Proverbs and The Art of War

IF you want to give your children—and yourself for that matter —a leap over most of the other 7 billion people on Earth, two works of literature are mandatory reading. These are the biblical book of Proverbs and The Art of War.

Both books offer a wealth of wisdom—knowledge combined with practical experience. Proverbs is usually thought of as a guide to life and The Art of War to military action. Close examination and study show that these two offer many of the same ideas but with a different thrust.

The vast majority of people with access to these two books are too lazy to actually read them. There prefer to read a quote or two from each and think they are wiser. That is like getting your news from Twitter and your learning from Facebook.

In the West, government leaders are not inclined to read Proverbs, but in China, The Art of War is taken seriously. You can see that in the continuing actions of the Chinese government. While a complete reading is necessary to fully understand the concepts, two particular quotes from The Art of War are important.

“Hence, that general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack.” The United States is demanding, challenging and shaming China into taking stronger action against North Korea over its missile and nuclear weapons program. But at the same time, the US is fighting with China over trade and currency. If you want someone to do something about a particular problem, it is probably not a good idea to antagonize him on another issue.

So, now, here is the Chinese “general” that has the US “opponent” trying to figure out whether to attack on trade and risk losing China’s assistance on North Korea. As the US ratchets up the pressure on trade, China lessens the pressure on North Korea. Donald J. Trump’s book The Art of the Deal may be no match for Sun Tzu’s The Art of War.

“Mystify, mislead and surprise the enemy”. That is not from The Art of the Deal. Here is the latest example of China taking that concept to heart.

For years, the Chinese have claimed that the government has not manipulated the currency to an artificial level, giving an unfair trade advantage. For the past three years, the government has taken strong action to prevent outflows of capital from China. At the same time, there has been a strong push to make the Chinese yuan a major global currency for trade.

Last week the game changed. The People’s Bank of China (PBOC) made a complete U-turn in policy. The details are that the PBOC reduced the reserve requirement for financial institutions trading in foreign exchange forwards by cutting it to zero from 20 percent. This makes it easier—and gives approval—for currency traders to lower the value of the yuan, which is exactly what the US is complaining about. However, now China can blame the currency market for doing exactly what the government has been doing for years—devaluing the yuan.

Outflows of the Chinese yuan will continue but the Chinese who want to get their money out of the country will pay a higher currency exchange-rate penalty. China gets its weak yuan and will penalize capital outflows. The Chinese government motto should probably be, “Know thy self, know thy enemy. A thousand battles, a thousand victories”.

E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

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