Deep Dive
Shownotes Transcript
We are live. Welcome, everybody, as people start to filter in. Really excited for today's Cynicism Live. We're chatting with Robin Brooks, who I think you saw from the intro. He is a
I would just say he's a foreign exchange strategy guru. Um, he's now at the Brookings. Uh, previously you were, I think chief economist at the Institute for national finance. Yeah. You got it for that. You were the chief for a strategist at Goldman Sachs. Is that right? Yeah. And now he, he is, uh, he's been a prolific, uh, Twitterer, but we've gotten him over to sub stack over the last few months. And he is now, um, a prolific sub stack user, both using notes as well as almost a daily missive. That's, uh,
super valuable, not always about their RMB, a lot about Forex, a lot about Russian sanctions. But so today we want to, I think that the broad topic is all things RMB. And so I welcome everybody. I encourage you to sign up to Robin's Substack. But first, I just want to ask Robin to just give a quick intro about his background a little more than I did, and then we'll dive into it.
Great. Hey, Bill, I really appreciate being here. And you have told me for many years to come over to Substack. I did not. I think I tried like four years ago. I wish I had. It's like many things. I wish I had done them a long time ago. So but I'm so glad to be here now. I think the platform is amazing. I think the publication tool is so easy.
It's actually really great. And my sub stack is on all things macro. Those people who know my Twitter feed know that I have a background in macro. I do anything from debts to currencies to emerging markets. My past job was basically on emerging markets and capital flows. And as part of that, I worked a lot on the RMB in China. But yeah,
The Substack is basically a slightly longer daily version of that, and I really love doing it. And the feedback and the exchange with people on Substack has been great. So I was at Goldman in 2015 on August 11th.
In 2015, I was on summer vacation in Jackson Hole, Wyoming, and China devalued the RMB. Within about 20 seconds, my summer vacation went completely out the window. I had the head of the Goldman trading desk on the phone.
to ask about what was going on and what the trading implications of this would be. And Bill, just to tell you about why any kind of devaluation of China is so seismic, it's because
China is basically an FX peg to the dollar. It's tightly managed. So any kind of volatility is basically radioactive for markets and has huge implications. Well, we want to get into that. I will just say that your August story. So my own August story was, you know, we had just sold our residence in Beijing and we were in the process of getting...
a fairly large amount of money converted from renminbi to U.S. dollars to transfer out to the U.S. And because we had bought a new property in 2010,
it was, you could get your money out pretty easily if you only had all the paperwork. And the banker we were working with just kept telling us to hurry up because something was going to happen. And so we were able to convert the money like four days before the devaluation. But it was pretty interesting because the bank's like, yeah, something seems like it's up. You might want to move faster. We're like, we're going as fast as we can. Amazing. That was, I think it went from like 6.5
Was it like 6.1 or so to like 6.3, if I'm remembering correctly? I mean, in the scheme of things. It wasn't huge, but it was a big deal. And then they torched the Chinese side. They torched a couple hundred billion dollars in reserves, right, trying to protect it because once they devalued, people assumed they had to go further, right?
Totally. So first of all, congrats on your real estate transaction. A decade ago. Back then it was shooting fish in a barrel. So the devaluation was only two or three percent. Yeah.
you know, that's nothing for global FX markets. No one bats an eyelid at that. But for China, they do because China's currency is so tightly managed. And I think that is really, really relevant for today. I'll come back to that in a second. But as you said, um,
the RMB was devalued back then. It basically caused panic domestically because people were worried about losing their savings, right? Is it really only going to be 2% to 3% or is this the beginning? Is this the beginning of the end? And the Chinese at the time, as you said, used a
used up a trillion in their foreign exchange reserves. It was actually a trillion. So they went from four trillion down to three trillion. I thought it was only a couple hundred billion. And what's so interesting about that episode is basically they were leaning against the wind, right? They were constantly trying to manage this depreciation, this fall, and it had the counterproductive effect of
of giving people an exit window to front run the PBOC and get their money out into dollars. It gave people time to convert into dollars.
And that's really relevant for today. When I was meeting with Chinese technocrats and officials this time last summer, obviously the one topic was the election, the U.S. election. Would Trump win? And when I talked to people in sort of the technocratic circles, not the political circles, I'll defer to the politics on you, they
Basically, the unanimous consensus was, okay, if the U.S. really does tariffs, if they really do big tariffs, we need to deval because that is a negative shock to our country. And in the first Trump term, those tariffs, they divided, what, was it like 15% or less than 15%, right? It was about 10% against the dollar. And it was basically...
a one-for-one offset to the tariffs that were imposed. If you go back to 2018, the U.S. put a 25% tariff on half of all imports from China. So the tariff rate on average went up about half that, so 12.5%. And
the yuan around that time fell basically that amount. So we have one data point where China devalued, uh, in response to us tariffs. And so the big surprise is that it hasn't now, uh,
And, you know, there's a variety of arguments. But one argument is going back to 2015, there could be capital flight because Chinese domestics will front run the devaluation. And so the pushback that I got last summer from Chinese technocrats was, well, okay.
our own population can only front run the devaluation if the devaluation is slow. If we do a big step adjustment, say the US does 20% tariff, we deval by 10%, there isn't going to be much front running because basically the devaluation has happened. And so the interesting thing is that
This circle of people has clearly been overruled, right? And so the question... Because the RMB has actually been appreciating since April 2nd, right? It's up. Against the dollar, not only against the dollar. Exactly. So you can think of basically the RMB. There's a small wrinkle to this, which you and I should really talk about because it's super relevant. But basically, you can think of the RMB as flat against the dollar. Okay, what's the wrinkle?
The wrinkle is, remember, April 2nd, the U.S. announced reciprocal tariffs on many countries, not just China. And it was after April 2nd that the RMB started to devalue just a tiny little bit.
And we're talking about, you know, you and I were laughing earlier about how 2% is a small deval for global FX markets. So 0.2% is tiny, but it caused global markets to freak out because markets were rationally expecting, well, this is the beginning of what's going to be a much bigger devaluation. And it basically caused turmoil in global markets, most importantly, in the US treasury market. Yeah.
You'll remember that Trump was tweeting about bond yields, everything is okay, don't worry. People were getting yippy, right? Exactly. So you're saying that the proximate cause of the yippiness was actually the small renminbi devaluation? It wasn't like some Japanese fund basis trade blowing up? Or was that basis trade blow up caused by the RMB devaluation? Yeah, exactly. So...
The RMB devaluation is really, really important because China is a massive importer of commodities. Most commodities come from emerging markets.
So if the RMB devalues against the dollar, that has huge spillover implications for the rest of emerging markets. If the RMB devalues, the rest of emerging markets devalue as well against the dollar. And so what happened in those days after April 2nd was emerging market currencies started coming under a lot of pressure.
Those central banks were intervening to support their currencies. That means those central banks are selling their U.S. selling U.S. treasuries. They was liquid, right? That's exactly what's liquid. Exactly. So they need cash. And so they're selling their treasuries. They use the cash to stabilize their own currencies. But that selling of treasuries declines.
destabilizes the U.S. Treasury market. And it's a very similar dynamic to what we had in March 2020 at the height of COVID. You'll remember the Treasury market blew up then as well. That was emerging markets too. So the channel is China devalues, that destabilizes EM. EM sells Treasuries, the Treasury market gets yippy. And do you think that the Chinese, when they sort of did what you say, this small devalue,
devaluation against US dollar around April 2nd. Do you think they knew it would have these follow-on cascading effects? That is the great question. So that goes to what is going on in Beijing and why has there not been devaluation? In my opinion, that episode shows you
that China has massive power and leverage over the United States. The United States, especially in the treasury market, is wildly over leveraged. You've heard the term basis trade, right? These are basically carry trades that are arbitraging tiny differences in yields across different treasury securities and futures and so forth. Those trades are a huge vulnerability for the United States because whenever there's a big unexpected shock,
Treasury market blows up and we are, you know, as a big borrower and deficit running country. Rates spike, options fail. Major, exactly, exactly. Major problem. So China in that week after April 2nd was able to trigger that vulnerability with essentially no move in the RMB. And so the question is,
Whether China is fully aware of the power that it has, I'm almost sure it is. I would imagine, I mean, they have some pretty smart people in places like, say, in the People's Bank of China. I would imagine they're quite aware of that. Even if they didn't intend it, they see the aftermath, they saw what happened, and they realize, well, actually...
They got what they wanted in a way, right? The U.S. basically reached out to, I mean, for a while, Trump was negotiating with himself on China and bringing tariffs. Still is on Sundays, depending on the day. So U.S. tariffs on China have come down significantly from back then, right? We were at 150%, which was bonkers. We're at 50% now, which is still kind of bonkers. Yeah. And
And so China, in a way, got what it wanted. And it is keeping, I think, this RMB devaluation card in its back pocket. It used it once very slightly, but it basically is a massive leverage point over the United States. But there are downsides to devaluing, though, right? I mean, it is not a cost-free exercise. I mean, I think I would, you know, because one of the things you've written about is
China should devalue because that, you know,
they have a real problem with deflation in the economy. And so why aren't they devaluing against the U.S. dollar? And we can talk about sort of why, you know, why that is. But I would just going back to your, how you opened the conversation talking about August 2015 and how, you know, effectively they burned a trillion in U.S. dollars in reserves defending the renminbi is, I think that was quite, you know, from a, from a, like at the top, I think that was quite a searing lesson for Xi Jinping. I think, I think it was viewed as a mistake, right?
That actually, and so now you fast forward and if you look at, you know, you have to wonder, are they confident if they start really
bigger devaluation, are they confident that they can just stop it where they want it to stop without having to, you know, again, burn through a lot of those reserves? And, you know, so I just, you know, certainly anecdotally had heard that the folks who were working sort of decided on the devaluation. It was not a good, it was not good for their political careers.
Yeah.
You know, there was a logic to doing things in a certain way, but it sort of missed the overlay of the actual PRC politics, right? And the decision-making processes. But so when you just looking at this year and their M&B, while it's appreciated or about flat with the U.S. dollar, right?
it has devalued pretty significantly against things like the euro. Is it down like 10% against the euro? Is that just because the dollar's weak and so since it's effectively pegged to the dollar, it just goes where the dollar goes? Exactly. So basically, going back to 2015, the problem at the time was the dollar was rising massively. It had risen about 25% over the past 18 months because at the time, the RMB was pegged to the dollar.
The RMB rode the dollar all the way up and basically risen 25% also. That is why in August 2015,
the PBOC then decided, okay, we got to devalue. And so they tried this one-off devaluation. Right now, we're in a little bit of a reverse situation, which helps China, which is good for China, which is that the dollar has been falling because of erratic policymaking in the United States. And so once again, the RMB is pegged to the dollar and has been riding the dollar down. That's not a statement on Chinese FX policy. It's in fact the opposite. It's
It's a statement on the complete lack of Chinese FX policy because it's just a function of this peg. Is this something that solves the basic challenge that China faces at the moment? No. Tariffs imposed by the United States, you can think of them as a bilateral imbalance, right? These are U.S. tariffs on China.
The only way to resolve that tension is to do a bilateral devaluation of the RMB against the US dollar. A trade-weighted devaluation, which is what the RMB is doing right now,
doesn't address the tariff stress. And the way that you can see that is if you look at Chinese exports, those are down massively if you look at its direct exports to the U.S. To the U.S., yeah. But they're up massively to all kinds of other places like Thailand, Vietnam, etc. Germany. Everybody. So...
What's happening is that there's basically this artificial barrier that's been put up vis-a-vis Chinese exports to the US. And so China is basically routing these goods via other countries still to the United States. That is a sign that
There's a real pressure point on China. These tariffs really are hurting. People are trying to get around them. And I think a better solution, if these tariffs are permanent, is to devalue. One other pushback that people give on China
And devaluation is, well, China can do fiscal policy. You can do fiscal stimulus, right? And you can kind of get, you can help your domestic economy get around this pressure from tariffs by doing that. And the issue with that is if these tariffs are permanent.
which in Trump's first term they were, right? Right. And while they lasted, they lasted the entirety of the Biden administration too. Exactly. If you're doing that and you are using fiscal stimulus, you're both basically opening a Pandora's box because you're basically opening the door to unlimited deficits, deficit support. And China has a debt ratio, which is close to a hundred percent for a gross general government debt. So they don't have that much fiscal space either. Right. Um,
So, I mean, the other thing, too, is if they were, though, I mean, back to what you talked about earlier about how there's sort of very small devaluation in April really sent the U.S. Treasury market into a real sort of almost panic. What would happen if they did a 10 or 15 percent devaluation? Wouldn't the same thing happen, but even more and sort of ripple across emerging markets? We would have a...
10% drop in the S&P within 24 hours, we would have a huge rally in the dollar.
against everybody as everybody's financial markets falls out of bed. We would have, therefore, huge leverage by China on the United States and global financial markets. And in my opinion, this trade war would be over within 24 hours. So I definitely... Meaning you think the Trump administration would basically have to sue for peace if that were to happen? Yes, exactly. Exactly. And it would illustrate that
the financial dependence of the United States on China is in actual fact really massive. And in a way, China kind of wears the pants is the uncomfortable truth. It's interesting because I think there are folks in the Trump administration who think that actually the U.S. has a lot of leverage when it comes to the financial sector. And in fact, you know, if you look at sort of there was a Geneva deal, whatever you want to call it, and then it sort of went sideways and the U.S. started advocating
adding these, you know, the Chinese held back on magnets and the U.S. started adding these, sending out letters to layer on new export controls in various areas. There was talk of
finance-related, you know, going after some banks in Hong Kong, for example, or going after some of the big Chinese banks because the belief is the U.S. has massive leverage over the PRC financial system. And if the U.S. were to sanction—because the U.S. has never actually sanctioned a meaningful Chinese financial institution because, you know, Mnuchin, there was talk in the first administration and Mnuchin walked it back because I think there was a concern that
it would be too damaging. So my point is, I think there's this perception that actually the U.S. has the leverage. You're saying that these policymakers have it wrong. Actually, the leverage is on the Chinese side. Is that what you're saying? Totally, yeah. The leverage is on the Chinese side. It is true, Bill, that— Or is it mutualist or destruction? Is that possible? For sure, right?
Let me elaborate on this point just for a second. So you mentioned sanctioning a Chinese bank, for example. So we have a case study on how that works because we just sanctioned, after Russia's invasion of Ukraine, a bunch of- The Chinese have the case study too. They have the playbook. So here's the thing. Sanctioning, say, Spare Bank or some other Russian bank, it did nothing to Russia. Why? Because-
Russia just routed payments for its exports through non-sanctioned banks, the most obvious one being Gazprom Bank. And so Putin's access to the dollar and to capital flows and to payments never changed. So unless we would have been willing to sanction all Russian banks, so shut down the financial system completely,
We essentially were really just kind of rearranging the deck chairs on the Titanic. It didn't do very much. So for China, the lesson is if we sanction individual financial institutions, we can tell ourselves it's a big deal. But the Russian example just taught us it really isn't. And so.
Of course, there's an element of mutually assured destruction. And I think a 10 or 15% devaluation would be a super big deal. I mean, global financial markets would really take a hit.
But I think in the first 48 hours after the devaluation, China would wear the pets. That's my view. Interesting. I mean, so one of the things that was sort of, there was chatter going around after the sort of the Geneva, sort of the post-Geneva breakdown was sanctions that would effectively close the dollar window in Hong Kong.
It kind of would work, I'm not sure, but the thinking was that would be massively punitive and damaging to the PRC financial system. Do you have any thoughts on that?
I really don't think so. I mean, the Chinese financial system is massively complex, right? You have a ton of financial institutions that are involved in dollar transactions. And the key thing is, like Russia, China is a huge exporter to the rest of the world. So it exports much more than it imports. So for Russia, that means...
Russia constantly has access to dollars because there's constantly a flow of payments for these goods that it's exporting. In Russia's case, it's oil. Or nearly oil, right? In China, it's actually manufactured goods. But the basic dynamics are the same, which is China is getting paid for stuff that it's exporting. And so that's a constant dollar inflow.
That is the lesson. So when we sanction, say, certain institutions in Hong Kong, maybe we close that dollar window, it doesn't change the fact that China will be getting paid for the goods that it's exporting. The only way to go after a net exporter like China
China, like Russia, is to do what the West ultimately did for Russia, which is basically to shut down exports of the key goods that are being exported. So in Russia's case, that's oil. And in China's case, that's way more difficult. It's not feasible. And even if the U.S. wanted to do it, very few, if any, other countries would go. Exactly. Exactly.
China exports a ton of stuff. It's massively diversified. It's massively integrated into the global economy. So to do something like the G7 oil price cap, which we did on Russia, which is the right idea conceptually,
It's just impossible for China. So again, that goes to my view that China in this negotiation with the United States actually kind of has the upper hand. And when I, I mean, you tell me, but when I look at how things have played out this year, China has almost kind of sat back and has been very quiet. I mean, they have retaliated on a number of dimensions, but the retaliation has been relatively constrained.
and they've basically let the U.S. flop around on its positions and just waited Trump out. And I think that is the right strategy, and it is, to me, a symptom of they know they have the upper hand. They're actually in a good position. I think they've also, you know, they were prepared in a lot of ways. They learned a lot from Trump 1, and, you know, they built...
you know, there's been talk on the Chinese side of, you know, one of their biggest vulnerabilities was the risk of the U.S. waging financial war on China, right? Understanding all these vulnerabilities. And I don't think, you know, I think, I think I still think we're, we're,
the mutual vulnerabilities are pretty high. And so we could both do, the U.S. could do a lot of damage to China. China could do a lot of damage to the U.S., right? In some ways, it is sort of more of a mutually assured damage, if not destruction scenario. But I think one of the things, to your point, is I think that especially on the U.S. side and in D.C., I think there has been a pretty significant underestimation of the tool of
of leverage that the PRC side has. And so you look at your point, I think what we've seen since Trump came into office this time and, you know, raised tariffs is the Chinese have sort of shown, they sort of, they haven't just said, oh, we're going to slap reciprocal tariffs because obviously they can't, right? Because they, you know, they, you know,
you know, they need to do sort of a portfolio of things. And they've done that with some sanctions, some entity listings, some export controls. And the biggest, of course, being the critical minerals, rare earths export controls, of which they really have massive leverage over the U.S. for the foreseeable future. On the renminbi, again, I think you're right because a lot of people said, well, you know, the norm, sort of the expected response would be some sort of devaluation because that's what they did in 20, you know, sort of in the 2018, 2019 period. Yeah.
but it may, you know, again, they showed what they could do potentially. I think that's what you're saying is they sort of showed a little bit of the, showed a little bit of the sword, right? They kind of pulled it out a little bit and said, this is what we can do. And then, you know, then sort of, okay. And now we're back to where we are, which is some sort of a, uh, holding pattern, so to speak. Um, but let, let me ask you a question. Um, uh,
So we have three episodes, basically. The first is 2015-2016, China devalued. The second episode is 2018-2019, China devalued. Then we have the current episode, China's not devaluing. To what extent do you think this is about consolidation of power around Xi in Beijing? Like the technocrats who had a say back then clearly have less of a say now.
So I do think that the 2015 episode where they burned so much of their reserves was quite searing. I also think, though, you know, I will guess that part of it is the...
you know, China's positioning of itself as the responsible power here, right? You know, they're the upholder of the multilateral trading system. They're the upholder of global trading rules. They are, you know, this is, they are the responsible actor. It is sort of their positioning against the Trump administration. And, you know, I mean, a lot of countries, depending on the day, it sells itself, right? Depending on what's going on, at least in a lot of countries. And I think that,
There may very well be a view that if they were to engage in a significant devaluation, that would be too destabilizing. Yes, it would cause damage to the U.S. Obviously, we've talked about how there's sort of mutual vulnerabilities, but that it would cause ripple effects across emerging markets that would then, and especially, you know, China talks about being the sort of they're of the global south.
they're effectively the leader of the global South. They're the, you know, they're, they're giving the global South a greater voice in global governance, you know, a pretty significant remedy devaluation, I think would be quite damaging throughout the global South. And so that would, that would blow a hole in part of what they're trying to, the way they're positioning themselves globally. But, and again, though, the other thing though is, is a devaluation is the question is, is how then to stabilize that for the Chinese domestic economy? And what does that do for,
domestic confidence when you're seeing the economy is not doing that well, to be euphemistic. And, you know, if they drop, if they devalue 10, 15% against the dollar, does that send a signal of potentially panic throughout the population? Probably not, but can they be sure it wouldn't?
So I think that is the other side of the coin, right? And it goes to what nerds like me, econ nerds like me, call the impossible trinity, right? You can't have...
independent monetary policy with an exchange rate peg, basically. What China right now needs is it needs to do something to counter this huge shock from tariffs. I mean, to think that tariffs from the US on China went from 20% to 50% in the space of less than half a year, that's insane. It's a huge shock. And it is a deflationary shock for China. The
The only reasonable policy response is to ease monetary policy radically. Maybe you want to do fiscal easing as well. Fine. But the primary response is to cut interest rates. They're not yet zero in China. Bond yields are between one and two percent across the curve. You can cut and ease radically, but you can't. And the basic
straightjacket is the peg against the dollar because if you start easing radically, which is what's needed to counter deflation, then inevitably you're going to have a depreciation of your currency against the dollar. So the picture is actually really, really complicated because China, by not devaluing against the dollar, is making an implicit judgment, okay, we will accept deflation. We will accept this economic hardship.
for now. The economic hardship is real. As I was saying, the transshipments are massive. And so you can think of, you know, you were saying China sees itself as a leader of the global south. So here's the flip side of that argument.
obviously a ton of goods that would have gone to the United States are now flooding all over the place. All over the place, yeah. Is that something that's necessarily positive for China vis-a-vis the global south? No. It's a major issue. They're in a really tough situation. Yeah, so I think this is a, you know, at the end of the day,
I sort of talked about the financial leg, which is the Achilles heel of the US. The export growth model is the Achilles heel of China.
If the U.S. could figure out how to do a G7 oil price cap, which it did on Russia, if it could figure out something similar to slow exports from China, that is the way to hurt China, and that is China's Achilles heel. It's just because of the diversity of exports from China. We haven't figured out how to do that yet. Honestly, if you look at the President Trump posting about 35% tariffs on Japan, we're at this...
who's going to join the U S in this? I mean, you, you know, you look at the EU, right? I mean, maybe there'll be some sort of a deal with the EU, but you know, the EU isn't particularly happy with daddy Trump these days. No, I, I was on my way back from beautiful. I don't know if you know this, but Frankfurt is the most romantic city in the world. Is that because you're from Frankfurt? I'm from Frankfurt. It's so romantic. Um, in any event, um,
I was on a plane back from Frankfurt to D.C. in early February, and I was looking at the headlines coming across on tariffs on Canada and Mexico, and I was just shocked. You know, why are we, the United States, picking a war with absolutely everybody? You know, that is what you absolutely should not do. You should figure out who are your big strategic opponents, and then you pick a fight with them.
And there are some people in the Trump administration who understand that, but they were not listening. They were overruled. Absolutely. And so, of course, within the Trump administration, there is a legitimate back and forth, I think, on how to engage China and on how to optimally impose tariffs. Right. If you impose tariffs only on China, obviously there's going to be these transshipments. So there was a camp in the Trump administration saying, well, we need to put tariffs on everybody.
to stop that from happening. And so I think there's all kinds of legitimate tensions, but how this was rolled out, the de facto picking a huge fight with everybody on April 2nd, it was just a big miscalculation. And back to your, I mean, back to the discussion around China and the trade around me, I mean, it is a
China's too big to tackle by yourself. Exactly. And there isn't the kind of... I mean, even with the Russia and those sanctions, you look at some of... I mean, you've written about it, the...
the holes and the sanctions and around the tankers and the shipment of oil. I mean, even the EU, you think in Europe, when there's a land war in Europe started by the Russians, that they would be more focused on tougher sanctions. And even there, they're not willing to do it. So I don't think there's any political world where they're going to be even tougher on China. Yeah. What I think, so my best guess of what President Xi's strategy is,
And of course, the US has played right into his hands, if this is in fact what he's thinking, is since the US decided to pick fights with absolutely everybody,
And since the United States economy is weakening significantly, and since financial markets in the United States are vulnerable, the dollar has fallen 11% this year, the fall. Wasn't the Washington Journal how to start this weekend? It's the biggest fall in the first half of the year since 73, I think? Yeah. And, you know, people say, oh, Trump is a mercantilist. He likes the fall. But that fall comes with all kinds of negative consequences. I just wrote a piece today how
Turkey is an example of what not to do with your central bank, right? Don't put pressure on your central bank to cut interest rates.
Turkey went into a financial crisis when Erdogan did that, and it has yet to come out five years later. What is happening with the Federal Reserve here and the growing political pressure on the Fed, which of course is a symptom of the trade war and a weakening US economy, right? Trump wants lower interest rates because the economy isn't doing that great.
You know, these are basically things where President Xi in Beijing is sitting there just looking at all this turmoil and the U.S. is basically exhausting itself.
And so I think what the Chinese are hoping for is, you know, in 12 months, this will all have blown over because the U.S. will have spent itself. That's what it looks like to me. I mean, certainly the Chinese, you know, you sort of what they say publicly in very, you know, speeches from some of the leaders or various documents is basically just focus on doing your own things well. Yes. Right. You know, harden the system. Right.
you know, hardened so that we can deal with all this external turbulence that seems to be increasing. And again, I think their view is, and I think correctly, is most of that external turbulence is being driven by here, driven here in DC is all they can do is do their own thing as well. And so that goes back to the question. So looking at the RMB, if you were the guy in Beijing who sets the RMB rate against the dollar,
right and you know the idea of there is no independent central bank in china that it doesn't function the same way you know pang gong shang who's the governor of the pboc you know he is not like jerome powell he doesn't sort of ignore what the leadership wants him to do um but if you were the guy who could say okay the remin b really should be f to the dollar where would you put it so i would um
request a meeting with President Xi. And I would say, do you want this thing over tomorrow or do you want it to drag on for the rest of the next five years or so? Because you can end it tomorrow. And I would say if we do a one or two, 3% devaluation, nothing tomorrow, global financial markets will fall out of bed and US negotiating position will crumble. I think this has to be
a policy option that is put to President Xi. Maybe it has, but I think the advantages to doing that for China are massively outweighed by the chance of open-ended conflict on economic terms with the United States. In the end, China is a massive exporter. That's its growth model. It has to defend that. And right now, in a way,
Of course, it's true that China looks like the grown-up in the room, but really it's the grown-up because it's kind of taking it on the chin, right? Its growth model is being seriously challenged today.
The main importer of its goods is saying no, no moss. Well, I mean, because it's a mercantilist system and increasingly so, and it's hurting a lot of other countries too. Yeah, exactly. It's how many countries see it, not just the U.S.,
Not just developed countries, but increasingly you see countries in the global south that are taking trade actions against what they see as bad PRC export practices. So I think what I would put to President Xi is the longer you let this thing drag on, the headlines are against you, right? Because you've got all these Chinese goods that are flooding global markets now. They would have gone to the United States. They're no longer going to the United States.
This is bad PR for us. This will, in the end, shift the narrative even more against us. If we can end this thing sooner rather than later, that's fundamentally in our advantage. And so if we can do that with a simple economic measure, I mean, by God, how many years have we been hassled for managing our exchange rate? Let's step away and let it fall.
Well, I mean, that is sort of, I mean, that is the sort of be careful what you wish for, right? Because for so long I said, oh, no, you know, you got to let the renminbi, you know, you know, float, right? Yeah. Yeah. So, okay. So, so, so the question just, I'll ask the question a little differently. So like, like leaving aside the trade war politics, just looking at sort of the economic fundamentals, if they let that renminbi float tomorrow, where would it go? Do you think? So.
I think there's a... And by the way, they're not going to. This is a purely hypothetical. We're discussing hypotheticals, yeah. So I think there's a short-term answer and a medium-term answer to that. China's current account surplus with the rest of the world is massive. If you go through the numbers, it's basically bigger than ever. Of course, there's
The issue of scaling by GDP, it doesn't look so big when you do that, but in raw dollar numbers, China is the biggest exporter to the rest of the world ever in the history of China. And it continues to increase. Continues to increase. So...
China's export model is more important than ever for the world, and especially for China. That means in the medium term, there's only one way for the RMB to go, which is to get stronger. So when you run standard economic models, they put undervaluation of the RMB around 20-30%. So that would get you to...
like into the fives to the dollar? Exactly. Exactly. Five, call it five 50 fair value. Um,
Which is crazy, right? But it's really not crazy when you consider how massive the current account surplus is. Now, short term, right, you can think of the current account as, you know, the steady as she goes flow of dollars. What then in the short term dominates are capital flows, which are a completely separate phenomenon. And
If you have a similar situation to 2015, where you get a devaluation in drips and drabs, which is what China did in 2015 and 2016, then...
depreciation expectations onshore will build. People will try and get their yuan to safety, convert them into dollars before devaluation happens. And so you'll get big capital flights. So in the short term, that will be the dynamic now as well. So I'm sympathetic to your point that if you devalue, you have this really complicated situation that you're managing.
And it could spiral out of control and ultimately backfire on China. That is a big risk. But that risk, I mean, we saw...
We have one natural experiment on this, which is the first week in April, that small devaluation. And, you know, people were really freaking out that week. Like they were thinking, oh my God, we're going to get a 5%, 10% deval from China. The 10-year yield was approaching 5%, right? There was concerns about auctions failing. You know, China came through that episode just fine. And so I almost think like,
It's interesting because you have these two behemoth superpowers facing off against each other, right? And in a way, China does not have enough self-confidence when it comes to its financial might.
It knows it's an export superpower, but like on its financial might, it's actually kind of doesn't have enough confidence in itself. And the United States is much too confident on its financial strength. Do you think on the Chinese side, there's the lack of confidence maybe because sort of there's a bigger debt issue than is public?
I think that is... They see more vulnerabilities than maybe outsiders see in their financial system? I think that is definitely possible. There's probably a lot of skeletons in the closet. So switching gears, related to this
Question to the RMB, right? One of the things we hear a lot about is, you know, the dollar is going to lose its status as a reserve currency, right? You know, especially this last year, you know, we sort of, people are losing faith in U.S. assets, U.S. dollars because of the politics here. Yeah.
And, you know, there's talk about RMB internationalization, increasing uses of the yen in cross-border payments, the yen in cross-border payments, etc. You know, there was an interesting speech. I think it was, I'm pulling up right here. I think it was on the 18th of June at the Lu Jiazui Forum, this annual big financial forum in Shanghai. Lu Jiazui is like sort of the financial district where the Pan Gongsheng, who's the PBC governor, the head of the central bank, said,
He didn't talk about sort of the U.S., the RMB replacing the dollar as a reserve currency. He talked about effectively the risks of, I'm quoting here, the risks of excessive reliance on a single sovereign currency and its negative impacts and how to foster healthy competition among a few strong sovereign currencies. And so as someone who's been looking at forex and sovereign currencies for most of your career,
Is it possible that you could end up with effectively like a basket of sovereign currencies that are, you know, all in the, say, 15, 20 percent share where the U.S. dollar's relative position or relative strength is weakened? But there are enough other ones that that works as a forex market. Does the forex market need sort of one big currency that everyone can go to if there's a problem?
So I think you put that whole question and topic perfectly. So China clearly is hoping for a multipolar world on currencies. Okay, so they want to be...
a counterweight and in a way a checks and balance on this exorbitant privilege that the United States has, this ability to dictate terms to others because the dollar is the reserve currency of the world. So let me say a couple things about that. So the dollar in, if you look at official FX reserve holdings, it's around 60%.
The euro is around 20, 25%, and China is really nowhere. It's 1 or 2, 3% at most. Outside of their own reserves, right? Outside of their own reserves, right. So this is global FX reserves. The IMF does a quarterly survey. These are the numbers from that survey. These...
numbers, these shares, so 60, 20, and then bupkis for everybody else, have not changed in the last 30, 40 years. So- You know, when the euro came about, wasn't the idea the euro was going to play this role? Exactly. And so I'm just giving that example to underscore how sticky the reserve currency status of the dollar is. So the hurdle-
for getting to a multipolar world for China is massive. It would require all kinds of things, starting with transparency of markets, accountability, rule of law,
open capital account so that people that go in can also take their money out. I mean, the hurdles are tremendous. And transparency around their reserves. Exactly. I think there's something bad about those. Super opaque. Not just PBOC reserves, but what's going on with all the state banks, right? I mean, official intervention has basically migrated to the state banks in the last 10 years. So the hurdles on China are super high. And
The answer or the way to make a multipolar world is not by somehow strong-arming markets or sweet-talking markets. It's by doing the hard work. Become transparent. Become accountable. Be what the United States is not, which is currently rule-based and predictable.
That's what you need to do. And I think China in that respect still falls significantly short. Maybe since we're pivoting a little bit to the bigger picture, let me also say, you know, the dollar is down 11% so far this year. It is blistering. I just got back from Asia. The negativity on the dollar, it is devastating.
Because of the politics here or because of the trade war? So let me break it down. So the fall in the dollar has basically happened at two points this year. It happened in early February when the U.S. imposed tariffs on Canada and Mexico and then within 12 hours took them back.
And it happened in that first week in April when Trump put big tariffs on everybody and then suspended them on April 9th and April 10th. So...
This is not a story about markets thinking tariffs are necessarily bad. It's about the flip-flopping on policy and the perception that policy is just out of control. That's what markets are reacting to. It's not that they think the basic issues around trade aren't legitimate. I think everyone in markets at this point realizes that they are.
It is that the way in which things are done and the haphazard nature and the chaos, frankly, of policymaking, markets are like, oh my God, if this is happening on trade, where else is it happening in the U.S. government? Is it almost like the U.S. looks like an emerging market now? I think that is, I mean, I just wrote a sub stack on exactly that, so I shouldn't play it down. I should play it up. But thank you for the promotion.
We are getting whiffs of that. The U.S. Treasury yields are stubbornly high, even though the United States economy is weakening. That's weird. And so...
You know, there are whiffs in different places of U.S. financial markets that are starting to look like emerging markets. But in the end, what makes an emerging markets? It's the lack of institutional frameworks. It's the lack of central bank independence. It's the lack of accountability. The erosion of the rule of law. Exactly. And that is, you know, where understandably financial markets are going like, hey, wait a minute. Why are we holding dollars?
So what are they going to hold? I mean, they're going to hold renminbi or they're going to hold gold? I mean, this is the question. This goes back to the sort of the – and maybe this is, again, back to sort of where the Chinese are coming in. You know, in some ways, it's like, okay, we can get a bigger share of renminbi without actually doing all the work that you laid out in terms of transparency and convertibility. And so this is sort of a lower cost way of –
chipping away at the dollar or building, you know, increasing their R&B share without actually doing all the hard things that people have been saying for so long in China you really need to do to internationalize, right? Totally. So it's sort of an opportunistic approach of looking at what you're describing as sort of the rest of the world seeing the dollar potentially? Yeah. So when I run out of talking points on good things about the dollar,
Which these days happens pretty quickly. Then I resort to TINA. There is no alternative, right? That basically is true. There is no rival reserve currency in the world. The Europeans are massively dysfunctional. You know, you and I touched on that a little bit earlier. I say this begrudgingly as part Euro trash, right? So, of course, there are things like crypto. There's gold. There's other commodities.
The problem is that those things are in limited supply and the price of this stuff has gone up so much. And it crypto Bitcoin doesn't work as like a currency. It's not a currency. Exactly. So, so,
So it's not the same kind of store of value that you're trying to replace the dollar with. And so I think TINA is still operating. The dollar became a reserve currency because of many decades of good policy. It'll take a while for that to break down and unwind, and I hope it doesn't. But I think everything that's happening right now is definitely not helpful.
So, I have cognizant of your time. I have one more question that if you have anything else you want to add, please do. But do you think Treasury Secretary Besson, who came from the financial markets, who worked for Soros, right, he must understand these issues, I would hope. Do you think he understands what you're saying about the dollar? For sure. I think it is more about the balance of power in Trump 1.0 versus Trump 2.0.
You'll remember, Bill, in Trump 1.0, there was Gary Cohn from Goldman. The globalists. The globalists. The globalists. So he was basically the conciliary, right? He was like... It wasn't just the globalists. It was the Goldmanists because it was Mnuchin was the next Goldman partner. Ray Cohn was... Was he president of Goldman at one point? Yeah, he was co-CEO or the number two under Lloyd Blankfein. I mean, massively... There's no one from Goldman in the administration now, is there?
I have a Goldman history, so I'm not going to comment on that question. Honestly, I actually don't think there is anyone from Goldman Sachs at this level. Honestly, the Goldman Sachs folks tend to actually understand the financial markets. But I was going to make a non-Goldman point, which was, having done meetings with Gary, he's just incredibly forceful, intimidating. I mean, the guy's huge. He's physically huge. So,
This is someone who is willing to say in a meeting with Trump, what's what? And no, we should not do this. And, you know, to be able to say that, you need to be incredibly rich. You need to be incredibly self-confident. And you need to basically be willing to fall on your sword. And basically not give a shit in the sense that like, okay, it's far from me, I'm fine, I don't care. And I think...
That perhaps is not the case in Trump 2.0. We don't have a Gary Cohn. And I think that's the big difference. And Scott Besson's been in financial markets for a long time. I think the head of the CEA, Steve Moran, is also highly knowledgeable on financial markets. These are not roots at all. It is more about
the power that is concentrated immediately around President Trump and this administration that is fundamentally different.
You know, it's easy to be always super, super negative. And the consensus bill right now is super negative on the United States. Well, that's what you're saying. You're tripped to Asia. So let me just highlight. It sounds like in some ways, it's like if everyone wants to throw out the dollar, it's probably actually an opportunity potentially. So let me just highlight, you know, in the end, what is the big thing that's been happening? It is we put on tariffs, okay? Tariffs for the United States are supposed to be inflationary.
If they are, in fact, inflationary, the Fed will not be able to cut. Markets are pricing a lot of cuts for the Fed. They're pricing a very dovish Fed, perhaps also because they think the Fed is subject to political interference increasingly. But if we get this inflation, I think that could be a turning point for the dollar. The dollar could rise if the Fed demonstrates it's independent. It won't cut. Right.
As I said, tariffs are inflationary for the United States. They're deflationary for everybody else, not just for China, for the Europeans as well, for the Japanese as well. And so if the Fed demonstrates its independence in the second half of the year, that could actually be the catalyst in the face of inflation for the dollar to rebound. And I think that would wrong foot global markets massively. Right.
Because there's so much, probably a pretty significant short positions on the dollar. Exactly. You're saying. Yeah, exactly. Interesting. Well, this is really thought provoking. Thanks so much for having me on. Anyone from the Trump administration is listening, but I think they probably get some pushback on some of the ways you've sort of talked about the relative leverage. But I think it's very important to have a different perspective because I found in D.C.,
And certainly seeing it from some of the actions the Trump administration has taken on China, I think – I mean, at one point, I think Secretary Bassett described China as playing with a pair of twos. And I think that sort of – the sort of underestimation of some of the leverage points that China has are pretty dangerous, put it that way. Yes.
So, well, look, I appreciate it. Everyone, go subscribe to Robin Substack. You can click on his name in the video or I'll put it and then when I send it out, I'll put a link to Substack. It's great. And thanks for this. I mean, this is really thought-provoking. So awesome to chat with you. Thank you. Yeah, we should do it again, especially if they do devalue, we'll have to get on it. Maybe they'll do something on the 10-year anniversary in a month, right? Yes, yes, yes. Let's hope not. All right, well, thank you. Thanks, everybody who joined. Take care. Bye. Thanks.