Is the US Striking a Grand Bargain with China over North Korea?

By Jonathan Roth

In an exclusive interview with RiskHedge, one of the financial world’s top China experts says a deal between the United States and China may be developing that would end North Korea’s nuclear program and transform the contours of the world’s political and financial power structures.

“I’ve always felt that Donald Trump comes into the White House and he views himself as a dealmaker,” explains Louis Gave, the co-founder and CEO of Gavekal. “So, if he sits down with the Chinese and says, ‘Look, I want to get a deal done,’ the Chinese tend to be fairly pragmatic. They know they have their own interests, lines that can’t get crossed—for instance Taiwan. So, I think they decided, ‘Look these are the lines we don’t negotiate on, anything else we can negotiate on.’”

Gave says removing the North Korean leadership would be a game changer. “Could China be in the background, starting to engineer a coup against Kim Jong Un, top him off and put another general in place?” rhetorically asks Gave. “That would be an extremely bullish development.”

Just based on how the financial markets are looking at the issue, Gave believes something may be happening. “You could think that the fact that the Korean stock market keeps on making new highs would be indicating that, yes, some kind of grand bargain is going to get struck.”

The deal’s particulars include the US ceding the South China Sea to China, and America giving up some of the dollar’s status as the world’s reserve currency.

“If it was to get the South China Sea, I think absolutely,” declares Gave. “Partly because, frankly, North Korea has become more of a pain in the neck for them than anything else.”

However, it is the global financial implications that could seal the agreement.

“I think [the US giving up some reserve currency status to China] is a lynchpin of it, to be honest,” says Gave. “And this is where, potentially, the Donald Trump administration is different from all of the administrations that preceded it in that Donald Trump is fundamentally a very mercantilist president. He wants the US to move back to a trade surplus. And, fundamentally you cannot run structurally the world’s reserve currency and run a trade surplus because the world needs your currency; you need to be exporting that currency. Donald Trump is the first US president in my lifetime, at least, that hasn’t paid lip service to the ‘strong dollar is good for America’ motto…. So in Donald Trump’s worldview, the burden of carrying the reserve currency has meant the decimation of US industry and US manufacturing jobs and that’s been too high a price to pay and one the US isn’t willing to pay anymore.”

RiskHedge has confirmed with another high-placed source in the hedge fund industry, who has also consulted with the US Department of Defense’s Office of Net Assessment, that an agreement between China and the US on North Korea and other issues is actively being negotiated. However, the source indicates the deal may be even broader and wider-reaching than Louis Gave has indicated. Watch this space for new developments.

Watch the full interview with Louis Gave above.