WEBVTT - Lots More on China's Moves to Create a Dollar Alternative 0:00:00.160 --> 0:00:03.240 If we never ever have had guests bringing treats for us, 0:00:03.279 --> 0:00:06.160 and now this is two days in a row. This 0:00:06.240 --> 0:00:09.639 is incredible, happened? This is no two days in a 0:00:09.720 --> 0:00:13.480 row guests bringing in sweets for us, which which makes 0:00:13.560 --> 0:00:13.960 us very. 0:00:13.880 --> 0:00:15.960 Popular in our row because then we'll share them with 0:00:16.000 --> 0:00:18.560 a thank you so much. 0:00:19.800 --> 0:00:23.200 I can't definitely does this bring you guys back to 0:00:23.239 --> 0:00:23.680 Hong Kong? 0:00:23.720 --> 0:00:23.919 You know? 0:00:24.239 --> 0:00:24.479 Yes? 0:00:25.040 --> 0:00:27.920 Yeah, I remember every year. I actually kind of miss it, 0:00:28.040 --> 0:00:31.560 like all the zodiac theme things every year, like you 0:00:31.560 --> 0:00:33.239 would walk around the streets and they'd be all the 0:00:33.280 --> 0:00:37.520 pastries and things, but also the little gold statues in 0:00:37.640 --> 0:00:40.199 like the shape of a dog or a bear, not 0:00:40.200 --> 0:00:42.680 a bear of a pig, or like a dragon and stuff. 0:00:42.760 --> 0:00:46.639 I missed that. We don't get that so much more. Joe, 0:00:46.680 --> 0:00:51.520 do you know what your zodiac animal is in China? 0:00:52.360 --> 0:00:59.080 I used to monkey, monkey, monkey, and I'm a bore. 0:00:59.560 --> 0:01:02.760 I'm very hello, yes, what are you? 0:01:02.880 --> 0:01:06.080 I'm read it? So this last year was my year? 0:01:06.880 --> 0:01:07.720 Did you have a good year? 0:01:08.120 --> 0:01:14.920 I think so I got, But. 0:01:14.840 --> 0:01:17.840 I'm here to carman? What Chinese zodiac animal? Are you? 0:01:18.040 --> 0:01:18.520 The horse? 0:01:19.760 --> 0:01:20.400 A good one too? 0:01:23.120 --> 0:01:30.479 I did a deadlift one? Okay, so many Uh, this 0:01:30.520 --> 0:01:32.440 isn't after school Special, except. 0:01:32.080 --> 0:01:34.640 I've decided I'm going to base my entire personality going 0:01:34.680 --> 0:01:37.880 forward on campaigning for a strategic pork reserve in the US. 0:01:38.000 --> 0:01:39.720 Where's the best with imposta? 0:01:39.880 --> 0:01:42.479 These are the important question? Is it robots taking over 0:01:42.520 --> 0:01:43.080 the world? No. 0:01:43.160 --> 0:01:46.039 I think that like in a couple of years, the 0:01:46.120 --> 0:01:48.320 AI will do a really good job of making the 0:01:48.320 --> 0:01:51.800 odd launch podcast. And people say, I don't really need 0:01:51.840 --> 0:01:53.480 to listen to Joe and Tracy anymore. 0:01:53.680 --> 0:01:59.360 We do have the perfect welcome to lots more. Will 0:01:59.400 --> 0:02:02.280 we catch up with friends about what's going on right now. 0:02:02.400 --> 0:02:05.639 Because even when ad thoughts is over, there's always lots 0:02:05.680 --> 0:02:06.880 more and we. 0:02:06.920 --> 0:02:09.360 Really do have the perfect guest. 0:02:11.639 --> 0:02:14.239 I'm always sort of skeptical of like, like when people 0:02:14.320 --> 0:02:16.080 talk about the end of the dollar, it sort of 0:02:16.080 --> 0:02:17.520 seems like crank stuff to me. 0:02:18.000 --> 0:02:20.720 We have had this conversation so many times. And yes, 0:02:20.800 --> 0:02:24.040 a lot of the people who like having conversations about 0:02:24.120 --> 0:02:27.240 the end of dollar dominance, they are crank adjacent many 0:02:27.240 --> 0:02:30.120 of them. Many of them are firmly in crank territory. 0:02:30.280 --> 0:02:33.560 But I do think it is true if you look 0:02:33.960 --> 0:02:36.960 at what's happening in certain parts of the financial system, like, 0:02:37.080 --> 0:02:41.959 there are attempts being made, even if they're not officially 0:02:42.120 --> 0:02:44.960 called we are trying to move away from the dollar. 0:02:45.080 --> 0:02:47.119 They are called things like, well, we want a more 0:02:47.160 --> 0:02:51.079 resilient financial system, or we want one where we are 0:02:51.120 --> 0:02:54.520 not as tied or as reliant on what's happening to 0:02:54.560 --> 0:02:58.560 the dollar exposed exactly right. So the efforts are there, 0:02:58.720 --> 0:03:01.639 they are underway. Does it mean that things are going 0:03:01.680 --> 0:03:05.560 to change in the next like year, Absolutely not. I 0:03:05.560 --> 0:03:07.680 don't think so. But I don't think they can be 0:03:07.760 --> 0:03:09.400 disregarded in total. 0:03:09.760 --> 0:03:12.600 Well, in the studio with us, we have someone who 0:03:12.960 --> 0:03:16.600 is definitely not a crank or crank and Jason. Former 0:03:16.680 --> 0:03:20.640 guest Zoe Lu You've a great piece China wants to 0:03:20.720 --> 0:03:24.919 ditch the dollar in Noema magazine, and you know this 0:03:24.960 --> 0:03:27.480 is of course we've done episodes on China and the dollar. 0:03:27.800 --> 0:03:30.720 They want to dedollarize, et cetera. I actually find it 0:03:30.760 --> 0:03:32.760 kind of compelling. Maybe there's something going on here. 0:03:33.360 --> 0:03:36.200 Wow. First of all, I do not get to choose 0:03:36.240 --> 0:03:41.240 the title, and I've spoken like a true journalist. 0:03:41.520 --> 0:03:45.560 All journalists have had this. Although I've generally been pretty 0:03:45.560 --> 0:03:46.040 involved in. 0:03:46.000 --> 0:03:48.480 Titles, it's much less of a thing than it used 0:03:48.520 --> 0:03:50.800 to be. If you were working on a newspaper for many, 0:03:50.840 --> 0:03:53.800 many years, it was the sub editors who would choose 0:03:53.840 --> 0:03:56.440 the headline. I'm sorry, Zoe, we've totally interrupted you and 0:03:56.520 --> 0:03:58.680 hijack the conversation talk about journalists. 0:03:58.680 --> 0:04:00.800 No, no, no, no. I actually, do you appreciate your 0:04:00.880 --> 0:04:04.400 explaining of this, because sometimes I get people emailing me 0:04:04.480 --> 0:04:06.800 saying that, well, the title of your article, you're saying 0:04:06.840 --> 0:04:09.680 that China is trying to ditch the dollar. But in reality, 0:04:09.760 --> 0:04:11.960 when we finish reading our article, it turned out that 0:04:12.040 --> 0:04:13.920 you are not saying that China is going to ditch 0:04:13.960 --> 0:04:17.440 the dollar. The bottom line of my argument is that 0:04:17.800 --> 0:04:22.279 for their art, economic and geopolitical reasons for countries like 0:04:22.360 --> 0:04:27.279 China to try to reduce its exposure to the dollar 0:04:27.279 --> 0:04:30.839 based system. And the reason I'm saying this is because 0:04:30.960 --> 0:04:33.560 just think about it. You can imagine China as the 0:04:34.560 --> 0:04:36.840 factory of the world, and you are buying a lot 0:04:36.839 --> 0:04:39.440 of commodities using one currency, and you are trying to 0:04:39.480 --> 0:04:43.200 sell your commodities are in the same currency. This is 0:04:43.240 --> 0:04:46.400 the story of China's rice. This is how China accumulated 0:04:46.720 --> 0:04:51.719 at one point for trillion for exchange reserves denominated in dollar, 0:04:52.279 --> 0:04:56.039 but every time when Chinese exporters importers doing a transaction, 0:04:56.200 --> 0:04:58.640 it has to go through the entire banking system, which 0:04:58.720 --> 0:05:03.440 is not denominated in the Chinese currency. This is why 0:05:03.480 --> 0:05:07.360 the Chinese financiers are grumpy about grumpy about right. They 0:05:07.360 --> 0:05:09.520 are saying that, well, you know, we're the largest trading 0:05:09.560 --> 0:05:11.800 punder with more than one hundred and twenty country them 0:05:11.839 --> 0:05:15.080 the world, and yet our currency is a very minimum. 0:05:15.640 --> 0:05:20.520 How much of the urge to maybe diversify a little 0:05:20.560 --> 0:05:25.160 bit comes from waning economic growth? And I'm very conscious 0:05:25.160 --> 0:05:27.560 that we are recording this in a week. You know, 0:05:27.600 --> 0:05:30.039 we are here on January twenty fifth. It has been 0:05:30.160 --> 0:05:33.760 a terrible week for both the Chinese economy and its 0:05:33.880 --> 0:05:38.279 financial assets. There's been a lot of ink spilt about 0:05:38.400 --> 0:05:40.960 the crash in Chinese stocks. I think the CSI three 0:05:41.040 --> 0:05:44.719 hundred index is down something like forty percent over the 0:05:44.760 --> 0:05:48.599 past three years. There's a lot of conversation about structural 0:05:48.640 --> 0:05:51.960 weakness in China's economy at the moment. How much of 0:05:52.000 --> 0:05:55.919 this urge to maybe dedollarize is too strong a word, 0:05:56.040 --> 0:06:01.120 but sort of diversify currency options is part of this 0:06:01.320 --> 0:06:05.360 economic evolution that makes a lot of sense tracy. 0:06:05.360 --> 0:06:08.880 In fact, if we go back all the way to 0:06:08.920 --> 0:06:12.080 the early two thousands, that was actually the very first 0:06:12.080 --> 0:06:15.599 time when the Chinese officials was talking about seriously talking 0:06:15.640 --> 0:06:19.039 about diversifying their foreign exchange reserve holdings. So from that 0:06:19.200 --> 0:06:23.640 time on, with the growing of the Chinese foreign exchange 0:06:23.640 --> 0:06:27.520 reserve accumulation, the conversation has been focused has been focused 0:06:27.520 --> 0:06:31.920 on how to reduce the opportunity cost of investing all 0:06:32.320 --> 0:06:37.040 the foreign exchange asset in US treasuries. But things started 0:06:37.080 --> 0:06:41.359 to change around two thousand, after twenty fourteen, part of 0:06:41.360 --> 0:06:46.359 the reason was because of the West's threatening of kicking 0:06:46.440 --> 0:06:50.240 Russia off the Swift system. Now at that time the 0:06:50.279 --> 0:06:53.680 West did not go with the nuclear option with Russia, 0:06:53.760 --> 0:06:56.720 but it did sort of provided it did provide a 0:06:56.760 --> 0:07:00.000 wake up call for present putting as well as the Chinese. 0:07:00.560 --> 0:07:04.160 And one year later, it was around twenty fifteen that 0:07:04.400 --> 0:07:09.320 was a launch of CIPS, China's cross border interbank payment system. 0:07:09.680 --> 0:07:13.600 And at that time, again the idea was to facilitate 0:07:13.840 --> 0:07:16.640 broader use of the Internet of the reman be in 0:07:16.680 --> 0:07:21.040 the international system. But then systematically people started to realize, well, 0:07:21.120 --> 0:07:26.000 this can be a hatch or a insurance policy. Then 0:07:26.320 --> 0:07:30.520 things really started to get worse from Chinese perspective around 0:07:30.600 --> 0:07:34.600 two southern eighteen with the escalation of US China trade 0:07:34.640 --> 0:07:39.760 war during the Trump administration, and you have Chinese financial regulators, 0:07:40.200 --> 0:07:44.280 even the people the vice chairman of China's Securities Regulatory Commission, 0:07:44.320 --> 0:07:46.600 funcing how he came out and saying that, well, we 0:07:46.600 --> 0:07:50.920 should be prepared for the so called forced decoupling, meaning 0:07:51.000 --> 0:07:53.600 China was being kicked out of the US led global 0:07:53.600 --> 0:07:58.320 financial system. And obviously with Russia's invasion of Ukraine and 0:07:58.480 --> 0:08:01.960 present puddings more against uk in and the freeze of 0:08:02.040 --> 0:08:05.040 Russian reserves and kicking out of kicking Russia out of 0:08:05.080 --> 0:08:08.640 the swift system, this is really the moment where China realized, 0:08:09.160 --> 0:08:11.560 you know, we could be the next Russia. And by 0:08:11.560 --> 0:08:13.160 the way, China is not the only country in the 0:08:13.200 --> 0:08:16.600 world of facing that kind of insecurity. You have countries 0:08:16.720 --> 0:08:20.440 like Saudi Arabia started to worry, and at one point 0:08:20.480 --> 0:08:22.800 there was even floating the idea that Saudi Arabia was 0:08:22.840 --> 0:08:27.520 considering moving. The trading of shifting is part of the 0:08:27.560 --> 0:08:31.000 transactions of oil or denominating the oil price pricing in 0:08:31.040 --> 0:08:33.120 the Remanbi so this is where I think a lot 0:08:33.160 --> 0:08:35.640 of things have been underestimated. 0:08:36.280 --> 0:08:38.680 I'm glad who brought up oil. Actually I should mention 0:08:39.800 --> 0:08:43.000 we talked to Zoe last year. I think it was 0:08:43.160 --> 0:08:46.920 maybe last August. She's the author of Sovereign Funds, How 0:08:46.920 --> 0:08:50.960 the CPC finances its global ambitions. She's the Maurice R. 0:08:51.000 --> 0:08:55.280 Greenberg Fellow at the Council on Foreign Relations. Perfect guests literally, 0:08:55.520 --> 0:08:57.360 But actually I'm glad you brought up oil because I 0:08:57.360 --> 0:09:00.560 thought one of the most fascinating aspects of your piece 0:09:00.760 --> 0:09:03.480 on China and the dollar, and I had never seen 0:09:03.559 --> 0:09:06.800 anyone put this together, which is that if China is 0:09:06.840 --> 0:09:09.920 going to be I don't know, if it's a dominant 0:09:10.000 --> 0:09:12.760 provider of rare earth metals, and we talk about this 0:09:12.800 --> 0:09:15.040 all the time in the context of like batteries and 0:09:15.120 --> 0:09:18.240 clean tech and certain needs for high tech, et cetera. 0:09:18.520 --> 0:09:20.680 And there's you know, this talk a dependence on China 0:09:20.720 --> 0:09:22.360 for all these things. If China is going to be 0:09:22.360 --> 0:09:24.560 I don't know, maybe the Saudi Arabia of some of 0:09:24.600 --> 0:09:28.360 these commodities, then this is an opportunity to create brand 0:09:28.400 --> 0:09:31.520 new markets that aren't not from day one. You know, 0:09:31.559 --> 0:09:33.280 It's like saudis like a bulkhead. 0:09:33.480 --> 0:09:33.680 Yeah. 0:09:33.720 --> 0:09:36.000 Yeah, Like Saudi Arabia is like okay, maybe if they're 0:09:36.000 --> 0:09:38.480 all these years, maybe it'll trade a little bit more 0:09:38.480 --> 0:09:41.800 oil and some other currency. But China could create a 0:09:41.840 --> 0:09:44.360 new market for these and not and have it be 0:09:44.760 --> 0:09:46.079 undollarized from day one. 0:09:46.679 --> 0:09:51.720 I think that is an excellent point to summarize my argument, 0:09:52.200 --> 0:09:56.360 and I wish you were my editor right at the 0:09:56.400 --> 0:10:01.079 top of very much. So this is how I think 0:10:01.120 --> 0:10:05.240 about the relationship between energy and finance. Right right now, 0:10:05.480 --> 0:10:08.160 we are living through a moment of the so called 0:10:08.240 --> 0:10:10.640 energy transition, but this is actually not the very first 0:10:10.640 --> 0:10:14.160 time we leave. The human society lived through this from 0:10:14.240 --> 0:10:19.400 fire to coal to oil, and the next thing could 0:10:19.520 --> 0:10:22.960 be renewable or clean energy. Could it be a variety 0:10:23.000 --> 0:10:26.200 of renewable resources or clean energy sources. And the danger 0:10:26.240 --> 0:10:30.160 of this is that when we move from an oil 0:10:30.240 --> 0:10:33.640 denominated global economy, which is about eighty percent of the 0:10:33.679 --> 0:10:37.679 global economy now is a fueld by oil. Right so, 0:10:38.120 --> 0:10:43.800 oil is one commodity that has one single market. It 0:10:43.840 --> 0:10:45.719 does not matter where you are trading it, whether you're 0:10:45.760 --> 0:10:48.480 in Texas, you are in Dubai, or in Singapore or 0:10:48.480 --> 0:10:51.920 Shanghai or London. At least for most of the time, 0:10:52.600 --> 0:10:56.520 there is only one global oil market price change here 0:10:56.559 --> 0:11:01.120 it moves over there. But renewables is totally different because 0:11:01.400 --> 0:11:06.560 it's a very much decentralized and distributed system. And even 0:11:06.559 --> 0:11:08.960 for natural gas is the same thing. Right, there is 0:11:09.080 --> 0:11:13.559 no single global market for natural gas. So from this perspective, 0:11:13.600 --> 0:11:19.559 this decentralized and fragmented market provide opportunity for the emergence 0:11:19.640 --> 0:11:23.120 of a different trading hub, different trading system, and different 0:11:23.200 --> 0:11:27.920 pricing mechanism. And this is where China see energy transition 0:11:28.080 --> 0:11:33.320 as an opportunity to reduce their dependence on the dollar system. 0:11:34.040 --> 0:11:38.280 And China actually has the market power in this regards 0:11:38.440 --> 0:11:41.480 because it is already one of It is the world's 0:11:41.559 --> 0:11:45.520 largest import of a lot of commodities, and it also 0:11:45.520 --> 0:11:49.959 dominates a lot of the processing capacity for critical minerals. 0:11:50.120 --> 0:11:53.320 So from that perspective, you see China has access to 0:11:53.760 --> 0:11:57.160 the resources, has the processing capacity. They also have the 0:11:57.200 --> 0:11:59.880 manufacturing capacity in the transition through. 0:12:00.760 --> 0:12:03.839 Yeah, I didn't realize this. So I knew China had 0:12:04.280 --> 0:12:08.440 rare earth capacity, I didn't realize it also has the 0:12:08.520 --> 0:12:13.800 tungsten capital of the world in in Ganjo. Am I 0:12:13.840 --> 0:12:17.040 pronouncing that right, very right in Ganjo. And it's funny 0:12:17.040 --> 0:12:19.520 because I've been to Ganjo on my way to Guylan, 0:12:19.600 --> 0:12:22.400 but the sitting, Yeah, but this was like I mean, 0:12:22.440 --> 0:12:25.240 it must have been like two thousand and four or 0:12:25.280 --> 0:12:28.840 something when my mother was working in Beijing, and you know, 0:12:28.960 --> 0:12:31.440 I was at university at the time, and rare earth 0:12:31.440 --> 0:12:35.080 metals were not on my mind, So the importance of 0:12:35.120 --> 0:12:38.320 that particular city of flew over my head at that time. 0:12:38.400 --> 0:12:42.120 But Tungsten capital of the world, as you point out. 0:12:41.800 --> 0:12:44.320 The example that you pointed out is very important to 0:12:44.360 --> 0:12:49.320 Tracy because Ganjo is the it is the location where 0:12:49.480 --> 0:12:52.199 you I cannot believe you actually have been there because 0:12:52.360 --> 0:12:55.679 I have never been there. Many tourists would not even no. 0:12:56.200 --> 0:12:58.200 It was a way stop on the way to Guilan. 0:12:58.360 --> 0:13:01.240 And I remember I've had a lot of of adventures 0:13:01.280 --> 0:13:04.120 in getting lost in foreign places, but this was one 0:13:04.160 --> 0:13:06.880 of the places where we genuinely got lost because we 0:13:06.880 --> 0:13:09.440 were only there for a night and we really struggled 0:13:09.440 --> 0:13:11.880 to find a restaurant to eat in and no one 0:13:12.120 --> 0:13:14.880 back then spoke English, and you know, we didn't have 0:13:14.960 --> 0:13:17.440 translator apps and things like that, so I remember we 0:13:17.480 --> 0:13:19.400 went to a restaurant and we ordered something and I 0:13:19.440 --> 0:13:22.160 think we got back. I think we thought we were 0:13:22.280 --> 0:13:24.679 ordering like chicken or beef, and we got I'm pretty 0:13:24.679 --> 0:13:27.280 sure it was pan fried scorpions. In the end, this 0:13:27.400 --> 0:13:32.560 was one of my like only like no, no, but 0:13:32.600 --> 0:13:35.760 anyway it was. It was not a tourist destination, as 0:13:35.800 --> 0:13:37.840 you point out. It was really a way stop on 0:13:37.880 --> 0:13:40.840 the way to Gwaelan, which is definitely a tourist destination 0:13:40.920 --> 0:13:42.120 and is beautiful. 0:13:42.280 --> 0:13:45.360 Very much so. But Gun Joe is important in the 0:13:45.440 --> 0:13:53.920 sense that it has China's a second rare metals exchange mechanism, 0:13:54.120 --> 0:13:57.160 and the whole idea behind setting up this is rare 0:13:57.240 --> 0:14:03.720 mineral exchange mechanism has been to increase the pricing power 0:14:03.920 --> 0:14:06.760 of the reman be in a lot of these critical 0:14:06.760 --> 0:14:10.439 minerals very much relevant for the energy transition, and China 0:14:10.480 --> 0:14:13.040 not only have one. China not only has one, but 0:14:13.200 --> 0:14:18.440 has another one in ne Mango Can Oh sorry no, 0:14:18.840 --> 0:14:20.920 I was just pointing out the name of the city. 0:14:20.960 --> 0:14:23.560 I believe it's abouttle rare earth mineral and just a 0:14:23.560 --> 0:14:26.560 small segue about rare earth. This is another aspect of 0:14:26.560 --> 0:14:30.280 why Chinese finance seers have been grumpy. They're saying that, Well, 0:14:30.320 --> 0:14:34.840 you know, China, it is the largest rare mineral exporting 0:14:34.840 --> 0:14:36.480 country in the world for a lamp period the time, 0:14:36.600 --> 0:14:40.600 but they have been exporting rare earth at an extremely 0:14:40.680 --> 0:14:43.920 cheap price. The idea is, you sell rare earth is 0:14:43.960 --> 0:14:46.960 a very important mineral, but you sell it dirt cheap. 0:14:47.360 --> 0:14:49.920 In Chinese word, rare earth is called a heat tool. 0:14:50.040 --> 0:14:52.920 It's like a rare earth means the two too. It's like, 0:14:53.120 --> 0:14:56.240 literally it means dirt. So you are selling something precious 0:14:56.480 --> 0:14:58.960 at the price of a dirt. So this is why 0:14:59.000 --> 0:15:02.440 we are really interesting in sort of increasing the pricing 0:15:02.480 --> 0:15:03.640 power of their meanbi. 0:15:03.520 --> 0:15:06.520 Wait, but is that just to try to get market share? 0:15:06.560 --> 0:15:10.760 Because I think about rare earth's and I think finite resources, 0:15:11.040 --> 0:15:13.960 a lot of people are struggling to get them or 0:15:14.400 --> 0:15:18.080 reliable access to them. Why would you sell it cheap? 0:15:19.040 --> 0:15:22.600 That is an excellent question. For a long period of time, 0:15:22.760 --> 0:15:25.880 rare earth as a metal, it didn't have a lot 0:15:25.960 --> 0:15:29.800 of applications. In the transition to renewables. Like if we 0:15:29.800 --> 0:15:32.680 were having this conversation back in let's say two thousand 0:15:32.680 --> 0:15:37.000 and seven, the market is definitely very different from what 0:15:37.040 --> 0:15:40.480 we are saying today. So from that perspective, yes, having 0:15:40.520 --> 0:15:44.720 market share is important, but the problem is the demand 0:15:44.880 --> 0:15:47.800 is not necessarily as high as it is today. 0:15:47.920 --> 0:15:50.080 Oh I see, Okay, So a lot of the discussion 0:15:50.120 --> 0:15:54.320 around the shortage of rare earth metals is still very hypothetical, 0:15:54.560 --> 0:15:55.000 very much so. 0:16:08.800 --> 0:16:11.880 Something that has come up on a couple of episodes 0:16:11.920 --> 0:16:13.840 we've done, but I don't think we've talked about it 0:16:13.920 --> 0:16:18.880 with you is the Belton Road initiative and the degree 0:16:18.880 --> 0:16:23.280 to which that has or hasn't actually been particularly effective 0:16:23.480 --> 0:16:28.000 at creating a renmend B network that rival or a 0:16:28.040 --> 0:16:30.320 renmen be system. And I think what was it, like 0:16:30.720 --> 0:16:34.760 a lot of the lending is still dollarized, right Terseay? Yeah, 0:16:34.840 --> 0:16:37.160 what is going on with that? And how did how 0:16:37.200 --> 0:16:40.000 do you see like you know, obviously the geopolitics ort 0:16:40.000 --> 0:16:42.520 of building relationships. Of course we've seen the emergence and 0:16:42.640 --> 0:16:45.880 growing of the formal like bricks group of countries. How 0:16:45.880 --> 0:16:48.480 does that How do some of these endeavors play into 0:16:49.040 --> 0:16:50.800 China's currency strategy in your view? 0:16:51.400 --> 0:16:56.120 So, the Belt on the Road initiative initially started as 0:16:56.280 --> 0:17:01.320 a way for Chinese leaders in particular Season to address 0:17:01.400 --> 0:17:05.640 China's domestic overcapacity problem, right is after the financial during 0:17:05.640 --> 0:17:08.120 the financial crisis, China, due to the fort tralling, remenbe 0:17:08.119 --> 0:17:12.280 stimulate and then it creates a lot of domestic overcapacity. Therefore, 0:17:12.520 --> 0:17:15.760 using President czimping his own word, he said, you know, 0:17:15.880 --> 0:17:18.639 China's overcapacity problem is a problem for us, but it 0:17:18.720 --> 0:17:21.720 could be beneficial for other countries. So that was the contact, 0:17:21.720 --> 0:17:24.240 that was the background. But it's in reality, it's not 0:17:24.280 --> 0:17:27.760 necessarily how it was imagined. Right, You're right. A lot 0:17:27.760 --> 0:17:33.520 of the lending have been denominated in dollars. However, Chinese financiers, 0:17:33.560 --> 0:17:38.080 including Presidence MP himself as the leader, have been evasioning 0:17:38.520 --> 0:17:42.399 having bri Beldroom Road Initiative as a vehicle or a 0:17:42.440 --> 0:17:46.800 mechanism to broaden the use of remenbe along Beldom Road 0:17:46.880 --> 0:17:51.520 initiative countries. And they even created a sovereign funds to 0:17:51.680 --> 0:17:54.800 help broadening the use of remenb and that sovereign funds 0:17:54.840 --> 0:17:58.280 is called the Silk Road Fund, and it was launched 0:17:58.280 --> 0:18:01.840 around to south end it if I remember it correctly, 0:18:01.920 --> 0:18:05.320 it should be around two thousand fourteen, two thousand fifteen 0:18:05.560 --> 0:18:08.760 ish if I remember it correctly, And at one of 0:18:08.800 --> 0:18:12.560 those Bolt and Road initiative International Corporation Forum, President City 0:18:12.680 --> 0:18:14.600 things that I'm going to give it, you know, another 0:18:14.680 --> 0:18:17.680 capital injection, and this time the capital injection is going 0:18:17.720 --> 0:18:20.720 to be denominated like the capital injection is going to 0:18:20.720 --> 0:18:23.679 be in I mean B. The whole purpose is to 0:18:23.720 --> 0:18:27.439 broaden the use of REMENB through this initiative. And what 0:18:27.560 --> 0:18:31.159 is fascinating is once President made the announcement, the Chinese 0:18:31.240 --> 0:18:33.720 Central Banker at that time came out and saying that 0:18:33.880 --> 0:18:36.399 this is a great idea and we are going to 0:18:36.520 --> 0:18:40.800 use the socro defund as a mechanism to facilitate the 0:18:41.040 --> 0:18:45.040 reminbi internationalization initiative. But the important part here is to 0:18:45.119 --> 0:18:50.159 remember is the is not really internationalization. It's not that 0:18:50.280 --> 0:18:52.960 they are removing capital controls or anything like that. They 0:18:52.960 --> 0:18:57.720 are doing this through creating a relatively regional space for 0:18:58.600 --> 0:19:02.840 Chinese importers acts orders to make transactions right. And in 0:19:02.880 --> 0:19:06.720 this particular context is also very important because Seal Croade Fund, 0:19:06.840 --> 0:19:10.000 the creation of the Seal Code of Fund was using 0:19:10.320 --> 0:19:15.399 China's foreign exchange reserves managed by State Administration of a 0:19:15.440 --> 0:19:19.119 Foreign exchange or safe which was which is the foreign 0:19:19.160 --> 0:19:23.800 exchange reserve management arm of the People's Bank of China, 0:19:24.160 --> 0:19:26.679 and in order to create the Seal Crode Fund, the 0:19:26.720 --> 0:19:32.440 PBOC created a special entity called Buttomwood and although capitalizing 0:19:32.520 --> 0:19:37.040 the Sellcrode Fund was bottom with initial mission, it then 0:19:37.200 --> 0:19:41.000 later went on to create additional investment funds played a 0:19:41.119 --> 0:19:43.879 very important role in stabilizing China's stock market. 0:19:44.119 --> 0:19:46.920 Yeah, I remember this. I think it came up in 0:19:47.119 --> 0:19:50.440 another one of our episodes, although I cannot remember which one. 0:19:50.520 --> 0:19:54.359 Since you brought up she listening to you lay out 0:19:54.680 --> 0:19:59.359 why China wants this type of diversification, it makes a 0:19:59.359 --> 0:20:01.960 lot of sense. And I think this is in many 0:20:02.000 --> 0:20:06.920 ways an underappreciated aspect of Shishin Ping and the CCPs, 0:20:07.000 --> 0:20:12.879 that like, they are good at identifying problems and vulnerabilities, 0:20:13.440 --> 0:20:17.960 it's just that sometimes they're bad at maybe identifying solutions. 0:20:18.480 --> 0:20:21.520 And sometimes I think Dan Wang, another one of our guests, 0:20:21.520 --> 0:20:24.120 pointed this out in his annual letter. And I'm probably 0:20:24.280 --> 0:20:28.000 paraphrasing here, but like, sometimes the solution is more painful 0:20:28.200 --> 0:20:30.600 than the problem itself. And you could make that argument 0:20:30.640 --> 0:20:33.439 for things like housing, what happened in the for profit 0:20:33.600 --> 0:20:38.080 education space, the tech crackdown, all of those things. What 0:20:38.240 --> 0:20:42.280 is the mechanism or the scenario in which China's attempt 0:20:42.359 --> 0:20:46.719 to diversify away from the dollar ends up harming it 0:20:47.200 --> 0:20:49.560 in some way. Like essentially, what are the risks here? 0:20:49.600 --> 0:20:51.360 I feel like they need to be discussed. 0:20:52.080 --> 0:20:55.560 So let me take a step back by explaining what 0:20:55.640 --> 0:21:00.400 are the risk What are the motivations for China totempt 0:21:00.760 --> 0:21:05.840 to reduce exposure? Right? In addition to economic reasons, there 0:21:05.880 --> 0:21:10.600 are what I consider as very important geopolitical vulnerabilities that 0:21:10.840 --> 0:21:14.680 has direct financial security implication, and I describe it as 0:21:14.680 --> 0:21:17.160 the three eyes. I know that last time we talked 0:21:17.160 --> 0:21:18.080 about the four d s. 0:21:19.920 --> 0:21:23.720 Any great comment or has to have their thing or 0:21:23.800 --> 0:21:27.439 guest recently Jason Cummins from Resident REVN. Howard the three ends. 0:21:28.040 --> 0:21:29.520 So we like they say, all right, what are the 0:21:29.560 --> 0:21:30.080 three eyes? 0:21:30.320 --> 0:21:36.040 So the three eyes is under rising geopolitical tension, exposed 0:21:36.119 --> 0:21:42.160 countries like China to ill liquidity challenge. It's exposed countries 0:21:42.240 --> 0:21:46.680 like China to insecure challenge, and they find the other 0:21:46.720 --> 0:21:52.320 part would because of insecurity, because of ill liquidity. China 0:21:52.560 --> 0:21:57.320 is building an alternative to to ensure against a lot 0:21:57.359 --> 0:22:00.880 of these vulnerabilities. Right, So those are the three and 0:22:01.280 --> 0:22:04.840 the mechanism for China to achieve. This is to create 0:22:04.880 --> 0:22:08.000 an alternative system. It can be summarized as the split. 0:22:08.280 --> 0:22:11.000 You have settlement and payment, that's the S and a P. 0:22:11.680 --> 0:22:16.680 You have liquidity, which is l and liquidity. The whole 0:22:16.720 --> 0:22:20.440 idea of liquidity is to create international demand for the 0:22:20.560 --> 0:22:24.200 reminbi and the remanbi asset. Right, and then I would 0:22:24.280 --> 0:22:28.159 be creating a sort of this international international system to 0:22:28.280 --> 0:22:32.560 increase the insurance. And then the key part would be 0:22:32.840 --> 0:22:36.520 the trading. The whole idea of China being not just 0:22:36.560 --> 0:22:39.560 the world factory but also a very important player in 0:22:39.640 --> 0:22:44.520 global commodities market. Now the backfire scenario would be at 0:22:44.640 --> 0:22:47.520 the T scenario. Now you have all this plumbing system. 0:22:47.640 --> 0:22:49.960 You know, the settlement, the payment, A lot of these 0:22:49.960 --> 0:22:51.920 are the plumbing. Yes, you can make it the argument 0:22:52.040 --> 0:22:54.720 to say that the transaction volume on the swift on 0:22:54.800 --> 0:22:58.080 the Chinese CIPS system is still very low. But the 0:22:58.119 --> 0:23:02.560 point is it's approved of concept. The idea is you 0:23:02.640 --> 0:23:04.840 buy insurance, you hope that you don't need it, but 0:23:04.960 --> 0:23:08.280 in case you need it, you have it ready to go. Right, 0:23:08.720 --> 0:23:12.239 and if the worst case scenario for China would be 0:23:12.880 --> 0:23:18.359 with the continued supply chain diversification, you started to say, okay, 0:23:18.400 --> 0:23:22.159 so what the implication for global currency system would be 0:23:22.440 --> 0:23:26.280 China started to build its own trading system, whereas a 0:23:26.400 --> 0:23:29.159 denominating year may be whereas the rest of the world 0:23:29.240 --> 0:23:32.920