Submitted by Eric Peters, CIO of One River Asset Management

Timelines:

(2006) China’s State Nuclear Power Technology Corp signs $8bln JV with Westinghouse then takes 75,000 technical docs on its latest AP1000 reactor.

(2006) Westinghouse’s PA servers are repeatedly penetrated by the Chinese, technical and R&D docs are stolen.

(2015) China breaks ground on the CAP1400 nuclear reactor, a Westinghouse AP1000 clone.

(2018) Brookfield buys bankrupt Westinghouse for $4.6bln.

(Today) China is building reactors in Pakistan and Romania, with scheduled projects in Argentina, Britain and Iran. They’re bidding on Saudi, South African and Turkish projects.

Perspectives:

“Russia at its very worst is a moderate threat to the US,” said the investor. “They have modest regional ambitions. They’re mischievous. But plenty of countries don’t do what we want.” If they wanted to nuke us, they would’ve during the Cold War. “China is the real strategic threat. They’ve coopted much of the US political and financial system,” he said. “Wall Street makes a ton of money from China.” No one that matters makes money from Russia. “It’s so telling that everyone is in hysterics over Russia. It’s a distraction that makes you wonder if the Chinese aren’t enabling or pushing the narrative.”

“The best way to bring Beijing to its knees is by running a tight monetary policy in the US,” continued the same investor. “China has the world’s most overleveraged, fragile financial system.” In 2008, China’s total debt-to-GDP was 140%. It is now roughly 300%, while GDP is slowing. “The economy is held together by capital controls. If those fail, the whole system fails.” The capital flight in 2015/16 cost the government $1trln in reserves, and that was with ultra-dove Yellen in charge. Imagine what would have happened with Volcker at the helm. “The Chinese are dying to get their money out.”

“Engineering a decade of rolling Chinese financial crises would be the most effective foreign policy the US could run,” continued the same investor. Forget about the South China Sea, don’t bother with more aircraft carriers, just let Beijing try to cope with their financial system. “And we’re 80% of the way there – we instigated a trade war, implemented a massive fiscal stimulus, which created the room to raise interest rates,” he said. “The combined policy mix makes capital want to leave at the same time it makes the dollar more attractive and effectively shuts down new investment inflows to China.”

The Consigliere:

“Made in China 2025 is a policy that came out with great fanfare,” said Peter Navarro, White House Trade Advisor, referring to Beijing’s overarching strategic industrial plan, unveiled in 2015 by Premier Li to move China up the value chain. “The Chinese are now suppressing it from being referenced in public because they don’t want people to know the intent of the plan, which is to capture 70% of global production in the emerging industries of the future within the next 7yrs. Think about that. And as President Trump has said, ‘If we lose the industries of the future, we won’t have a future.’”