ports in foreign nations.

The worry here is that politically-driven trade is usually corrupted by war in the end. The Opium Wars between Britain and China have a lot of similarities to today. Britain got the Chinese addicted to opium from its Indian and Afghani colonies to try and balance the trade deficit from Chinese goods flowing west. Today it’s much the same situation.

Trade deficits, the immense amount of wealth in trade and the way trade makes us interdependent are just wonderful opportunities for politicians to wreak havoc.

In fact, the very same regions are at play as in the Opium Wars. India, which boycotted China’s Belt and Road conference, is furious that China’s plans include projects in Kashmir and Pakistan. The countries fought wars over these regions.

Addiction to credit

Keen to put a fly in the ointment, India pointed out that China is really just exporting credit. The funding for all these projects is from loans. And that makes participants in China’s efforts borrowers from China.

This puts China in a dangerously strong political position. The Indian foreign minister put it this way: “Connectivity initiatives must follow principles of financial responsibility to avoid projects that would create unsustainable debt burden for communities.” If China gets the world addicted to its easy credit, that’ll be little different to the opioid addiction of the Opium Wars.

Another worry is that China’s banking system is looking shaky in the first place, as we investigated on Thursday.

Keep in mind that the ideology swap is just the latest reversal in a long history. The Puritans who landed on Plymouth Rock to found one of America’s first colonies were collectivists in the extreme while the Chinese were part of the original Silk Road. It’s strange how history goes in cycles.

My friends at Cycles, Trends and Forecasts apply that idea to financial markets, with remarkable success. And their current set of predictions based on cycles of the past are extraordinary.

German election news

With Holland and France down, Europe’s election coverage continues with Nordrhein-Westfalen (NRW). It’s an important place, and not just because it happens to be my birthplace.

The German state was governed by the centre-left Social Democrats (SPD) for 46 of the last 51 years. The first time it swung from SPD’s red to the Christian Democrats’ (CDU) black, it triggered an election that gave Angela Merkel her first term as chancellor. She’s dominated Europe and Germany since.

Well, NRW just swung black again as Merkel’s CDU took the state. The anti-immigrant Alternative for Germany party (AfD) only just made the cut-off to get into the state parliament with 7% and the Greens lost badly.

You can interpret this in two ways. Perhaps Germany is swinging the opposite way to France, Holland and the UK. It remains pro-establishment.

But unfortunately it’s not that simple. For example, the SPD’s new leader is a recent leader of the EU Parliament – one of Nigel Farage’s many arch-enemies. So both major parties are pro-EU.

A reasoned German voice

That’s opened up the gap for a return of the liberal free market Free Democratic Party (FDP). It’s been in the doldrums for years now and a growing number of its factions are eurosceptic. At least it disagrees with many EU policies. It surged in the NRW vote and hopes to re-enter parliament in the national elections this year. Hopefully euroscepticism will have a reasoned voice inside Germany soon.

What’s happened is that Merkel has taken the centre. It’s like Tony Blair lurching the Labour Party right, but Merkel lurched the CDU left. The result is that the major parties are very similar. Merkel is seen as a wise leader, giving her the edge.

It’s a surprise to see such a small amount of support for the anti-immigration AfD. My aunt and uncle work in the NRW welfare department. They tell me stories of Syrians pretending to divorce their various wives so they can rent out the welfare flats their wives are allocated, and can collect their single parent income support too. My cousin’s commute to medicine school can’t go through the park at night because it’s too close to the refugee camp.

Until next time,

Nick Hubble
Capital & Conflict