China, the Dollar, and the Rise of Programmable Money | Ideas Lab | Ep.42
Summary
China's Currency Strategy: China is actively managing its accumulation of US dollars due to persistent trade surpluses with the US, focusing on diversifying away from US Treasuries and increasing gold reserves.
Investment Entities: Key Chinese investment entities like Central Huijin, China Investment Corporation (CIC), and SAFE are crucial in managing China's foreign exchange reserves and strategic investments, both domestically and internationally.
Stable Coins Concern: China views dollar-backed stable coins as a significant threat to its monetary sovereignty and capital control, as they could facilitate anonymous and unrestricted capital flows.
US-China Trade Dynamics: Despite ongoing trade tensions and tariffs, the structural trade surplus between the US and China remains stable, with Chinese exporters absorbing some tariff costs to maintain market access.
Programmable Money: China's potential development of its own stable coins would likely include features for government monitoring and control, contrasting with the anonymity of dollar-backed stable coins.
Global Financial Influence: China's efforts to promote the renminbi internationally face challenges from the US's push for dollar-backed stable coins, which could reinforce the dollar's global dominance.
Regulatory Environment: The US's regulatory framework for stable coins, as outlined in the Genius Act, aims to ensure stability and promote the dollar's international role, raising concerns for countries like China.
Transcript
[Music] Now they can basically connect your digital ID with facial recognition and with your banking activity almost instantaneously from a strengthening control perspective. That's pretty good. But they they are afraid of anonymous freely moving cryptocurrencies or or stable coins. And more importantly, China doesn't issue dollar. Hence, dollarbacked stable coin freely moving in international system is going to be a threat to uh the party both domestically and and internationally. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely Kevin Coldine, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In the series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. And with that, please welcome Kevin Cold Iron. Okay, thanks Neils and welcome everyone to the Ideas Lab podcast. Despite all the headlines and chaos surrounding tariffs, the US is still going to run large current account deficits with China. And that means China is still accumulating vast amounts of US dollars. If it's not investing those assets directly back in US markets, where are they going? And what is happening with China's project to create a currency to rival the dollar? In particular, how is China thinking about and responding to efforts by the US to to extend the dollar's international role by promoting dollar stable coins? These are very important questions and our guest today is the perfect person to answer them. Dr. Zoe Lou was a guest on the Ideas Lab podcast two years ago when we discussed her book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambition. And I asked her back on the show after reading a new piece she published in Foreign Policy called China is worried about dollarbacked stable coins. So, uh, Zoe, thanks so much for joining us today and, uh, welcome back to the show. >> Ken, thank you so much for inviting me back. I really appreciate it. Oh, it's our it's our pleasure. Um, so first of all, I just want to say, hey, you know, congratulations on the success you've had with the book. I mean, I know you've had some great reviews and places like the Financial Times. Kind of hard to believe that it's been two years since we spoke and the topic is still really relevant. >> I certainly hope so. And again, thank you for inviting me uh to talk about uh my my my book when it was first out. And uh the timing is interesting because two years ago when we when you first invited me joining the podcast that was when the hard copy uh was out and uh in in August of this year the paperback uh was released. So now I hope more people can can can can buy it at a cheaper price. >> Well that's that's definitely a mark of success when it goes when it goes to paperback. So congratulations. Um thank you. Okay. So you know we want to do uh two things today. First we want to get a sense for how China is managing its ongoing accumulation of dollars and then we want to talk about how it's responding to the threat it perceives from dollarbacked stable coins. So just you know I guess starting um with the managing of dollars. I mean I I looked at the official statistics and for 2024 the US ran a current account deficit uh with China of around $260 billion. Now that's less than the average over the last decade or so which was around $315 billion but still a very significant amount. So I guess my first question is do we have do you have any idea how all the tariff chaos is going to impact us in 2025? Is it too early to say anything about that about in particularly where we might end up in terms of an ongoing kind of scale of the current account um you know deficit with China? Yeah, sure Kevin. And I think here um a important um background footnote is that uh US China has been running persistent trade um surplus against the United States. And the number in terms of current account surplus has been relatively stable since the first trade war in back in 2018 to now is the number of around 260 u billion dollars has been stable over the past a few years despite um persistent tariff and in some ways if we take a step back in 2018 that was the first round of US China uh trade tension started with President Trump jacking up tariffs and then uh 2020 20 that in January that was the phase one trade deal and then covid happened and then uh Biden came into power during this whole period of time uh tariff against China was there president Biden did not remove any of the tariffs and now when President Trump came back it's just that the tariff the heat of tariff level has gone up so you I I guess from viewing from China's perspective they have been engaging with a lowle level trade war with the United or tariff war with the United States for for for over seven or eight years. So from that perspective, I do not necessarily think the trade deficit is going to be significantly narrowed because they've they've gone through this period of time in and if anything I do imagine that a lot of these on and off 90-day extensions and then another 90-day extensions um might accelerate some of these frontloading anxieties by American importers. Um but so that might be a factor contributing to relatively stable size of uh current account America's current deficit uh with with China like trade deficit with China against China. But putting that aside, I'd also uh want to uh share a little bit of uh interesting result that I've find in my recent research with regards to this trade uh tariff and inflation and because I think everybody has been curious about why inflation has not uh been increasing as as much as people uh imagined and in particular conventional uh economic uh economics principle would inform as once you increase the tariff you know like consumers uh would would bear the cost inflation would go up but so far it's not the case and I'd say that this has a lot to perhaps has a lot to do with uh the structure of of trade especially the supplier and buyer relationship how contract get work get work out and also in international logistics or shipping. Can can you give us a little can you give us some um example of that? Are you saying that the essentially these these contracts are are already established you know months or years in advance and so the the prices only adjust slowly. Is that what you're saying? >> Um I think there is a part of that but Chinese suppliers are very nimble and there are uh hundreds of them producing almost a similar product. Um so um the I I I I guess the contract aspect of that is for a lot of these Chinese suppliers especially when evolutionary competition at home means profit killing and exporting to the United States elsewhere uh means they can make more money. So they would put a higher premium on having access to US market having access to US consumers. So the a lot of them once they have a contract once they are in the supplier uh ecosystem of say big box buyers like Walmart they won't want to lose that. Hence this is why uh when uh liberation day tariff was just imposed you started to see news stories like Walmart trying to pass the tariff cost to their Chinese suppliers saying that well you have to absorb at least 10 or uh 15% of the tariff cost. Um but here given that the Chinese suppliers um most of them are small and medium-sized companies and numbers as of last year showed that the average uh profit profit level of a small and a medium-sized Chinese exporters uh their profit level last as of last year was around 5.2%. So they would not have the ability to absorb um 10% or 15% of tariff. So um in when we look at the numbers though uh Chinese customs p uh publish the price level of Chinese export and that number has gone down since liberation day tariff. That means the the Chinese exporters they have absorbed some of the cost in the given given the rise of of of tariff and we have fairly we we we are competent to to say that a lot of this has a lot to do with lowering tariff to America because after all China still export a lot to the United States right in terms of direct trade as well as as well as indirect although Southeast Asia has been China's has become China's the trading partner but a lot of those were intermediary goods eventually get shipped to the United States but if you look at the US census publish import prices from different places including China so interestingly uh their number their import price from China has gone slightly up so something does not really match here so uh will be so when I was in China in the summer I I was I I I talked with a lot of Chinese exporters and manufacturers so um they One example folks give me is that they ask me like have I heard of like in TV commercials for example have I have I encountered this um uh this phenomenon is you know a product can be sold for $1 but the shipping fee can be $299 things like that. So um this is this is quite quite interesting because when we think about exporters they will think through the lens of total cost of goods sold and if you if the buyer were taking care of the logistics then you don't really think think about the shipping fee but if given that China over the past few years has been has invested a lot of money in increasing the efficiency of of supply of logistics lowering the cost of of lowering the cost um of of shipping even uh fundamentally. So that means in a buyer and supplier contract renegotiation because of tariff right in the the the supplier would have more leverage of in terms of I'm going to take I'm I'm although I I'm not willing to lower the price by 15 10% what I can do is I take care of the shipping fee now from American importers perspective that actually is is not necessary a bad deal. Especially when you are thinking about you can you can think about this in terms of the total cost of goods you you imported and it's still total cost of goods. But now you get a better way trying to readjust what is the cost of the goods that will subject that will be subject to tariff versus the shipping fee. >> Oh, I see. So what you're I think let me see if I I can repeat this back to you. So you're saying that essentially the the total cost involves basically what you sell the good for as well as the shipping fee. The tariffs are applied to what the goods are sold for. So what we can do is kind of rebalance those two things and we won't lower the cost of the goods sold but we'll lower the shipping fee >> or we or the Chinese can the Chinese exporters can potentially bear all the cost of shipping. >> Gotcha. I gota >> right. But from a importer's perspective, you know, like you from importer's perspective, your total cost you you they um there there are ways that people can uh can can go through a go through a an agent trying to either inflate or deflate the price the the cost of goods imported or or exported. But that I I say that is fairly risky because the penalty uh would be quite hefty. However, what what what is hard to manipulate is the shipping cost and if you can you can you can transfer the shipping cost not from you but to the exporters then that is a that that would be money saved. >> I see. I see. But still that the either way the total cost of the goods is going to reflect both the cost sold and the shipping fee. So that should work its way through to inflation at some point. Right. I think at some point yes. Um but the the the the trade structure between US and China are slightly uh different are very different than trade between US and EU. So now uh when we look at export the sectors yin y in China that are mostly most dependent or most sensitive to uh US market meaning they are very sensitive to the increase in tariff right these are mostly low value added uh product not not uh advanced equip or sophisticated equipment. So from that perspective you know these lower value added goods um they ship in terms of big containers and uh you can manage the shipping fee. So those uh at when when when export get augmented in terms of a containers and when China or Chinese exporters can uh get a better prices on shipping, they can the this deal can make a decent amount of money. Although they lowered the cost of although they they lowered the profitability from the good that they manufacture but they can still maintain the order access to American market but I do think the inflation would work through the way uh especially in terms of tariff on on on uh European or Japanese uh equipments because those are those takes a longer time to to to to translate into inflation and uh equipment they tend to depre appreciate over a shorter over a longer period of time say than toys or umbrella. >> I gotcha. Well, that's fascinating. Um I we could probably spend the rest of the show talking about ju just that. Um, but I mean I guess what I would what I was like to do is say okay at at a high level I think what you're saying is hey since 2018 there's been this ongoing trade war and it's um you know it it changes its nature but it's been there and and the exporters um have had to deal with it and at the end of the day there's still a kind of consistent structural surplus that China has with the US and what that means is that they're collecting 250 $260 billion a year in dollars and that money needs to be um invested some in some way and and uh you know of course there's been a lot of talk about foreign um sovereign wealth funds not wanting to hold US treasuries for for various reasons um um given the instability in US policy um since Trump took office. And so I I'd like to talk about, you know, what what China is actually doing with those dollars that it's earning. And when we talked in September 23, basically you said there's kind of, you know, based on your book, there's three main actors involved in China. There's uh Central Jin, there's CIC, China Investment Corporation, and there SAFE, the State Administration for Foreign Exchange. And um I was hoping you could just give us kind of like a highlevel overview um of those of the main focus of each of those. Now I know that's that's kind of unfair because their activities are very complex and they're involved in a lot of different things that overlap, but maybe just to set the stage for us. tell us, you know, for for anyone who hadn't listened to that first podcast, just who those three um actors are, what their focus is, and you know, and then we can talk about what they've been what they've been focusing on over the last year or two and what you think they'll be doing going forward. >> Uh, sure. So, the three actors um that I explain in the book primarily, the number one is the central hoin. It was established back in early 2000s with the purpose to restructure uh China's um Chinese banks and in those days the Chinese banks were suffering from non-perfor huge non-performing loan issue but uh see central huin's restructuring them was so successful that not only these banks like ICBC become uh largest bank in the world but see but central himself uh itself has become a important player behind um a lot of almost every single one of Chinese uh financial institutions uh banking or non-banking including uh or or or for that matter also includes Chinese policy banks and relate since uh related to what CIC central has been doing now we or or since the end of COVID would be teaming up or beefing up ch the so-called national teams. I think since um I guess since since early 2000 20 early 2023 uh in the news in the newspaper uh folks have been talking about uh China's China is China is building up its national team to stabilize the economy stabilize the stock market in particular but you know when people when when newspaper was putting out stories like that the important background is that this is nothing new because they have been doing this for you know the last almost two decades, right? And uh so that so that that that is what you know what C what central has been doing uh it has been deploying a lot of resources to stabilize China's uh equity market in particular and uh interestingly some some of the companies in its portfolio these are all public information what the Chinese government or the communist party of China considers as strategic industries. One such example would be BYD. Uh, Central Hu is one of the largest uh shareholders of BYYD's publicly listed uh stocks and these are all public public information. So that's that. And then um the the the second player I explained in my book is so-called CICD or China Investment Corporation. I think a lot of people are very familiar with the CIC. uh they have been uh they they debuted into they debuted into international market back in 2007 right in the running up of global financial crisis and CIC over the years uh have greatly expanded its portfolio but mostly in developed market um and uh when CIC was established or or China Investment Corporation was established it also absorbed and took central huin as its domestic arm. term. So the important footnote here is yes the central CIC is gigantic sometime depending upon the year that you're you are looking at uh back back in 2020 back in 2022 or 2023 around that time it was uh briefly the world's largest sovereign wealth fund uh as people as people call it um but since then it it's become number two or number three no longer the largest but still quite quite quite large um but it's important to to know that yes CIC might have a very large portfolio large asset under management but about twothirds of CIC's portfolio is under central meaning it's hold domestically now internationally uh CIC has been I'd say it has been expanding but uh since 2018 and uh especially uh dur since 2018 when US during the first Trump administration uh US government strengthened its investment review process and it strengthened its um also export control system and the idea the whole idea is um you know the US government does not want strategic investors with ulterior motive to invest in um US asset that might have negative national security concerns. Since then uh CIC's expansion in the United States has uh suffered tremendously suffered to the extent that by 2022 CIC had to close off its office uh in in the US. um the idea because simply because dealm uh is becoming so difficult. But over the years um despite a lot of despite you know this obvious challenge uh this strengthened uh strengthened um investment investment review review by by CPHAS uh CIC has been seeking partnership with whole with with um stakeholders or institutional investors based in the United States. One such example would be uh CIC's partnership with Goldman Sachs. I think that was a uh that can be considered as a an achievement or a deliverable uh coming out of President Trump's visit to Beijing back in 2017. Um and through this partnership, CIC uh has been able to invest in uh the United States uh over the years despite uh rising uh narrative rising tensions between these two country. And are those partnerships still because I remember we talked about that Goldman Sachs partnership um when we first met and then is that still operating and still um still investing? >> Yes, it is still operating and to my knowledge I haven't heard anything about them uh being being closed or shut down. they are still they are they are the partnership is still viable and uh uh they are still looking for opportunities uh from uh from from Goldman's perspective you know the US China joint investment fund is a fully owned is fully owned and fully managed by by Goldman Sachs so um depending upon you know how you how you structure it how how depending upon how you view it how you evaluate it um there is a you can you can say that this is a US entity Although the money comes from CIC from China, but this is the US entity. Um it is not a foreign entity trying to invest in US. So that's that's the CIC. And then um the third entity that uh uh we we we discussed uh and I I analyzed in the book is uh this institution called a safe or state administration of foreign exchange. that is the uh foreign exchange management arm of the PBOC. Oftent times the the head of safe would be at least a deputy governor of the P people's bank of China. Um and a safe has broadly speaking two different portfolios. One is the official foreign exchange reserves uh that has been relatively stable stable around 3 point slightly higher than three three trillion dollars despite rising Chinese current account deficit. So the question is what is the discrepancy and where they manage the money. So on the discrepancy part I'd say um Chinese exporters uh tend to have the practice tend to have a practice of overly inflating the export invoices because uh you know that benefit there there are two benefits of that you inflate it so that you can get more export rebate. you know a lot of export sectors the Chinese government especially the local government pays a export tax rebate for the exporters. So there is incentive there and then the other incentive is to through this infl through invoice inflation um folks can trans transfer some of their money overseas because China has a lot of China remains um under stringent export uh stringent um uh capital control uh regime but there are also a sign significant amount of money that doesn't really put into the official official statistics of foreign exchange. Instead, SA safe has over the years established several uh investment arms. Uh these are investment companies managing that part of money ultimately comes from Chinese exporters. But because they do not uh get deposited in or does not get accounted towards foreign exchange reserves they can do all sorts of other riskbearing and longer term investment opport investment uh activities um include also including help Chinese companies to conduct mergers and acquisitions using this mechanism called safe co-inancing. Uh what the mechanism is uh safe basically allow designated Chinese banks or policy banks to take out foreign exchange from safe and then these banks can then pass on the money to Chinese companies who need to pay the bills or need to need the money for buying an overseas mine or company. you know, when safe is making these um FX and trusted loans, isn't is that um in some way reinforcing uh the dollarbased trading system because presumably they're making these loans in in US dollars. They're collecting US dollars um and then they're going and saying, "Okay, well, we're going to make you a trade finance loan or a loan for M&A, and we're going to make this loan in dollars." So, you know, it's it's it's a it's a way to earn returns on their dollar reserves. It's not investing in US Treasury. So, it's sort of strategically good in that sense, but it's also not promoting, you know, a competition to the dollar in terms of if foreign tra if I've got that right. >> I think Kevin, that's a very interesting observation. I think that is very insightful in a way. Yes. As long as Chinese companies are using uh FX for overseas mergers and acquisitions, they are part of this dollar-based global uh trade and financial system. They are they are they are participating in that. But that being said, what the what if you look at what SIF's overall portfolio is on the one hand, they have been diversifying their uh treasury. They they have been diversifying foreign exchange reserves and not not parking additional uh earned foreign currency into the official reserves account. So that is one way to diversify away. And then on the other hand, they have also been slowly but steadily decreasing the holding of US treasuries. Um I think as of the last time I checked it was around April. I think the Chinese holding of US treasury was already below $760 billion. So they've been uh we've been ste at at its height a few years ago it was over $1.3 trillion. So now they have slowly but steadily decreased that. But if they're going to do that, what you know, either by, you know, sort of not reinvesting money or or, you know, treasuries that that uh mature or by by selling, they're still they still have the dollars and if they want to maintain the currency peg, then they can't um they can't sell the dollar. So, they have to reinvest it elsewhere. So, at that point, does the you know the FX reserves become become sort of shadow reserves? they disappear into um these other activities. Um >> I'd say uh I descri I described this uh foreign foreign exchange asset hold held by um safe affiliated institutions or the Chinese banks uh or companies that conduct overseas uh overseas activities. I describe this as part of this shadow reserve system. Um and the reason why but we we ought to think it differently in the sense that official foreign exchange reserves they cannot be used for investment or riskbearing activities. That's you know like when you when you think about how IMF define foreign exchange reserves they are low risk bearing or invested primarily in uh zerorisk asset that should be US dollar US treasuries or for that matter it has to be ultimately very liquid. So that basically means the moment money is moved outside of the official foreign exchange reserves, it's no longer part of the reserve system. Hence, they can be used for a few a lot of other activities. Now for all these so-called shadow reserves asset, it's not easy for them to be reclassified as foreign exchange reserves specifically because they are neither liquid nor uh risk-free. So if you have a company use it to reinvest in overseas mine uh it takes time to liquidate that right. So um I guess to just complete this thought you know what they have also been doing simultaneously with reducing holding US treasuries they have also been buying gold. So buying gold is another way to sort of um diversify but then at the same time uh you can buy gold through using official foreign exchange reserves. You can also use all these shadow reserves. From that perspective, yes, uh, SAFE has by by using trustive loans to participate or support the Chinese companies to conduct overseas mergers and acquisitions. This is part of this dollar-based international financial system. However, that is not the entire picture. They've been diversifying. They've been reducing holding of US US treasuries, buying gold. And then at the same time simultaneously China the PBOC has been signing a lot of currency swaps to facilitate the use of remb in trade and to facilitate the use of rembian in investment. Chinese banks has been also setting up a lot of overseas branches or be settlement centers in Europe, in Middle East, in Latin America and uh through in the context of Barri the Chinese government specifically and this also has something to do with another safe finance safe institution called the Silk Road Fund. So code fund one at um received injection yin and uh the safe the the the head of the head of uh of of the silk road fund specifically talked about the role of the silk road fund in promoting the use of reimb in uh international trade and finance. Um then of course um you also have the PBC developing uh based financial infrastructure um commonly known as CIPS or the crossber uh interbank payment system. So we've been trying what what the remaining doesn't have right now is a is a complete currency recycle uh system unlike the US dollar. So now now China trade a lot. China doesn't have a trade problem. what China has is a currency problem and they know that right exactly as what you were saying Chinese companies conducting international investment is reinforcing the the the rule of dollar. So what are they going to do for for them? They have this dilemma of re you know largest trading country but not really a reserve currency status. They hold a lot of reserves of other countries. So what are they going to do? They need to increase international demand for rem and remin denominated asset and they cannot just force other countries to say take rem or take B take Chinese government bond please. They cannot do that especially knowing that China has um capital control. So what they can potentially do is to uh slowly increase the uh make make more attractive. If countries already trade with China a lot through currency swap, you can trade using remb. The idea is to strengthen the use strengthen the role of remb in international transactions or or or a means of exchange the function of currency means of exchange. What they can also do is to in the case of Argentina for example you can through currency swaps through the ex expansion of currency swaps you can have another um have another country pay off their dollar loans uh using remin right so that's in the context in the context of of Argentina's uh debt to uh to the IMF so um then finally they can also try to increase uh the the the the acceptance of remimb in financial market uh such as by working with the the exchanges allowing rem denominated asset to be part of the uh the collateral composition allowing rem you know that is also a part a part of uh actions that they can they can implement to drive up uh demand for uh for rem asset. So and and so far I think we have been making progress in all these directions. [Music] >> Okay. Well, I think that's a good um you know maybe segue to talk about stable coins because you wrote this this article saying that China is very worried about stable coins um and I mean slight from a slightly different perspective but uh basically the you know concern is that you know that the the use of bank issued stable coins could actually accelerate or promote the you know the dollar's role internationally. Um, so you know before we get into that I I just wonder maybe could you just give a very simple overview to listeners who might not know what a stable coin is to just explain what it is to them and then we'll talk about um why China might be so worried about >> um I think broadly speaking stable coins would be a uh would be in the broader universe of uh the so-called cryptocurrency ecosystem but is it has a unique role is not just any other type of crypto currency. Um it's a different unlike most of other cryp cryptocurrencies like like like like like Bitcoin um those like bit Bitcoin prices can swing widely right they they are very volatile but a stable coin they are stable in the sense that they are designed to have a relatively stable value and the way they can be stable is that they are supposed to be pegged to non-digital asset like fiat out currencies like the US dollar or euro um and I think world world gold council is going to um peg a stable coin with gold. So this is why um they are called stables specifically because they are pegged to non digital asset so that their price are less volatile uh in terms of as a as a medium of exchange. >> Okay, thanks. Yeah, and you know the US has just passed the Genius Act and that kind of spec specifies a regulatory framework for stable coin issuers. You know they can you know if they follow a certain amount of rules and if they they limit their investments to things like you know cash or reserves at the Fed, short-term treasury bills, deposits at insured banks, they can be classified as as stable coins. So in other words, they they can only invest in a very very limited range of, you know, lowrisk dollar assets. Um, which gives the supposed to give the um owner of the coin um confidence that, you know, it will always be worth $1. Um so the US is um aggressively pushing this um stable coins and and this has got a lot of people outside the US worried and you say in your article that China not only sees this as economically disruptive but an outright political threat and can you explain to um you know to listeners like why something like a stable coin would be a political threat to to China? >> Uh sure. I think there are two level of of of this. There are things um universally uh challenging to to the to the to other countries uh monetary sovereignty and there are something unique to China which is specifically with regard to capital control and the centrality of the communist party of China in the financial system and capital allocation. So the first part you know is is the first part why I think um dollar back to stable coin uh as well as the potential re reengthening the potential strengthening or re rehabilitation of the US dollar because a lot of people are talking about how sanctions might erode the the dominance of dollar right I think this dollar backed stable coin could potentially restrengthening the the dominance of the dollar specifically because um this as exactly as what you were saying this bec this make dollarbacked stable coin. Basically makes stable coin a uh a unique forms of programmable money that they can once issued once issued they can freely circulate around the world almost instantaneously and remain uh anonymous. So this for a lot of countries this basically means this is the erosion of their monetary uh sovereignty because this eliminate eliminate the barrier between any other uh participant in international trade or internal finance to obtain dollar in cases where in case when countries have capital control they have to apply for licenses and this applies to China they have to apply to get a dollar now you have a new vehicle to literally through dollar back stable coin you essentially get dollar almost instantaneously, right? So this basically means like a stable the way that I think about a dollar back stable coin is like a a digital form of a dollar bill. um because dollar bills circulate around in the system and um uh when you give me $1 or when I give you $1, we don't know where this $1 through whom this dollar has gone through. So I think digital like in the digital world a dollar back stable coin operate almost like that once issued once minted it's it can circulate like that. So it's highly liquid and the cost of moving money across border is also very low. >> No, I was just going to you know think like you know in the old days you know when you travel around to a you know a country say in South America or even parts of Eastern Europe when I was younger you know you could you could pay for things with US dollars dollar bills. Um, and exactly you're saying essentially now, you know, >> I could be I could be in Europe, I could be in China and I could go out to dinner or whatever and just if they accepted it, I could pay with my dollar stable coin just transferred from what my phone to your phone. And so that has the potential then to, you know, as um as you said, um it could replace the domestic currency or maybe not replace but compete um quite um effectively with domestic currencies which I mean I know the Europeans are worried about this. Um so I can see why that would be an issue. Um can you talk about kind of the second level of threat that that's that's sort of unique to China? uh unique to China. This has a lot to do with capital control as well as the centrality of the party um in China's financial system because um a pillar of the party's political power is such that they can control the flow of money and they can also allocate money favorably to uh sectors or institutions that they consider as more important or more strategic than others. So um within this structure what dollarbacked stable coin could potentially disrupt is to displace the parties centrality in uh this in the in the system. Imagine a Chinese exporter. Chinese exporters they would probably be very much open to using dollarbacked stable coins. Part of the reason is because well you lower the international transaction cost that's economic motivation. Then secondly related to what we were talking about earlier you inflating your export uh invoices you you know the idea is rather than spending rather than going through underground money uh underground money laundering uh system trying to move your money overseas. Now you have a ready to go dollarbacked stable coin system that is you can you can move your money overseas easy and without the ability of being tracked by the uh Chinese by the Chinese government. I think the anonymous aspect of it and the highly liquid aspect of it of of the dollar backed stable coin are the the monetary authority uh y in China more than others specifically because the the Chinese government would want to be able to stop undesired capital outflow and stop it anytime they would want it they would want to but if we move if exporters move to a dollar backed stable coin system uh then the Chinese government would lose all the ability to to monitor it. So that's for the exporters. >> Let's say you you're a Chinese exporter and you you adopt a US-based uh dollar stable coin. Um and I can see where as you say that would be useful if you wanted then to you know move those dollars that you earn over you know outside of China. Mhm. >> But let's say, you know, you you still um you need to keep some money in China. You have to pay your suppliers. You have to pay people. >> Um so you would then have to, you know, you'd have to essentially sell those stable coins to um to the central bank to get to get local currency. And the central bank might just say, "Well, we're not we're not accepting those um stable coins." So, you know, that you're kind of stuck. you'd have to operate totally with dollar stable coins. >> Ah that is a very interesting point and I think this is exactly why right after uh the Trump administration passed the genius act Hong Kong jump forward with their own stable coin bill which is they are ex they are experimenting in a sort of a regulatory sandbox uh relative to mainland. The idea is to uh figure out a way to issue perhaps Hong Kong dollar backed st Hong Kong dollar backed the stable coin or even offshore maybe backed stable coin. The vision is that on the one hand they realize there is this potential threat to uh the potential threat of reinforcing the role of the US dollar but then on the other hand they are also developing this mechanism trying to uh take part of the take part of the of of the pie if you will. Now if they do move forward with that then for the Chinese importers for the Chinese exporters or for that matter importers it becomes very convenient because a lot of Chinese exporting companies they register in Hong Kong anyways. So what you end up you what you need to do is to just u uh apply uh for a license so that you can get Hong Kong dollar backed stable coin and you can do all the transactions offshore. And in fact to your point about you know all the how how are the exporters trying to to handle this I think it's very revealing that China's large uh largest uh e-commerce platform like Jingong like uh Alibaba they were all very enthusiastic then they were among the first to uh not just endorse potential rem or Hong Kong dollar backed stable coin they were also among the first to apply for the licenses. So you end up having an offshore market that can do all these transactions. But for Beijing in the mainland aspect in the main in mainland China uh capital control is still very ve very rigid and they are doing all that they can trying to not being displaced by US dollar back sustain through Hong Kong and then they also try to have uh capital control. So fundamentally what I see the Chinese government tries to do is to how to maintain the relevancy of the remb and the remb system way in a era where digital dollar might restrengthen the the ro of the US dollar and they also want to have maintain and tighten capital control. There is also an international aspect of it which is the restrengthening of the dollar y international system through dollar back to stable coin would also mean it's a setback for uh the Chinese government or the PBOC to promote the based financial system because since 2000 since um uh since they they launched the CIPS system back in 2015 and over the past few years since President Putin's war against Ukraine. We start we started to see China actually have expanded uh try to very aggressively very actively to expand the remi based financial based system and they do this specifically because they were also concerned about fallen falling victim of US financial sanctions. So the risk strengthening of the US dollar through dollar back stable coin I guess just to close up close off this part is on the one hand is there is domestic threat threatening its centrality in capital location uh or the monetary sovereignty and then on the other hand um it also renders China even more vulnerable to financial sanctions in terms of how a rem back remb or dollar backed or or Hong Kong dollar backed stable coin would would look like so far it's it's important important to realize that there it's it's still blockchain based technology but the Chinese blockchain is very different from uh foreign blockchain is all from foreign it's public block it's public chain everybody can have access to it uh but in China is not it's permissible blockchain meaning you folks have to uh apply be vetted you get a permission to join in other word at the entrance level at the gate you already know who is who in other the fundament the blockchain as the anonymous aspect of blockchain in China doesn't exist in other word anything happening in China despite it could just be a number you think about it as a bank number now in the blockchain systems in the US in the system that we are familiar with a number is a number you don't necessarily know who is who but in China the number is associated with identifiable entity or person or things like that Um now the a Chinese uh stable coin could is also very likely to have a lot of features uh strengthening uh financial transaction monitoring. Uh meaning um and the technology is already there through their practice of the eB or the digital remb. the idea that as the core the core feature of that is they would they would they are willing to offer an a Chinese Hong Kong dollar or offshore remb uh stable coin. But the very distinctive part of that is is highly uh is highly uh monitored and uh the government could also potentially uh put in criteria for specific usage. this this I mean these stable this Hong Kong dollar stable coin could potentially only be used for e-commerce in this domain or that domain. Now I think there are good or bad aspect of it. It's not all bad, you know, like when we think about uh monitoring financial transactions, especially in this particular case, if all transactions move to a government monitored or government censored uh blockchain system, that literally means the government can stop financial transactions anytime. It's convenient for them. But then on the other hand, I think the good the good aspect of that could be, you know, you can program in the special usage of the of this stable coin. You can also program in the expiration date. This basically means it makes financial uh physical stimulus in particular much more easier. You can program it such that the money is going to be expired within a month or so and uh this money you can use this money to buy uh EVs or you can use it to buy this and that for consumption purposes. So I I think there there are some upshot of it but I I'm I'm not exactly sure my optimism um is is necessarily shared by by by policy makers fundamentally through my conversation with monetary authority in the mainland is that they are still deeply deeply skeptical of stable coins or or cryptocurrency in general. So just to be clear about that, you're saying they're not they're deeply skeptical about um the renb stable coins um but they accept that the dollar stable coins are here and that they're going to be a threat. >> Their position has always been skeptical about a cryptocurrency period, but they like the technology. So this is why since 20 since December 2013 uh up to 2020 they systematically basically banned all cryptocurrency related financial activities but they did not ban uh cryptocurrency ownership. You can still own it as as virtual asset um but in terms of domestic transactions or foreign entities transaction in China these are all banned as financial activity. Then um they they like the technology. Uh even president himself talked about prioritizing the development of blockchain technology. They want to harness the technology and hoping that by um allowing or determining who gets to participate in this system. So it can help modernizing the financial the digital uh economy because digital economy is part of China's priority. They want everything go digital and it can ultimately be fac facilitating the strengthening of the parties control in the financial system because you already have the digital digital ID card. You already have everybody's official recognition and everything. Now they can basically connect your digital ID with facial recognition and with your banking activity almost instantaneously from a strengthening control perspective. That's pretty good. But they they are afraid of anonymous freely moving cryptocurrencies or or stable coins and more importantly China doesn't issue dollar. Hence dollar backs stable coin freely moving international system is going to be a threat to uh the party both domestically and and internationally >> if you're a um you know so they're trying to promote the use of the remn internationally. Um, but if you're if you're a holder of a um, you know, a Hong Kong based or Hong Kong issued remmbbacked stable coin that has all these programmable features, that doesn't seem very attractive to me because it feels like you could just they could you could, you know, lose access to it at any point, right? The CCP could just say, "Okay, well, we're, you know, we're changing the the programming terms on this and all a sudden it's gone." I mean, the whole point and so I could be wrong about that, but to me like the and I'm not sure I believe this as much anymore now with Trump, but prior to Trump, the attractiveness of the dollar as a reserve currency was basically well, you know, you've got it and you can do what what you want with it. That, you know, it's the ultimate freedom. And now I'm not so sure that's the case anymore. But um it clearly doesn't seem to be the case with these um R&Bbacked stable coins um if I if I'm understanding you correctly. So I guess my question is two part. One, am I understanding it correctly? And two, wouldn't that, you know, kind of reduce the attractiveness of of that as a something I'd want to, you know, as a non-Chinese person want to hold? >> Uh I think your understanding is accurate. Um but so far um yin so far Hong Kong's experiment with this stable coin bill is fairly is fairly fairly new. Um so we don't exactly we I I haven't seen concrete measures in terms of how they are going to address how the actual Hong Kong dollar back currency is going to look like to what extent they are going to allow at what degree they allow anonymous. So um if it were it if it were similar like the United States then it literally means they would have to have a entirely they would have they would allow access to public blockchain and so far we don't see any political um political uh appetite for that from the mainland government. They don't like this this anonymous uh feature. Um then then in terms of in terms of you know the programmable feature and how how attractive it how attractive it is. I think it really depends upon who you ask for a lot of people who especially for folks do do a lot of transactions with the mainland and they are there to go they are there to stay or for that matter uh take Hong Kong as an example. Hong Kong as international financial center. They have it has transformed tremendously from more orienting from serving as a bridge for China to the rest of the world. It's now more about China views Hong Kong as as as a bridge for chi for for foreigners to come into China as well as for China to experiment policies um in the global system with a controlled environment. And China is still a very very big market. a lot of like major financial international financial institutions they won't want to lose access to China. So this is where I feel like the the attractiveness of a uh monitored uh stable coin potentially could for some people is still there. It's just that as long I mean as long as folks are doing um legitimate transactions as long as folks are not using like a biggest critique of this cryptocurrency including I guess stable coins is that you know they are they they they facilitate a lot of illicit financial transactions right so if putting that aside um as long China is not going is not going to get rid of of capital controls period so if a rem back stable coin means or a or offshore maybe or CNH, right? If a offshore back there may be stable coin means there it provide a higher it provide a higher liquidity in the sense that stable coins and stable coins they can transact among with transact with each other at a lower cost faster. then probably for portfolio diversification purposes or for mitigating currency uh currency risk purposes, you might as well want to hold some of CNH based stable coin or Hong Kong dollar backed stable coin. The idea is no but of course you would have to take uh you would have to accept the premise that China is not going to get rid of capital control. However, a offshore remaining bback backed stable coin or Hong Kong backed stable coin would allow a higher degree of freedom to make transactions with the international market uh or for that matter converted to other currencies. And to what so far there is there is a limit for uh how much dollar that an individual can uh transfer overseas per transaction. I think it's $5,000 per person per transaction. Uh and there is also upper cap limit in terms of how many over a year how much over a year but there is no such limit in the stable coin stable coin world yet. So um I guess um this is also some the challenge that Chinese regulators need to need need to to deal with. You can imagine a scenario if they do if they do not do this carefully. Uh then you would end up having a scenario where a lot of mainlanders they are going to go to Hong Kong and converted rem into Hong Kong dollarbas best stable coin and once you do that it becomes a very easy way to move capital overseas. So this is why I think fundamentally the Chinese monetary authorities are deeply uh skeptical and they are moving very slowly about um Jamimb backed stable coin and in some conversation that I had um folks explained to me that China is not going to implement it implement B stable coins anytime soon but uh they are closely monitoring the progress and closely monitoring the field If we come to the determination that we can have a we we are confident to uh control and monitor uh the flow of money in the stable coin world, China can catch up and catch up very quickly. That's what explained to me. So they are they are happy to play the catchup game, but they are not willing to experiment or go run with it anytime soon. Well, listen, I think uh we'll uh we'll leave it there and um I really appreciate you taking the time to to explain and your um you know, your level of expertise is um is really quite impressive and this is an area that's yeah, this is only just getting started. So, um thanks so much for um for joining the show again >> and Kevin, thank you so much for inviting me. Uh I I enjoyed our conversation. >> Okay. Um well um just to remind you Zoe's uh book is called Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions uh Ambitions and her most uh recent piece which you can read um at the Council on Foreign Relations website is called Why China is Spooked by Dollar Stable Coins and how it will respond. So, please make sure to go and get a copy of her book and her latest piece and follow her work because I think as you can tell from our conversation that a lot of these issues are not being discussed enough on mainstream media. So, for all of us here at Top Traders Unplugged, thanks for listening and we'll see you soon. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. [Music]
China, the Dollar, and the Rise of Programmable Money | Ideas Lab | Ep.42
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[Music] Now they can basically connect your digital ID with facial recognition and with your banking activity almost instantaneously from a strengthening control perspective. That's pretty good. But they they are afraid of anonymous freely moving cryptocurrencies or or stable coins. And more importantly, China doesn't issue dollar. Hence, dollarbacked stable coin freely moving in international system is going to be a threat to uh the party both domestically and and internationally. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely Kevin Coldine, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In the series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. And with that, please welcome Kevin Cold Iron. Okay, thanks Neils and welcome everyone to the Ideas Lab podcast. Despite all the headlines and chaos surrounding tariffs, the US is still going to run large current account deficits with China. And that means China is still accumulating vast amounts of US dollars. If it's not investing those assets directly back in US markets, where are they going? And what is happening with China's project to create a currency to rival the dollar? In particular, how is China thinking about and responding to efforts by the US to to extend the dollar's international role by promoting dollar stable coins? These are very important questions and our guest today is the perfect person to answer them. Dr. Zoe Lou was a guest on the Ideas Lab podcast two years ago when we discussed her book, Sovereign Funds: How the Communist Party of China Finances Its Global Ambition. And I asked her back on the show after reading a new piece she published in Foreign Policy called China is worried about dollarbacked stable coins. So, uh, Zoe, thanks so much for joining us today and, uh, welcome back to the show. >> Ken, thank you so much for inviting me back. I really appreciate it. Oh, it's our it's our pleasure. Um, so first of all, I just want to say, hey, you know, congratulations on the success you've had with the book. I mean, I know you've had some great reviews and places like the Financial Times. Kind of hard to believe that it's been two years since we spoke and the topic is still really relevant. >> I certainly hope so. And again, thank you for inviting me uh to talk about uh my my my book when it was first out. And uh the timing is interesting because two years ago when we when you first invited me joining the podcast that was when the hard copy uh was out and uh in in August of this year the paperback uh was released. So now I hope more people can can can can buy it at a cheaper price. >> Well that's that's definitely a mark of success when it goes when it goes to paperback. So congratulations. Um thank you. Okay. So you know we want to do uh two things today. First we want to get a sense for how China is managing its ongoing accumulation of dollars and then we want to talk about how it's responding to the threat it perceives from dollarbacked stable coins. So just you know I guess starting um with the managing of dollars. I mean I I looked at the official statistics and for 2024 the US ran a current account deficit uh with China of around $260 billion. Now that's less than the average over the last decade or so which was around $315 billion but still a very significant amount. So I guess my first question is do we have do you have any idea how all the tariff chaos is going to impact us in 2025? Is it too early to say anything about that about in particularly where we might end up in terms of an ongoing kind of scale of the current account um you know deficit with China? Yeah, sure Kevin. And I think here um a important um background footnote is that uh US China has been running persistent trade um surplus against the United States. And the number in terms of current account surplus has been relatively stable since the first trade war in back in 2018 to now is the number of around 260 u billion dollars has been stable over the past a few years despite um persistent tariff and in some ways if we take a step back in 2018 that was the first round of US China uh trade tension started with President Trump jacking up tariffs and then uh 2020 20 that in January that was the phase one trade deal and then covid happened and then uh Biden came into power during this whole period of time uh tariff against China was there president Biden did not remove any of the tariffs and now when President Trump came back it's just that the tariff the heat of tariff level has gone up so you I I guess from viewing from China's perspective they have been engaging with a lowle level trade war with the United or tariff war with the United States for for for over seven or eight years. So from that perspective, I do not necessarily think the trade deficit is going to be significantly narrowed because they've they've gone through this period of time in and if anything I do imagine that a lot of these on and off 90-day extensions and then another 90-day extensions um might accelerate some of these frontloading anxieties by American importers. Um but so that might be a factor contributing to relatively stable size of uh current account America's current deficit uh with with China like trade deficit with China against China. But putting that aside, I'd also uh want to uh share a little bit of uh interesting result that I've find in my recent research with regards to this trade uh tariff and inflation and because I think everybody has been curious about why inflation has not uh been increasing as as much as people uh imagined and in particular conventional uh economic uh economics principle would inform as once you increase the tariff you know like consumers uh would would bear the cost inflation would go up but so far it's not the case and I'd say that this has a lot to perhaps has a lot to do with uh the structure of of trade especially the supplier and buyer relationship how contract get work get work out and also in international logistics or shipping. Can can you give us a little can you give us some um example of that? Are you saying that the essentially these these contracts are are already established you know months or years in advance and so the the prices only adjust slowly. Is that what you're saying? >> Um I think there is a part of that but Chinese suppliers are very nimble and there are uh hundreds of them producing almost a similar product. Um so um the I I I I guess the contract aspect of that is for a lot of these Chinese suppliers especially when evolutionary competition at home means profit killing and exporting to the United States elsewhere uh means they can make more money. So they would put a higher premium on having access to US market having access to US consumers. So the a lot of them once they have a contract once they are in the supplier uh ecosystem of say big box buyers like Walmart they won't want to lose that. Hence this is why uh when uh liberation day tariff was just imposed you started to see news stories like Walmart trying to pass the tariff cost to their Chinese suppliers saying that well you have to absorb at least 10 or uh 15% of the tariff cost. Um but here given that the Chinese suppliers um most of them are small and medium-sized companies and numbers as of last year showed that the average uh profit profit level of a small and a medium-sized Chinese exporters uh their profit level last as of last year was around 5.2%. So they would not have the ability to absorb um 10% or 15% of tariff. So um in when we look at the numbers though uh Chinese customs p uh publish the price level of Chinese export and that number has gone down since liberation day tariff. That means the the Chinese exporters they have absorbed some of the cost in the given given the rise of of of tariff and we have fairly we we we are competent to to say that a lot of this has a lot to do with lowering tariff to America because after all China still export a lot to the United States right in terms of direct trade as well as as well as indirect although Southeast Asia has been China's has become China's the trading partner but a lot of those were intermediary goods eventually get shipped to the United States but if you look at the US census publish import prices from different places including China so interestingly uh their number their import price from China has gone slightly up so something does not really match here so uh will be so when I was in China in the summer I I was I I I talked with a lot of Chinese exporters and manufacturers so um they One example folks give me is that they ask me like have I heard of like in TV commercials for example have I have I encountered this um uh this phenomenon is you know a product can be sold for $1 but the shipping fee can be $299 things like that. So um this is this is quite quite interesting because when we think about exporters they will think through the lens of total cost of goods sold and if you if the buyer were taking care of the logistics then you don't really think think about the shipping fee but if given that China over the past few years has been has invested a lot of money in increasing the efficiency of of supply of logistics lowering the cost of of lowering the cost um of of shipping even uh fundamentally. So that means in a buyer and supplier contract renegotiation because of tariff right in the the the supplier would have more leverage of in terms of I'm going to take I'm I'm although I I'm not willing to lower the price by 15 10% what I can do is I take care of the shipping fee now from American importers perspective that actually is is not necessary a bad deal. Especially when you are thinking about you can you can think about this in terms of the total cost of goods you you imported and it's still total cost of goods. But now you get a better way trying to readjust what is the cost of the goods that will subject that will be subject to tariff versus the shipping fee. >> Oh, I see. So what you're I think let me see if I I can repeat this back to you. So you're saying that essentially the the total cost involves basically what you sell the good for as well as the shipping fee. The tariffs are applied to what the goods are sold for. So what we can do is kind of rebalance those two things and we won't lower the cost of the goods sold but we'll lower the shipping fee >> or we or the Chinese can the Chinese exporters can potentially bear all the cost of shipping. >> Gotcha. I gota >> right. But from a importer's perspective, you know, like you from importer's perspective, your total cost you you they um there there are ways that people can uh can can go through a go through a an agent trying to either inflate or deflate the price the the cost of goods imported or or exported. But that I I say that is fairly risky because the penalty uh would be quite hefty. However, what what what is hard to manipulate is the shipping cost and if you can you can you can transfer the shipping cost not from you but to the exporters then that is a that that would be money saved. >> I see. I see. But still that the either way the total cost of the goods is going to reflect both the cost sold and the shipping fee. So that should work its way through to inflation at some point. Right. I think at some point yes. Um but the the the the trade structure between US and China are slightly uh different are very different than trade between US and EU. So now uh when we look at export the sectors yin y in China that are mostly most dependent or most sensitive to uh US market meaning they are very sensitive to the increase in tariff right these are mostly low value added uh product not not uh advanced equip or sophisticated equipment. So from that perspective you know these lower value added goods um they ship in terms of big containers and uh you can manage the shipping fee. So those uh at when when when export get augmented in terms of a containers and when China or Chinese exporters can uh get a better prices on shipping, they can the this deal can make a decent amount of money. Although they lowered the cost of although they they lowered the profitability from the good that they manufacture but they can still maintain the order access to American market but I do think the inflation would work through the way uh especially in terms of tariff on on on uh European or Japanese uh equipments because those are those takes a longer time to to to to translate into inflation and uh equipment they tend to depre appreciate over a shorter over a longer period of time say than toys or umbrella. >> I gotcha. Well, that's fascinating. Um I we could probably spend the rest of the show talking about ju just that. Um, but I mean I guess what I would what I was like to do is say okay at at a high level I think what you're saying is hey since 2018 there's been this ongoing trade war and it's um you know it it changes its nature but it's been there and and the exporters um have had to deal with it and at the end of the day there's still a kind of consistent structural surplus that China has with the US and what that means is that they're collecting 250 $260 billion a year in dollars and that money needs to be um invested some in some way and and uh you know of course there's been a lot of talk about foreign um sovereign wealth funds not wanting to hold US treasuries for for various reasons um um given the instability in US policy um since Trump took office. And so I I'd like to talk about, you know, what what China is actually doing with those dollars that it's earning. And when we talked in September 23, basically you said there's kind of, you know, based on your book, there's three main actors involved in China. There's uh Central Jin, there's CIC, China Investment Corporation, and there SAFE, the State Administration for Foreign Exchange. And um I was hoping you could just give us kind of like a highlevel overview um of those of the main focus of each of those. Now I know that's that's kind of unfair because their activities are very complex and they're involved in a lot of different things that overlap, but maybe just to set the stage for us. tell us, you know, for for anyone who hadn't listened to that first podcast, just who those three um actors are, what their focus is, and you know, and then we can talk about what they've been what they've been focusing on over the last year or two and what you think they'll be doing going forward. >> Uh, sure. So, the three actors um that I explain in the book primarily, the number one is the central hoin. It was established back in early 2000s with the purpose to restructure uh China's um Chinese banks and in those days the Chinese banks were suffering from non-perfor huge non-performing loan issue but uh see central huin's restructuring them was so successful that not only these banks like ICBC become uh largest bank in the world but see but central himself uh itself has become a important player behind um a lot of almost every single one of Chinese uh financial institutions uh banking or non-banking including uh or or or for that matter also includes Chinese policy banks and relate since uh related to what CIC central has been doing now we or or since the end of COVID would be teaming up or beefing up ch the so-called national teams. I think since um I guess since since early 2000 20 early 2023 uh in the news in the newspaper uh folks have been talking about uh China's China is China is building up its national team to stabilize the economy stabilize the stock market in particular but you know when people when when newspaper was putting out stories like that the important background is that this is nothing new because they have been doing this for you know the last almost two decades, right? And uh so that so that that that is what you know what C what central has been doing uh it has been deploying a lot of resources to stabilize China's uh equity market in particular and uh interestingly some some of the companies in its portfolio these are all public information what the Chinese government or the communist party of China considers as strategic industries. One such example would be BYD. Uh, Central Hu is one of the largest uh shareholders of BYYD's publicly listed uh stocks and these are all public public information. So that's that. And then um the the the second player I explained in my book is so-called CICD or China Investment Corporation. I think a lot of people are very familiar with the CIC. uh they have been uh they they debuted into they debuted into international market back in 2007 right in the running up of global financial crisis and CIC over the years uh have greatly expanded its portfolio but mostly in developed market um and uh when CIC was established or or China Investment Corporation was established it also absorbed and took central huin as its domestic arm. term. So the important footnote here is yes the central CIC is gigantic sometime depending upon the year that you're you are looking at uh back back in 2020 back in 2022 or 2023 around that time it was uh briefly the world's largest sovereign wealth fund uh as people as people call it um but since then it it's become number two or number three no longer the largest but still quite quite quite large um but it's important to to know that yes CIC might have a very large portfolio large asset under management but about twothirds of CIC's portfolio is under central meaning it's hold domestically now internationally uh CIC has been I'd say it has been expanding but uh since 2018 and uh especially uh dur since 2018 when US during the first Trump administration uh US government strengthened its investment review process and it strengthened its um also export control system and the idea the whole idea is um you know the US government does not want strategic investors with ulterior motive to invest in um US asset that might have negative national security concerns. Since then uh CIC's expansion in the United States has uh suffered tremendously suffered to the extent that by 2022 CIC had to close off its office uh in in the US. um the idea because simply because dealm uh is becoming so difficult. But over the years um despite a lot of despite you know this obvious challenge uh this strengthened uh strengthened um investment investment review review by by CPHAS uh CIC has been seeking partnership with whole with with um stakeholders or institutional investors based in the United States. One such example would be uh CIC's partnership with Goldman Sachs. I think that was a uh that can be considered as a an achievement or a deliverable uh coming out of President Trump's visit to Beijing back in 2017. Um and through this partnership, CIC uh has been able to invest in uh the United States uh over the years despite uh rising uh narrative rising tensions between these two country. And are those partnerships still because I remember we talked about that Goldman Sachs partnership um when we first met and then is that still operating and still um still investing? >> Yes, it is still operating and to my knowledge I haven't heard anything about them uh being being closed or shut down. they are still they are they are the partnership is still viable and uh uh they are still looking for opportunities uh from uh from from Goldman's perspective you know the US China joint investment fund is a fully owned is fully owned and fully managed by by Goldman Sachs so um depending upon you know how you how you structure it how how depending upon how you view it how you evaluate it um there is a you can you can say that this is a US entity Although the money comes from CIC from China, but this is the US entity. Um it is not a foreign entity trying to invest in US. So that's that's the CIC. And then um the third entity that uh uh we we we discussed uh and I I analyzed in the book is uh this institution called a safe or state administration of foreign exchange. that is the uh foreign exchange management arm of the PBOC. Oftent times the the head of safe would be at least a deputy governor of the P people's bank of China. Um and a safe has broadly speaking two different portfolios. One is the official foreign exchange reserves uh that has been relatively stable stable around 3 point slightly higher than three three trillion dollars despite rising Chinese current account deficit. So the question is what is the discrepancy and where they manage the money. So on the discrepancy part I'd say um Chinese exporters uh tend to have the practice tend to have a practice of overly inflating the export invoices because uh you know that benefit there there are two benefits of that you inflate it so that you can get more export rebate. you know a lot of export sectors the Chinese government especially the local government pays a export tax rebate for the exporters. So there is incentive there and then the other incentive is to through this infl through invoice inflation um folks can trans transfer some of their money overseas because China has a lot of China remains um under stringent export uh stringent um uh capital control uh regime but there are also a sign significant amount of money that doesn't really put into the official official statistics of foreign exchange. Instead, SA safe has over the years established several uh investment arms. Uh these are investment companies managing that part of money ultimately comes from Chinese exporters. But because they do not uh get deposited in or does not get accounted towards foreign exchange reserves they can do all sorts of other riskbearing and longer term investment opport investment uh activities um include also including help Chinese companies to conduct mergers and acquisitions using this mechanism called safe co-inancing. Uh what the mechanism is uh safe basically allow designated Chinese banks or policy banks to take out foreign exchange from safe and then these banks can then pass on the money to Chinese companies who need to pay the bills or need to need the money for buying an overseas mine or company. you know, when safe is making these um FX and trusted loans, isn't is that um in some way reinforcing uh the dollarbased trading system because presumably they're making these loans in in US dollars. They're collecting US dollars um and then they're going and saying, "Okay, well, we're going to make you a trade finance loan or a loan for M&A, and we're going to make this loan in dollars." So, you know, it's it's it's a it's a way to earn returns on their dollar reserves. It's not investing in US Treasury. So, it's sort of strategically good in that sense, but it's also not promoting, you know, a competition to the dollar in terms of if foreign tra if I've got that right. >> I think Kevin, that's a very interesting observation. I think that is very insightful in a way. Yes. As long as Chinese companies are using uh FX for overseas mergers and acquisitions, they are part of this dollar-based global uh trade and financial system. They are they are they are participating in that. But that being said, what the what if you look at what SIF's overall portfolio is on the one hand, they have been diversifying their uh treasury. They they have been diversifying foreign exchange reserves and not not parking additional uh earned foreign currency into the official reserves account. So that is one way to diversify away. And then on the other hand, they have also been slowly but steadily decreasing the holding of US treasuries. Um I think as of the last time I checked it was around April. I think the Chinese holding of US treasury was already below $760 billion. So they've been uh we've been ste at at its height a few years ago it was over $1.3 trillion. So now they have slowly but steadily decreased that. But if they're going to do that, what you know, either by, you know, sort of not reinvesting money or or, you know, treasuries that that uh mature or by by selling, they're still they still have the dollars and if they want to maintain the currency peg, then they can't um they can't sell the dollar. So, they have to reinvest it elsewhere. So, at that point, does the you know the FX reserves become become sort of shadow reserves? they disappear into um these other activities. Um >> I'd say uh I descri I described this uh foreign foreign exchange asset hold held by um safe affiliated institutions or the Chinese banks uh or companies that conduct overseas uh overseas activities. I describe this as part of this shadow reserve system. Um and the reason why but we we ought to think it differently in the sense that official foreign exchange reserves they cannot be used for investment or riskbearing activities. That's you know like when you when you think about how IMF define foreign exchange reserves they are low risk bearing or invested primarily in uh zerorisk asset that should be US dollar US treasuries or for that matter it has to be ultimately very liquid. So that basically means the moment money is moved outside of the official foreign exchange reserves, it's no longer part of the reserve system. Hence, they can be used for a few a lot of other activities. Now for all these so-called shadow reserves asset, it's not easy for them to be reclassified as foreign exchange reserves specifically because they are neither liquid nor uh risk-free. So if you have a company use it to reinvest in overseas mine uh it takes time to liquidate that right. So um I guess to just complete this thought you know what they have also been doing simultaneously with reducing holding US treasuries they have also been buying gold. So buying gold is another way to sort of um diversify but then at the same time uh you can buy gold through using official foreign exchange reserves. You can also use all these shadow reserves. From that perspective, yes, uh, SAFE has by by using trustive loans to participate or support the Chinese companies to conduct overseas mergers and acquisitions. This is part of this dollar-based international financial system. However, that is not the entire picture. They've been diversifying. They've been reducing holding of US US treasuries, buying gold. And then at the same time simultaneously China the PBOC has been signing a lot of currency swaps to facilitate the use of remb in trade and to facilitate the use of rembian in investment. Chinese banks has been also setting up a lot of overseas branches or be settlement centers in Europe, in Middle East, in Latin America and uh through in the context of Barri the Chinese government specifically and this also has something to do with another safe finance safe institution called the Silk Road Fund. So code fund one at um received injection yin and uh the safe the the the head of the head of uh of of the silk road fund specifically talked about the role of the silk road fund in promoting the use of reimb in uh international trade and finance. Um then of course um you also have the PBC developing uh based financial infrastructure um commonly known as CIPS or the crossber uh interbank payment system. So we've been trying what what the remaining doesn't have right now is a is a complete currency recycle uh system unlike the US dollar. So now now China trade a lot. China doesn't have a trade problem. what China has is a currency problem and they know that right exactly as what you were saying Chinese companies conducting international investment is reinforcing the the the rule of dollar. So what are they going to do for for them? They have this dilemma of re you know largest trading country but not really a reserve currency status. They hold a lot of reserves of other countries. So what are they going to do? They need to increase international demand for rem and remin denominated asset and they cannot just force other countries to say take rem or take B take Chinese government bond please. They cannot do that especially knowing that China has um capital control. So what they can potentially do is to uh slowly increase the uh make make more attractive. If countries already trade with China a lot through currency swap, you can trade using remb. The idea is to strengthen the use strengthen the role of remb in international transactions or or or a means of exchange the function of currency means of exchange. What they can also do is to in the case of Argentina for example you can through currency swaps through the ex expansion of currency swaps you can have another um have another country pay off their dollar loans uh using remin right so that's in the context in the context of of Argentina's uh debt to uh to the IMF so um then finally they can also try to increase uh the the the the acceptance of remimb in financial market uh such as by working with the the exchanges allowing rem denominated asset to be part of the uh the collateral composition allowing rem you know that is also a part a part of uh actions that they can they can implement to drive up uh demand for uh for rem asset. So and and so far I think we have been making progress in all these directions. [Music] >> Okay. Well, I think that's a good um you know maybe segue to talk about stable coins because you wrote this this article saying that China is very worried about stable coins um and I mean slight from a slightly different perspective but uh basically the you know concern is that you know that the the use of bank issued stable coins could actually accelerate or promote the you know the dollar's role internationally. Um, so you know before we get into that I I just wonder maybe could you just give a very simple overview to listeners who might not know what a stable coin is to just explain what it is to them and then we'll talk about um why China might be so worried about >> um I think broadly speaking stable coins would be a uh would be in the broader universe of uh the so-called cryptocurrency ecosystem but is it has a unique role is not just any other type of crypto currency. Um it's a different unlike most of other cryp cryptocurrencies like like like like like Bitcoin um those like bit Bitcoin prices can swing widely right they they are very volatile but a stable coin they are stable in the sense that they are designed to have a relatively stable value and the way they can be stable is that they are supposed to be pegged to non-digital asset like fiat out currencies like the US dollar or euro um and I think world world gold council is going to um peg a stable coin with gold. So this is why um they are called stables specifically because they are pegged to non digital asset so that their price are less volatile uh in terms of as a as a medium of exchange. >> Okay, thanks. Yeah, and you know the US has just passed the Genius Act and that kind of spec specifies a regulatory framework for stable coin issuers. You know they can you know if they follow a certain amount of rules and if they they limit their investments to things like you know cash or reserves at the Fed, short-term treasury bills, deposits at insured banks, they can be classified as as stable coins. So in other words, they they can only invest in a very very limited range of, you know, lowrisk dollar assets. Um, which gives the supposed to give the um owner of the coin um confidence that, you know, it will always be worth $1. Um so the US is um aggressively pushing this um stable coins and and this has got a lot of people outside the US worried and you say in your article that China not only sees this as economically disruptive but an outright political threat and can you explain to um you know to listeners like why something like a stable coin would be a political threat to to China? >> Uh sure. I think there are two level of of of this. There are things um universally uh challenging to to the to the to other countries uh monetary sovereignty and there are something unique to China which is specifically with regard to capital control and the centrality of the communist party of China in the financial system and capital allocation. So the first part you know is is the first part why I think um dollar back to stable coin uh as well as the potential re reengthening the potential strengthening or re rehabilitation of the US dollar because a lot of people are talking about how sanctions might erode the the dominance of dollar right I think this dollar backed stable coin could potentially restrengthening the the dominance of the dollar specifically because um this as exactly as what you were saying this bec this make dollarbacked stable coin. Basically makes stable coin a uh a unique forms of programmable money that they can once issued once issued they can freely circulate around the world almost instantaneously and remain uh anonymous. So this for a lot of countries this basically means this is the erosion of their monetary uh sovereignty because this eliminate eliminate the barrier between any other uh participant in international trade or internal finance to obtain dollar in cases where in case when countries have capital control they have to apply for licenses and this applies to China they have to apply to get a dollar now you have a new vehicle to literally through dollar back stable coin you essentially get dollar almost instantaneously, right? So this basically means like a stable the way that I think about a dollar back stable coin is like a a digital form of a dollar bill. um because dollar bills circulate around in the system and um uh when you give me $1 or when I give you $1, we don't know where this $1 through whom this dollar has gone through. So I think digital like in the digital world a dollar back stable coin operate almost like that once issued once minted it's it can circulate like that. So it's highly liquid and the cost of moving money across border is also very low. >> No, I was just going to you know think like you know in the old days you know when you travel around to a you know a country say in South America or even parts of Eastern Europe when I was younger you know you could you could pay for things with US dollars dollar bills. Um, and exactly you're saying essentially now, you know, >> I could be I could be in Europe, I could be in China and I could go out to dinner or whatever and just if they accepted it, I could pay with my dollar stable coin just transferred from what my phone to your phone. And so that has the potential then to, you know, as um as you said, um it could replace the domestic currency or maybe not replace but compete um quite um effectively with domestic currencies which I mean I know the Europeans are worried about this. Um so I can see why that would be an issue. Um can you talk about kind of the second level of threat that that's that's sort of unique to China? uh unique to China. This has a lot to do with capital control as well as the centrality of the party um in China's financial system because um a pillar of the party's political power is such that they can control the flow of money and they can also allocate money favorably to uh sectors or institutions that they consider as more important or more strategic than others. So um within this structure what dollarbacked stable coin could potentially disrupt is to displace the parties centrality in uh this in the in the system. Imagine a Chinese exporter. Chinese exporters they would probably be very much open to using dollarbacked stable coins. Part of the reason is because well you lower the international transaction cost that's economic motivation. Then secondly related to what we were talking about earlier you inflating your export uh invoices you you know the idea is rather than spending rather than going through underground money uh underground money laundering uh system trying to move your money overseas. Now you have a ready to go dollarbacked stable coin system that is you can you can move your money overseas easy and without the ability of being tracked by the uh Chinese by the Chinese government. I think the anonymous aspect of it and the highly liquid aspect of it of of the dollar backed stable coin are the the monetary authority uh y in China more than others specifically because the the Chinese government would want to be able to stop undesired capital outflow and stop it anytime they would want it they would want to but if we move if exporters move to a dollar backed stable coin system uh then the Chinese government would lose all the ability to to monitor it. So that's for the exporters. >> Let's say you you're a Chinese exporter and you you adopt a US-based uh dollar stable coin. Um and I can see where as you say that would be useful if you wanted then to you know move those dollars that you earn over you know outside of China. Mhm. >> But let's say, you know, you you still um you need to keep some money in China. You have to pay your suppliers. You have to pay people. >> Um so you would then have to, you know, you'd have to essentially sell those stable coins to um to the central bank to get to get local currency. And the central bank might just say, "Well, we're not we're not accepting those um stable coins." So, you know, that you're kind of stuck. you'd have to operate totally with dollar stable coins. >> Ah that is a very interesting point and I think this is exactly why right after uh the Trump administration passed the genius act Hong Kong jump forward with their own stable coin bill which is they are ex they are experimenting in a sort of a regulatory sandbox uh relative to mainland. The idea is to uh figure out a way to issue perhaps Hong Kong dollar backed st Hong Kong dollar backed the stable coin or even offshore maybe backed stable coin. The vision is that on the one hand they realize there is this potential threat to uh the potential threat of reinforcing the role of the US dollar but then on the other hand they are also developing this mechanism trying to uh take part of the take part of the of of the pie if you will. Now if they do move forward with that then for the Chinese importers for the Chinese exporters or for that matter importers it becomes very convenient because a lot of Chinese exporting companies they register in Hong Kong anyways. So what you end up you what you need to do is to just u uh apply uh for a license so that you can get Hong Kong dollar backed stable coin and you can do all the transactions offshore. And in fact to your point about you know all the how how are the exporters trying to to handle this I think it's very revealing that China's large uh largest uh e-commerce platform like Jingong like uh Alibaba they were all very enthusiastic then they were among the first to uh not just endorse potential rem or Hong Kong dollar backed stable coin they were also among the first to apply for the licenses. So you end up having an offshore market that can do all these transactions. But for Beijing in the mainland aspect in the main in mainland China uh capital control is still very ve very rigid and they are doing all that they can trying to not being displaced by US dollar back sustain through Hong Kong and then they also try to have uh capital control. So fundamentally what I see the Chinese government tries to do is to how to maintain the relevancy of the remb and the remb system way in a era where digital dollar might restrengthen the the ro of the US dollar and they also want to have maintain and tighten capital control. There is also an international aspect of it which is the restrengthening of the dollar y international system through dollar back to stable coin would also mean it's a setback for uh the Chinese government or the PBOC to promote the based financial system because since 2000 since um uh since they they launched the CIPS system back in 2015 and over the past few years since President Putin's war against Ukraine. We start we started to see China actually have expanded uh try to very aggressively very actively to expand the remi based financial based system and they do this specifically because they were also concerned about fallen falling victim of US financial sanctions. So the risk strengthening of the US dollar through dollar back stable coin I guess just to close up close off this part is on the one hand is there is domestic threat threatening its centrality in capital location uh or the monetary sovereignty and then on the other hand um it also renders China even more vulnerable to financial sanctions in terms of how a rem back remb or dollar backed or or Hong Kong dollar backed stable coin would would look like so far it's it's important important to realize that there it's it's still blockchain based technology but the Chinese blockchain is very different from uh foreign blockchain is all from foreign it's public block it's public chain everybody can have access to it uh but in China is not it's permissible blockchain meaning you folks have to uh apply be vetted you get a permission to join in other word at the entrance level at the gate you already know who is who in other the fundament the blockchain as the anonymous aspect of blockchain in China doesn't exist in other word anything happening in China despite it could just be a number you think about it as a bank number now in the blockchain systems in the US in the system that we are familiar with a number is a number you don't necessarily know who is who but in China the number is associated with identifiable entity or person or things like that Um now the a Chinese uh stable coin could is also very likely to have a lot of features uh strengthening uh financial transaction monitoring. Uh meaning um and the technology is already there through their practice of the eB or the digital remb. the idea that as the core the core feature of that is they would they would they are willing to offer an a Chinese Hong Kong dollar or offshore remb uh stable coin. But the very distinctive part of that is is highly uh is highly uh monitored and uh the government could also potentially uh put in criteria for specific usage. this this I mean these stable this Hong Kong dollar stable coin could potentially only be used for e-commerce in this domain or that domain. Now I think there are good or bad aspect of it. It's not all bad, you know, like when we think about uh monitoring financial transactions, especially in this particular case, if all transactions move to a government monitored or government censored uh blockchain system, that literally means the government can stop financial transactions anytime. It's convenient for them. But then on the other hand, I think the good the good aspect of that could be, you know, you can program in the special usage of the of this stable coin. You can also program in the expiration date. This basically means it makes financial uh physical stimulus in particular much more easier. You can program it such that the money is going to be expired within a month or so and uh this money you can use this money to buy uh EVs or you can use it to buy this and that for consumption purposes. So I I think there there are some upshot of it but I I'm I'm not exactly sure my optimism um is is necessarily shared by by by policy makers fundamentally through my conversation with monetary authority in the mainland is that they are still deeply deeply skeptical of stable coins or or cryptocurrency in general. So just to be clear about that, you're saying they're not they're deeply skeptical about um the renb stable coins um but they accept that the dollar stable coins are here and that they're going to be a threat. >> Their position has always been skeptical about a cryptocurrency period, but they like the technology. So this is why since 20 since December 2013 uh up to 2020 they systematically basically banned all cryptocurrency related financial activities but they did not ban uh cryptocurrency ownership. You can still own it as as virtual asset um but in terms of domestic transactions or foreign entities transaction in China these are all banned as financial activity. Then um they they like the technology. Uh even president himself talked about prioritizing the development of blockchain technology. They want to harness the technology and hoping that by um allowing or determining who gets to participate in this system. So it can help modernizing the financial the digital uh economy because digital economy is part of China's priority. They want everything go digital and it can ultimately be fac facilitating the strengthening of the parties control in the financial system because you already have the digital digital ID card. You already have everybody's official recognition and everything. Now they can basically connect your digital ID with facial recognition and with your banking activity almost instantaneously from a strengthening control perspective. That's pretty good. But they they are afraid of anonymous freely moving cryptocurrencies or or stable coins and more importantly China doesn't issue dollar. Hence dollar backs stable coin freely moving international system is going to be a threat to uh the party both domestically and and internationally >> if you're a um you know so they're trying to promote the use of the remn internationally. Um, but if you're if you're a holder of a um, you know, a Hong Kong based or Hong Kong issued remmbbacked stable coin that has all these programmable features, that doesn't seem very attractive to me because it feels like you could just they could you could, you know, lose access to it at any point, right? The CCP could just say, "Okay, well, we're, you know, we're changing the the programming terms on this and all a sudden it's gone." I mean, the whole point and so I could be wrong about that, but to me like the and I'm not sure I believe this as much anymore now with Trump, but prior to Trump, the attractiveness of the dollar as a reserve currency was basically well, you know, you've got it and you can do what what you want with it. That, you know, it's the ultimate freedom. And now I'm not so sure that's the case anymore. But um it clearly doesn't seem to be the case with these um R&Bbacked stable coins um if I if I'm understanding you correctly. So I guess my question is two part. One, am I understanding it correctly? And two, wouldn't that, you know, kind of reduce the attractiveness of of that as a something I'd want to, you know, as a non-Chinese person want to hold? >> Uh I think your understanding is accurate. Um but so far um yin so far Hong Kong's experiment with this stable coin bill is fairly is fairly fairly new. Um so we don't exactly we I I haven't seen concrete measures in terms of how they are going to address how the actual Hong Kong dollar back currency is going to look like to what extent they are going to allow at what degree they allow anonymous. So um if it were it if it were similar like the United States then it literally means they would have to have a entirely they would have they would allow access to public blockchain and so far we don't see any political um political uh appetite for that from the mainland government. They don't like this this anonymous uh feature. Um then then in terms of in terms of you know the programmable feature and how how attractive it how attractive it is. I think it really depends upon who you ask for a lot of people who especially for folks do do a lot of transactions with the mainland and they are there to go they are there to stay or for that matter uh take Hong Kong as an example. Hong Kong as international financial center. They have it has transformed tremendously from more orienting from serving as a bridge for China to the rest of the world. It's now more about China views Hong Kong as as as a bridge for chi for for foreigners to come into China as well as for China to experiment policies um in the global system with a controlled environment. And China is still a very very big market. a lot of like major financial international financial institutions they won't want to lose access to China. So this is where I feel like the the attractiveness of a uh monitored uh stable coin potentially could for some people is still there. It's just that as long I mean as long as folks are doing um legitimate transactions as long as folks are not using like a biggest critique of this cryptocurrency including I guess stable coins is that you know they are they they they facilitate a lot of illicit financial transactions right so if putting that aside um as long China is not going is not going to get rid of of capital controls period so if a rem back stable coin means or a or offshore maybe or CNH, right? If a offshore back there may be stable coin means there it provide a higher it provide a higher liquidity in the sense that stable coins and stable coins they can transact among with transact with each other at a lower cost faster. then probably for portfolio diversification purposes or for mitigating currency uh currency risk purposes, you might as well want to hold some of CNH based stable coin or Hong Kong dollar backed stable coin. The idea is no but of course you would have to take uh you would have to accept the premise that China is not going to get rid of capital control. However, a offshore remaining bback backed stable coin or Hong Kong backed stable coin would allow a higher degree of freedom to make transactions with the international market uh or for that matter converted to other currencies. And to what so far there is there is a limit for uh how much dollar that an individual can uh transfer overseas per transaction. I think it's $5,000 per person per transaction. Uh and there is also upper cap limit in terms of how many over a year how much over a year but there is no such limit in the stable coin stable coin world yet. So um I guess um this is also some the challenge that Chinese regulators need to need need to to deal with. You can imagine a scenario if they do if they do not do this carefully. Uh then you would end up having a scenario where a lot of mainlanders they are going to go to Hong Kong and converted rem into Hong Kong dollarbas best stable coin and once you do that it becomes a very easy way to move capital overseas. So this is why I think fundamentally the Chinese monetary authorities are deeply uh skeptical and they are moving very slowly about um Jamimb backed stable coin and in some conversation that I had um folks explained to me that China is not going to implement it implement B stable coins anytime soon but uh they are closely monitoring the progress and closely monitoring the field If we come to the determination that we can have a we we are confident to uh control and monitor uh the flow of money in the stable coin world, China can catch up and catch up very quickly. That's what explained to me. So they are they are happy to play the catchup game, but they are not willing to experiment or go run with it anytime soon. Well, listen, I think uh we'll uh we'll leave it there and um I really appreciate you taking the time to to explain and your um you know, your level of expertise is um is really quite impressive and this is an area that's yeah, this is only just getting started. So, um thanks so much for um for joining the show again >> and Kevin, thank you so much for inviting me. Uh I I enjoyed our conversation. >> Okay. Um well um just to remind you Zoe's uh book is called Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions uh Ambitions and her most uh recent piece which you can read um at the Council on Foreign Relations website is called Why China is Spooked by Dollar Stable Coins and how it will respond. So, please make sure to go and get a copy of her book and her latest piece and follow her work because I think as you can tell from our conversation that a lot of these issues are not being discussed enough on mainstream media. So, for all of us here at Top Traders Unplugged, thanks for listening and we'll see you soon. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. [Music]