Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Bred what's going on with the yen?
Speaker 3: Well, it's, uh, there's a bit, a bit of an intervention.
Speaker 3: The intervention took it from roughly one sixty to one
Speaker 3: fifty two, and now it is drifting back up towards yes,
Speaker 3: like round one fifty five. Broadly, the yen is just
Speaker 3: really really, really really weak. Obviously, that's because Japanese interest
Speaker 3: rates are very low relative to US and European rates,
Speaker 3: and they the end reached a level where the Japanese
Speaker 3: Ministry of Finance, which has Japan's reserves, started selling dollars
Speaker 3: buying yen to try to try to limit how we
Speaker 3: can become.
Speaker 1: Joe, I gotta say I hate currencies. They are my
Speaker 1: most hated a class locus everything No, because everything's relative.
Speaker 1: So it's like, the yen is down. But is it
Speaker 1: dollar strength or is it yen weakness? It sounds like
Speaker 1: from what brad Is said, it's more yet weakness. But
Speaker 1: I'm sure there's someone out there who will argue that
Speaker 1: it's actually the dollar.
Speaker 2: I did a deadlift one, okay, uh barges. This isn't
Speaker 2: after school special, except.
Speaker 1: I've decided I'm going to base my entire personality going
Speaker 1: forward on campaigning for a strategic pork reserve in the US.
Speaker 4: Where's the best with imposta?
Speaker 1: These are the important question. Is it robots taking over
Speaker 1: the world? No.
Speaker 2: I think that like in a couple of years, the
Speaker 2: AI will do a really good job of making the
Speaker 2: odd launch podcast. And people say, I don't really need
Speaker 2: to listen to Joe and Tracy anymore.
Speaker 4: We do haveing perfect.
Speaker 2: Welcome to lots more? Will we catch up with friends
Speaker 2: about what's going on right now?
Speaker 1: Because even when odd Lots is over, there's always lots more.
Speaker 4: And we really do have the perfect guest.
Speaker 1: You know.
Speaker 2: We had our friend Hugh Hendry on the show just
Speaker 2: this week and he was all telling this dollar story.
Speaker 2: But like, is there something wrong with Japan? Should we
Speaker 2: be scared? Or is this just a natural repricing due
Speaker 2: to the interest rate differential?
Speaker 3: I mean, I don't think there's anything structurally or fundamentally
Speaker 3: wrong with Japan. I mean, Japan obviously has had difficulty
Speaker 3: generating sustained inflation over time, and the Bank of Japan
Speaker 3: is determined to kind of get inflation up this time,
Speaker 3: and so the Bank of Japan has been, you know,
Speaker 3: running a monetary policy that's a bit at odds with
Speaker 3: the policy of the Fed and the ECB. I mean,
Speaker 3: clearly this is a case of yen weakness, because you
Speaker 3: can look at the yen versus the dollar or the
Speaker 3: yen versus the Euro, and either way it is weak.
Speaker 3: But it has reached a level of kind of extreme weakness.
Speaker 3: In real terms, the yen is back to its levels
Speaker 3: of the early nineteen seventies, and so, you know, like
Speaker 3: if you think of Japan's economy in the early nineteen seventies,
Speaker 3: that is, before Pan's electronics industry took over the you know,
Speaker 3: took on the world, before Toyota's export wave and the
Speaker 3: globalization of Japanese automakers. It's just it's returned Japan to
Speaker 3: a level of purchasing power that does seem a bit
Speaker 3: at odds with the underlying strength of its economy. But
Speaker 3: that's I guess, you can. You know, the debate is
Speaker 3: whether that's a natural consequence of interest rate differentials which
Speaker 3: are large and now there's less of an expectation that
Speaker 3: the Fed's going to cut, so the interest rate differential
Speaker 3: will persist, or whether the yen has overshot a little bit.
Speaker 4: It's reached such.
Speaker 3: An extreme level of weakness that it is divorced even
Speaker 3: from an interest rate differential that supports a weekend.
Speaker 1: So we're speaking to Brad Setzer, senior fellow at the
Speaker 1: Council on Foreign Relations and someone we like to talk
Speaker 1: to to connect a lot of different things that are
Speaker 1: going on in the world. And I'm just going to
Speaker 1: ask one more question on the yen. And maybe it's
Speaker 1: sort of rephrasing Joe's question about should we be worried?
Speaker 1: But we have seen all the talk about yen intervention recently,
Speaker 1: and since that supposed intervention, it looks like the yen
Speaker 1: is weakening again. Is that something to worry about?
Speaker 3: I guess it depends on what you mean by worry.
Speaker 3: If you're the Ministry of Finance, you would rather that
Speaker 3: the yen sort of just stay in a like a
Speaker 3: range of one fifty to one fifty four. So if
Speaker 3: you're the Ministry of Finance, I think you are worried
Speaker 3: because the yen is drifting back towards one sixty, or
Speaker 3: drifting back towards levels where you'd be expected to intervene
Speaker 3: again the goal of intervention. Some people argue the goal
Speaker 3: of intervention is to change the direction and go from
Speaker 3: yen weakness to yen strength. I think that's an unrealistic goal,
Speaker 3: and I don't think that is Japan's goal. I think
Speaker 3: the goal of the Ministry of Finance is to limit,
Speaker 3: to set a floor under how weak the yen is.
Speaker 3: As the yen continues to depreciate, as it gets closer
Speaker 3: to one sixty, I think there'll be increasing expectations of intervention.
Speaker 3: And you know, in the short run, the intervention works,
Speaker 3: and I think the longer one, I mean it works
Speaker 3: in the sense that it will move the market back
Speaker 3: towards one point fifty, and then it becomes a question
Speaker 3: of whether the Ministry of Finance has to continuously intervene,
Speaker 3: in which case eventually you will have a question about
Speaker 3: whether it's running out of firepower, or whether the Bank
Speaker 3: of Japan needs, if it's really worried, needs to join
Speaker 3: the Ministry of Finance and adjust short term rates in
Speaker 3: Japan as well.
Speaker 2: Tracy, can I say something that has always bothered me?
Speaker 2: And I don't mean Brad, don't listen to this part
Speaker 2: because I'm going to question something that a professional economists
Speaker 2: say all the time. But I'm always confused, and oh,
Speaker 2: they didn't have enough inflation. They can't generate like we
Speaker 2: have inflation now in the US. It doesn't seem that great. Meanwhile,
Speaker 2: Japan doesn't have much inflation. I don't know, it doesn't
Speaker 2: seem that bad to me, Like, maybe just don't worry
Speaker 2: about making inflation higher, doesn't wait.
Speaker 1: I do want to hear Brad respond to those.
Speaker 3: Look, I actually think it's a real debate in Japan. Okay,
Speaker 3: you know, Japan's economy did function for a while.
Speaker 2: I've never been there, but every time I've looked pictures,
Speaker 2: it seems like a peaceful, prosperous society with great consumer
Speaker 2: and food and not inexpensive housing and working rail and
Speaker 2: all these things that we supposedly want. Like, okay, so
Speaker 2: it's not there's not much inflation.
Speaker 4: Who cares.
Speaker 3: I mean, it did generate some you know, it was
Speaker 3: perceived to generate some significant problems. I mean, zero interest rates.
Speaker 3: Zero inflation and zero interest rates doesn't leave much scope
Speaker 3: for monetary policy to respond to downturns, and then it
Speaker 3: makes wage adjustments more difficult. If some sector needs a
Speaker 3: reduced real wage, you have to accept weaker nominal wages
Speaker 3: and that yeah, that's just hard and people don't like
Speaker 3: seeing there the dollar or yen value of their paycheck fall.
Speaker 3: That said, I do think that there is a question
Speaker 3: about whether whether low interest rates in a global environment
Speaker 3: where other central banks have much higher interest rates, and
Speaker 3: so your main transmission mechanism in theory is a week en,
Speaker 3: about whether that's generating the right kind of inflation In Japan,
Speaker 3: it's pushing up the price of imports. Imports in Japan
Speaker 3: feed into consumer prices. They're also an input into some
Speaker 3: Japanese industry. But in general terms, a weekend raises the
Speaker 3: cost of imported energy and food and reduces real wages,
Speaker 3: which we've seen. There was a headline yesterday about falling
Speaker 3: real wages for close to two years in Japan. And
Speaker 3: so it isn't clear that if the main effect of
Speaker 3: a week in is reduced real wages and you have
Speaker 3: less fewer yen to spend on Japanese services, you can't
Speaker 3: go out as much because you're spending more on imported oil,
Speaker 3: whether that will generate rate a healthy, self sustaining process
Speaker 3: of appreciation. The winners of a week yen in Japan
Speaker 3: are the multinationals the big exporters, some of the financial
Speaker 3: investors who had long dollar position in their portfolio. But
Speaker 3: there isn't any immediate transmission from a big company which
Speaker 3: is making more gives me more yen on its operations
Speaker 3: in Thailand in the United States to real wages in
Speaker 3: Japan to increase spending in Japan. So it hasn't yet
Speaker 3: generated the kind of inflationary dynamics that you've seen in
Speaker 3: other economies. And so I do think there is a concern,
Speaker 3: and that's why the Ministry of Finance is intervening and
Speaker 3: trying to separately limit yen weakness. There's a concern that
Speaker 3: yen weakness isn't actually helping reflate Japan's economy.
Speaker 1: Brad, you mentioned wages there, real wages, and I was
Speaker 1: just thinking back to my wage when I was in
Speaker 1: grade school in Japan, and I used to get one
Speaker 1: thousand yen every week for my allowance, which was ten dollars.
Speaker 1: And I have to say that exchange rate is forever
Speaker 1: fixed in my mind as like what the yen should be.
Speaker 1: It should always be around like one hundred to the dollar.
Speaker 1: And when I look at the chart now, it's really
Speaker 1: kind of stunning. To me, But you also mentioned imports
Speaker 1: getting more expensive, and this is something that we wanted
Speaker 1: to speak to you about. Did you see the China
Speaker 1: export data that came out this morning.
Speaker 3: I did.
Speaker 1: Yeah, So exports going up more than expected. I think
Speaker 1: it was like a one point five percent increase in
Speaker 1: dollar terms versus a forecast for one point three percent.
Speaker 1: And this has kind of burst into the public consciousness
Speaker 1: of at least finance Twitter recently, this idea that China's
Speaker 1: exports have been relatively strong and this is one of
Speaker 1: the few bright spots perhaps in the Chinese economy. Can
Speaker 1: you talk a little bit more about that. Some people
Speaker 1: are couching this as like a China a shock that
Speaker 1: we should be worried about that the rest of the
Speaker 1: world will struggle to respond to.
Speaker 3: So I guess you know, if you just look at
Speaker 3: the headline increase in dollars, an increase of one or
Speaker 3: two percent doesn't seem that dramatic. So there's another important component,
Speaker 3: which is that Chinese export prices have been falling quite significantly,
Speaker 3: you know, because of yuan weakness, because of lower price
Speaker 3: war for electric vehicles, a price war for solar panels,
Speaker 3: a price war for a lot of China's exports, so
Speaker 3: export volumes are actually up more like ten percent. I mean,
Speaker 3: I don't think the numbers yet available for April, but
Speaker 3: that was certainly the case for the first quarter, and
Speaker 3: so it is in that context that one can think
Speaker 3: of a new China shock. I think that the notion
Speaker 3: of a new China shock is very much tied to
Speaker 3: the auto sector and both the electric vehicle sector and
Speaker 3: traditional combustion engines, where China has gone from basically being
Speaker 3: a source of import demand. China imported high end luxury
Speaker 3: cars from Germany, not so many from Japan, but few
Speaker 3: from Japan, a lot from Germany, and five years ago
Speaker 3: it wasn't a big export or not of cars. Produced
Speaker 3: some trucks for export, but not much. Past few years,
Speaker 3: that's changed. China is now the world's biggest exporter of cars.
Speaker 3: It's electric vehicle manufacturers are exceptionally competitive. They're taking market
Speaker 3: share from the foreign joint ventures in China, and they're
Speaker 3: really starting to try to export. And then some of
Speaker 3: the old capacity that made traditional internal combustion engine cars
Speaker 3: in China is being repurposed to serve global demand. So
Speaker 3: this is just combining to really push up export volumes
Speaker 3: in autos in an important way. There's also just enormous
Speaker 3: capacity inside China to produce solar panels, to produce batteries,
Speaker 3: and so you know, China can meet global demand for
Speaker 3: these products as it expands out of its existing capacity,
Speaker 3: which makes it very difficult for other countries who want
Speaker 3: to build up their own solar industry or their own
Speaker 3: battery industry to get those industries going. I think that's
Speaker 3: the sense in which China's exports are a bit of
Speaker 3: a shock to the global system and why there's been
Speaker 3: a bit of pushback. There's some technical factors as well.
Speaker 3: We all remember that during the pandemic, everybody bought a
Speaker 3: lot of computers, bought a lot of household appliances. That
Speaker 3: drove China's exports up to a really, really high level.
Speaker 3: Two years ago, they kind of dip back down and
Speaker 3: now they're coming back up. But there's a dynamic around
Speaker 3: China's traditional exports, and then there's a separate dynamic around
Speaker 3: cars and clean energy exports, and I think the China
Speaker 3: shock is much more now around cars and clean energy.
Speaker 2: You know, I remember in the post twenty ten environment,
Speaker 2: and there's a lot of talk about, you know, currency wars.
Speaker 2: In this idea, everyone doing this beggar thy neighbor policy
Speaker 2: of trying to have their currency weaker so that they
Speaker 2: could sell more. Is that still a dynamic because the
Speaker 2: end can fall, can keep falling. But it doesn't mean
Speaker 2: they're going to have a national BYD. In fact, Toyota
Speaker 2: isn't even really that into evs as far as I
Speaker 2: can tell, or the Malaysian ring it is pretty weak.
Speaker 2: But they don't have a BYD either, or a Shoumi
Speaker 2: or a comac or whatever. It is, Like, how much
Speaker 2: do currencies today play and trade competitiveness or in an
Speaker 2: environment in which the big source of action seems to
Speaker 2: be non commodity more cutting edge technological exports.
Speaker 3: I'm super retro on this question, Okay, in my view,
Speaker 3: still matter, they matter.
Speaker 4: There's our headline, you know.
Speaker 3: Oh, I'm really going out on a limb there. I look.
Speaker 3: I think the response of Japanese exports to yen weakness
Speaker 3: has been relatively modest. I think there's a lot of
Speaker 3: different reasons for that. I think Toyota has wanted to
Speaker 3: protect its transplants, its factories in the United States. It
Speaker 3: hasn't wanted to engage in a price war. It has
Speaker 3: preferred to basically take the yeek week in as a
Speaker 3: source of greater profit rather than really engage in a
Speaker 3: fight for volume. If you look at the weak Korean
Speaker 3: wand which is also veriry.
Speaker 2: Which always going to bring up because it sort of
Speaker 2: shows that there is this commonality and it's not just
Speaker 2: a yen story.
Speaker 3: But yes, anyway, you know, if you look at Hyundai's
Speaker 3: sales in the US and they're exports to the US,
Speaker 3: they've responded very clearly to the to the week one.
Speaker 3: You know, there's been an enormous actually increase hasn't gotten
Speaker 3: a lot of attention in Korean auto exports to the US.
Speaker 3: And I also think the fact that in real terms,
Speaker 3: because Chinese inflation has actually been very low relative to
Speaker 3: inflation and the rest of the world, and the yuan
Speaker 3: has come down against the dollar, you know, there's been
Speaker 3: a roughly ten percent weakening of the yuan in real terms,
Speaker 3: and I think that is one of the factors that
Speaker 3: is contributing to this export boom. You see all these
Speaker 3: comparisons of China's EV prices versus prices of evs elsewhere,
Speaker 3: and of course part of that is just you know,
Speaker 3: byd had got really good at making evs really fast.
Speaker 3: But part of it is that the Chinese yuan is
Speaker 3: below where it was fifteen years ago against the dollar,
Speaker 3: and inflation differentials are now bringing cost in China down.
Speaker 3: My rule of thumb is that if the Chinese yuan
Speaker 3: is not going up, if it's not appreciating, China tends
Speaker 3: to gain global market share. And I think that is
Speaker 3: a general rule that's held over time, and I think
Speaker 3: it's asserting itself now. The interesting thing about China is
Speaker 3: that it is not giving up its old competitive advantages
Speaker 3: as it is introducing these new advantages. It's just exporting more.
Speaker 3: And I think that is in part a function of
Speaker 3: the week you on. So there's been some weirdness. Certainly
Speaker 3: a lot of relationships broke down during the pandemic. But
Speaker 3: my baseline thesis is that you're going to see a
Speaker 3: reassertion of the traditional, well established relationship between currency values
Speaker 3: and export volumes pretty clearly over the next couple of years.
Speaker 1: Wait, this is my chance to ask you about Chinese
Speaker 1: excavators and what they maybe say about what's driving the
Speaker 1: export boom and the debate between you know, interest rate
Speaker 1: differentials and maybe currency contributions versus excess capacity, because that's
Speaker 1: the other thing that people are talking a lot about,
Speaker 1: this idea that, well, there's so much excess capacity in
Speaker 1: the Chinese economy. If you can't sell into your domestic market,
Speaker 1: then you're going to try to sell more outside of it.
Speaker 3: Look, the reality is the two those factors tend to
Speaker 3: go together. If you've got weakness in your domestic market,
Speaker 3: you're going to have low interest rates and a weak
Speaker 3: currency as a general rule, and that exchange rate signal
Speaker 3: helps you take products that previously were produced for your
Speaker 3: own market and sell them to the rest of the world.
Speaker 3: They're not mutually exclusive explanations. A weak currency helps you
Speaker 3: take excess capacity and sell it globally. There's two different
Speaker 3: things that have happened with excavators, which are like the
Speaker 3: big construction equipment with like a backo that helps you
Speaker 3: dig out the foundation of a new building or help
Speaker 3: build a road. They're like the base construction equipment you
Speaker 3: know in the US would be like the thing Caterpillar makes.
Speaker 1: It's the thing that every guy I've ever met always
Speaker 1: dreams of operating.
Speaker 3: Because they're cool.
Speaker 2: Exactly by the way, So on the point, sorry to intervine,
Speaker 2: but on this point, Tracy, you know, I'm going to
Speaker 2: Las Vegas next week to see Dead and Co. With
Speaker 2: a few friends at the sphere, and we're looking at
Speaker 2: a few of the things that we can do, like
Speaker 2: we're gonna go see the big dam that's out there
Speaker 2: and other stuff. One of the things that possibly will
Speaker 2: be on our itinerary is this big amusement park where
Speaker 2: adults and kids can dig up stuff with excavators.
Speaker 1: So you may get a business model.
Speaker 4: You may get a.
Speaker 2: Picture of me in about a week from today sitting
Speaker 2: in an excavator or in the bucket part of it.
Speaker 4: Anyway, So yes, confirmed, all right, gor.
Speaker 3: And in my youth, I think I had a Lego
Speaker 3: set that where you had like the fancy gears and
Speaker 3: you could like make it move and it was an
Speaker 3: excavator and it was the total list. There's something amazing
Speaker 3: about the mechanics of an excavator excavator. But you know,
Speaker 3: two things have happened. Like twenty years ago, there were
Speaker 3: a lot of excavators made in China. Even then, those
Speaker 3: excavators were often made by Caterpillar or Komatsu. The big
Speaker 3: Japanese construction equipment company. And so over the past twenty years,
Speaker 3: Chinese companies have sprung up, developed, been able to produce
Speaker 3: at a lower cost point, probably gotten a little local preference.
Speaker 3: You know, if you're a state back construction company, you're
Speaker 3: probably going to use a Chinese excavator if it is
Speaker 3: price competitive. And so inside the Chinese market, the Chinese companies,
Speaker 3: the Chinese marks have gained at the expensive foreign companies.
Speaker 3: And then the second thing that happened is that as
Speaker 3: China went through, you know, one of the world's biggest
Speaker 3: property booms, there was just a lot of demand for excavators.
Speaker 3: So capacity increased and China was producing a lot of excavators.
Speaker 3: Chinese companies were producing a lot of excavators that were
Speaker 3: mostly being used in China as part of the construction boom.
Speaker 3: Construction boom turned to construction busts. Chinese companies are making
Speaker 3: competitive excavators, and guess what those excavators are being exported globally.
Speaker 3: Same dynamics a little bit in steel. It is not
Speaker 3: just a clean tech ev dynamic. The set of inputs
Speaker 3: old industry inputs into construction. You know, construction activity in
Speaker 3: China's down. It's going to go down further, given all
Speaker 3: the difficulties in the property development sector, and given the
Speaker 3: fact that China's overbuilt and you're going to have to
Speaker 3: have an extended period of much reduced property construction. Those
Speaker 3: inputs are in some small part being exported. I mean,
Speaker 3: China could export more steel, but Chinese steel exports now
Speaker 3: exceed US steel production. I think they exceed Japanese steel production.
Speaker 3: I mean, that's just a and that has not exhausted
Speaker 3: Chinese export capacity. There's still capacity to export more. So
Speaker 3: that's the kind of thing that makes a lot of
Speaker 3: China's trading partners nervous. You know, China's can export one
Speaker 3: hundred million tons of metric tons of steel and still
Speaker 3: export another one hundred million. China's exporting five million vehicles,
Speaker 3: but there is clearly capacity inside China export ten wow.
Speaker 3: And you know five is more than Japan, it's more
Speaker 3: than Germany. Ten would be record breaking. So it's that
Speaker 3: forward looking concern is very real.
Speaker 4: Tracy two things.
Speaker 2: I'm on Alibaba dot Com right now, and there's apparently
Speaker 2: excavators you can buy for two thousand dollars from China.
Speaker 2: I don't understand how that has.
Speaker 3: To be any man.
Speaker 2: Yeah, but they look like something. But then the other
Speaker 2: thing is like, you know, Tracy, just I just had
Speaker 2: this light bulb moment where, you know, when the Internet
Speaker 2: bubble happened in the US, everyone is like, well, yeah,
Speaker 2: but there were some good spillovers because we got all
Speaker 2: this unused fiber optics and that laid the groundwork for
Speaker 2: the next twenty years China real estate bubble, creating this
Speaker 2: incredible unused capacity of excavator and I know how to
Speaker 2: make excavators for the rest of the world.
Speaker 4: So there you go.
Speaker 1: Okay, Brad. The other thing we wanted to ask you about,
Speaker 1: we could just turn this into an excavator.
Speaker 2: At the We got to get that guy on TikTok
Speaker 2: who sells the Chinese excavators sometime.
Speaker 1: That would be fun.
Speaker 2: Brad.
Speaker 1: The other thing we want to ask you, and this
Speaker 1: kind of ties into the discussion around well, it very
Speaker 1: much ties into the discussion around China's export boom. You
Speaker 1: just published a paper at the French Institute of International
Speaker 1: Relations called Power and Financial Interdependence, and you're sort of
Speaker 1: tackling this idea of the China and US financial systems
Speaker 1: being intertwined so China buys a lot of US treasuries
Speaker 1: because it has to, basically because it's exporting a lot
Speaker 1: to the US. But you make the point that there's
Speaker 1: a difference between financial intertwining or interdependence versus the sort
Speaker 1: of real economy interdependence. Could you talk a little bit
Speaker 1: more about that.
Speaker 3: Well, I mean, I think the paper has an ambitious title,
Speaker 3: so hopefully people will read it as a paper with
Speaker 3: some ambition, even if the conclusions are nuanced. I guess
Speaker 3: I make a number of different observations about the link
Speaker 3: between financial interdependence and real economic interdependence. One is the
Speaker 3: one you made that if there is an enormous trade imbalance,
Speaker 3: by definition, there has to be offsetting financing, and there
Speaker 3: will be a financial imbalance, even if that imbalance is
Speaker 3: a bit hidden, and even if it is hard to trace.
Speaker 3: And one of the clear trends over the past fifteen
Speaker 3: years is that China has gone from more or less
Speaker 3: taking its export surplus, having the central bank buy it up,
Speaker 3: buy up the dollars in investing in treasuries and agencies
Speaker 3: doing a lot of more diverse things with its foreign
Speaker 3: exchange reserves. There's a phrase that safe uses which I
Speaker 3: like called the diversified use of foreign exchange reserves, which
Speaker 3: actually it would be putting them things into financial assets
Speaker 3: that are in no way foreign exchange reserves. And then
Speaker 3: because of low interest rates, right now, the accumulation of
Speaker 3: financial assets on the Chinese side has moved to the
Speaker 3: export to the private side of China's economy, and so
Speaker 3: it doesn't show up as this huge sustained bid for treasuries.
Speaker 3: So that's kind of one theme. The other theme is, hey,
Speaker 3: if you're thinking about the exercise of power, there are
Speaker 3: conditions when you really need financial assets. If you have
Speaker 3: an overvalue currency and you want to defend that currency,
Speaker 3: you don't want the currency to weaken, or if you
Speaker 3: have foreign currency denominated debts that you really want to pay,
Speaker 3: you need financial assets, and losing access to financial assets
Speaker 3: can be a very powerful sanction. But China buy and large,
Speaker 3: doesn't need access to its legacy financial assets to do
Speaker 3: much of anything right now. It's got this big ongoing
Speaker 3: trade ser plus, it doesn't have much foreign currency external debt.
Speaker 3: Obviously it does help with respect to intervention, but if
Speaker 3: at the end of the day, the worst outcome that
Speaker 3: for China from losing access to your foreign exchange reserves
Speaker 3: is a weak Chinese yuan, that's probably something China can manage. Actually, Conversely,
Speaker 3: those countries that are selling financial assets to China, they're
Speaker 3: receiving real goods and surfaces, mostly goods, and if you
Speaker 3: lose access to real goods in a crisis in certain contexts,
Speaker 3: that can be quite devastating. You lose access to imported components,
Speaker 3: and then the rest of your production process can't continue
Speaker 3: until you find an alternative source. And for some products
Speaker 3: there is no alternative source that's also not Chinese. So
Speaker 3: I think you have to worry a little bit in this.
Speaker 3: In a world where you know, so called interdependence has
Speaker 3: been weaponized, and the US has weaponized interdependence chip export
Speaker 3: controls or the classic example, financial sanctions or the other.
Speaker 3: China has weaponized interdependence economic coercion, not buying commodities or
Speaker 3: at least some commodities from countries where it don't say
Speaker 3: nice things about China, famously with Australia are squeezing Korean
Speaker 3: automakers after Korea agreed to the deployment of a powerful
Speaker 3: US radar in Korea, or losing access to Chinese tourists,
Speaker 3: because the Chinese State Tourism Bureau doesn't sell package holidays
Speaker 3: to your country if you're not saying, if you're rude
Speaker 3: and mean to the Chinese people. So you know, there
Speaker 3: are various ways in which interdependence can be weaponized, and
Speaker 3: some of those involve limits on the use of your
Speaker 3: foreign assets, financial sanctions, and some of those involve restrictions
Speaker 3: on the real flow of goods. And I think in
Speaker 3: the most extreme scenarios, the restrictions on the real flow
Speaker 3: of goods may be more significant for the Sino American
Speaker 3: leverage than financial right.
Speaker 2: That's basically my takeaway here that if the US did
Speaker 2: to China at some point in the future what it
Speaker 2: did to Russia, which I'm not even.
Speaker 4: Sure that that effective.
Speaker 2: Against Russia, but against China it wouldn't have a big
Speaker 2: impact necessarily, But if the China converted conversely did the opposite,
Speaker 2: it would.
Speaker 4: Have a big impact on US. So it seems like
Speaker 4: a bad situation for the US well.
Speaker 3: But to be fair, one of the side effects of
Speaker 3: the property boom in China, you know, Xi Jinping has
Speaker 3: this idea that he can reduce his dependence on the
Speaker 3: rest of the world by substituting out all the goods
Speaker 3: that China now imports, all at least the manufactured goods
Speaker 3: that China imports, and building up stockpiles of all the
Speaker 3: commodities that China imports, And so if there was a
Speaker 3: big interruption in trade, China's economy could continue to function
Speaker 3: fair enough. One thesis. It's a pretty aggressive thesis. It's
Speaker 3: aggressive in the sense that it's preparing for a negative contingency.
Speaker 3: It's aggressive in the sense that it it engineers out
Speaker 3: all of other countries' exports into manufactured exports into China.
Speaker 3: But it doesn't change the fact that an enormous part
Speaker 3: of the Chinese economy and a growing part of the
Speaker 3: Chinese economy. All the people making excavators, for example, are
Speaker 3: internal combustion engine cars for export. They their jobs depend
Speaker 3: on access to export markets. So China's dependence on external
Speaker 3: demand has gone up very, very significantly over the past
Speaker 3: three or four years, even as China's reliance on imported
Speaker 3: manufactured inputs has gone down. So China does have its
Speaker 3: own very significant vulnerabilities in that respect.
Speaker 1: We're back to excavators as the prism through which to
Speaker 1: understand China's Economy, lots More is produced by Carmen Rodriguez
Speaker 1: and Dashel Bennett, with help from Moses Onam and kel Brooks.
Speaker 2: Our sound engineer is Blake Maple's Sage Bouman is the
Speaker 2: head of Bloomberg Pucks.
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Speaker 4: Thanks for listening.