President Xi in San Francisco: Kiss and Make Up with the Biden Administration?

The world has suffered deeply from the breakdown of relations between the U.S. and China. Since the heady days when Bill Clinton welcomed China into the World Trade Organization, things have run so far downhill that the two superpowers have consolidated into opposing geopolitical blocs that are increasingly engaged in ever more aggressive shows of force.

China aligned with Russia, Iran, and many emerging market nations. This meant the U.S. had to consider the real possibility of multi-front wars. The U.S. found itself aligned with the Five-Eyes nations, NATO and hardened regional alliances worldwide with selected nations like the Philippines in the Pacific and Morocco in the Atlantic. Ukraine had already become tricky, especially given Russia’s persistent threat to revert of nuclear weapons. The prospect of a breakout of regional war in the Middle East is making all the parties reassess.

Now a new critical challenge to these geopolitical realignments has become painfully evident: Wars are brutally expensive. And costs of preparing for possible wars are threatening to overwhelm national economic policies. Increased defense and national security requirements are boosting borrowing needs of nations at the very time when national economies are hovering on the edge of economic downturn. Bond markets on which nations depend are threatening to reject overreaching global aspirations of their leaders.

The leaders of China and the United States are becoming aware they simply cannot afford to proceed on this present path leading towards greater confrontation.

Biden and Xi Jinping meeting in San Francisco. The two are very likely to strike a deal that will diminish the scale of geopolitical confrontation under a theme of “stabilization”, agreeing to halt the seemingly relentless slide into decoupling large segments of the world economy.

Given the significant present possibility of a hard landing for their stumbling economies, both leaders need to demonstrate an historic “win” to strengthen their precarious positions of leadership. “win”. They both need it right now.

China staked out a role as a peace broker by opposing Putin’s threats to deploy nuclear weapons. As soon as Putin said “nukes” China said “truce”.

But that is not enough for President Xi. He now faces the existential risk that China falls apart. The economy has collapsed. The massive failure of Evergrand exposed a simple truth. It wasn’t just one huge property company that had gone bust. It was the realization that the whole idea that Chinese people could be safe by buying property to get rich was over.

The losses have dented every citizen’s hopes for the future. Meanwhile, Foreign Direct Investment into China has gone negative for the first time in modern history as foreign investors rush to escape the tightening grip of the Communist Party on private business. The hardworking youth in China are protesting the fact that there’s nothing at the end of the rainbow – no jobs, no income, no reward. Nobody believes they’ll get rich before they get old anymore.

America cancelled China under both Trump and Biden. This killed any hope of rising export sales pulling China into the return of domestic growth. The Belt and Road Initiative should have become a revenue generator for China, but it has turned into a system that bleeds cash. The poor emerging market nations used to pay China or borrow money from China to cover the cost of China’s seemingly kind offer to build physical infrastructure.

But now those emerging markets cannot pay back those loans, thanks to rising inflation and the global slowdown. When the Chinese Communist Party last month convened a multi-year national review pf the Chinese economy, they concluded the economy was sinking with inadequate demand to keep its production engine running.

The conclusion was reached that a new source of demand was needed, but Xi Jinping personally opposed free handouts to the working classes. Instead, the participants in the review agreed to return to the “tried and true” promotion of manufacturing to produce goods for export to the U.S. and Europe. But it has become evident that demand for more manufactures from China was not likely as both the U.S. and Europe were entering a period of slowdown in their own demand.

Frustrated that the U.S. and Europe seemed to be entering economic slump, days ago President Xi visited China’s Central Bank (PBOC)and China’s national economic regulatory agencies to express unhappiness with their technocratic policies’ failures. No doubt he demanded that they make the numbers prettier even though the world lost faith in the veracity of their numbers a long time ago. Xi insisted the CCP must impose greater oversight to ensure policies brought about stronger economic growth.

But greater command and control at the center of the economy likely will make China’s economy more brittle and fragile and impede innovation. His internal opponents are murmuring. They all want to get back to making money. They don’t want to waste the already declining youth demographics on a senseless war with the world’s most formidable military power. For the Chinese people, Taiwan can wait.

Meanwhile, President Biden’s popularity is collapsing. Both President Trump and total long-shot Robert F Kennedy Jr are way ahead of him in the polls and in fundraising with all the key swing votes. Democratic Senator Manchin looks likely to launch a campaign for the Presidency under a “no labels” candidacy. Only 14% of Americans think that Biden has improved their standard of living.

Unexpectedly confronted with a shock Hamas terrorist attack on Gaza and growing Iranian threats to ignite a wider Middle East war, Biden has engaged in a serious show of force, deploying aircraft carriers to the Pacific and the Middles East and by revealing frightening new technologies like the deep penetration nuclear gravity bomb and the long new range nuclear bomber known as the B-21 Flying Bomber. All this signals China, Iran and Russia to back off.

The U.S. economy for now still seems to be doing ok but few give Biden any credit for that. Meanwhile the war in Ukraine seems to have reached an impasse. Russia is not losing, and Ukraine is not winning.

The appetite for spending money on foreign wars dropped further once the problem in Israel stole the headlines from Ukraine. It became almost impossible for Biden to justify further funds for Ukraine once President Zelensky announced that he is refusing to hold elections. This killed any idea that the US and Ukraine were fighting for democracy.

Also, the unlimited defence of Israel has now become hotly controversial. It is splitting the all-important Jewish vote and splitting the young voters, both of which are critical for Biden’s re-election chances. So, the President needs a win. He needs a historic win. Short of having a war, he needs a peace deal. He needs an historic peace deal.

Now could be the moment that both the U.S. and China agree to play nice for the sake of the world. This means China must burn tight links with both Russia and Tehran which had served their purpose but are now obstacles to stabilizing China-U.S. relations. Their bullying forced changed the U.S. perception of risk and brought The President to the negotiating table with China.

The U.S. wants to support Ukraine and Israel but can’t afford the heavy costs now under consideration. Nor can the U.S. afford a larger conflagration in the Middle East. Already we hear the former Head of NATO suggesting that Ukraine join NATO but only the parts of the country they control. The implication is to leave the rest to Russia. Call it a draw.

The solution is an armistice in Ukraine and having China and Russia stop supporting Hamas, Hezbollah, and a renewed Iranian war on the Sunni Kingdoms. The price will be that the U.S. and China must end their squabbles. When Xi summoned Gov. Newsom to Beijing he lay the groundwork for reconciliation by saying “divorce is not an option”. Given that Newsom is Biden’s personally preferred running mate, and therefore a possible next U.S. President, this change of tone was very important.

The bottom line is that neither side can afford a messy divorce and both sides now know it. The White House can’t raise or cut taxes. Their hands are tied. China can’t find a way to stimulate its economy either.

So are we on the brink of a “kiss and make up” photo op?

If so, that would generate a serious rally in the markets and a huge sense of relief amongst the citizens of the world. Maybe the “make up” part won’t be as friendly as the photo op would imply. Maybe the U.S. and China will continue to invisibly war against each other underwater, in space and in cyberspace.

But, if this type of conflict is out of the public view, things will get better. A cold war beats a hot war any day. If the two sides must make up a bunch of stories about concessions to get this done, they will. They might now actually make up, but they might make up a story that all is fine. That pushes this whole problem well into the future.

President Xi no doubt is aware that there is a strong desire in Congress in both of the major U.S. political parties for tougher measures against China. Xi’s aides have announced that following his meeting with President Biden he will make a major address to both the peoples of America and of China on the world’s need for stabilization of relations between the two countries and embarking on a new period of combined efforts to assure a safer and more prosperous world economy.

That San Francisco address may mark an historically important turning point in relations between the two most powerful nations in the world. …Or, at least, a worldwide perception that a turn for a better future is not only possible but is under way.

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