0:03

Bloomberg Audio Studios, podcasts,

0:06

radio news.

0:10

Bred what's going on with the yen?

0:14

Well, it's, uh, there's a bit, a bit

0:16

of an intervention. The intervention took

0:18

it from roughly one sixty to one fifty

0:21

two, and now it is drifting

0:23

back up towards yes, like round one fifty

0:25

five. Broadly, the yen is just really

0:27

really, really really weak. Obviously,

0:30

that's because Japanese interest rates are very

0:32

low relative to US and European rates,

0:35

and they the end reached a level where the

0:37

Japanese Ministry of Finance, which has Japan's

0:39

reserves, started selling

0:41

dollars buying yen to try to

0:44

try to limit how we can become.

0:47

Joe, I gotta say I hate currencies. They

0:49

are my most hated a class locus

0:51

everything No, because everything's relative. So

0:54

it's like, the yen is down. But is it

0:56

dollar strength or is it yen weakness?

0:58

It sounds like from what brad Is said, it's

1:00

more yet weakness. But I'm sure there's

1:02

someone out there who will argue that it's actually

1:04

the dollar.

1:07

I did a deadlift one,

1:10

okay, uh

1:14

barges. This isn't after school special, except.

1:16

I've decided I'm going to base my entire personality

1:19

going forward on campaigning for a strategic

1:21

pork reserve in the US.

1:22

Where's the best with imposta?

1:24

These are the important question. Is it robots

1:26

taking over the world? No.

1:27

I think that like in a couple

1:30

of years, the AI will do a really

1:32

good job of making the odd launch podcast.

1:34

And people say, I don't really need to listen

1:37

to Joe and Tracy anymore.

1:38

We do haveing perfect.

1:42

Welcome to lots more? Will we catch up with friends

1:45

about what's going on right now?

1:47

Because even when odd Lots is over, there's

1:49

always lots more.

1:51

And we really do have the perfect

1:53

guest.

1:56

You know.

1:56

We had our friend Hugh Hendry on the

1:58

show just this week and he was all telling

2:01

this dollar story. But like,

2:03

is there something wrong with Japan? Should

2:05

we be scared? Or is this just a natural

2:08

repricing due to the interest rate differential?

2:11

I mean, I don't think there's anything structurally

2:14

or fundamentally wrong with

2:16

Japan. I mean, Japan obviously has

2:18

had difficulty generating sustained inflation

2:21

over time, and the Bank of Japan

2:23

is determined to kind of get inflation

2:25

up this time, and so the

2:27

Bank of Japan has been, you

2:30

know, running a monetary policy that's

2:32

a bit at odds with the policy of the

2:34

Fed and the ECB. I

2:36

mean, clearly this is a case of yen weakness,

2:39

because you can look at the yen versus the dollar

2:41

or the yen versus the Euro, and either way

2:43

it is weak. But it has reached

2:45

a level of kind of extreme weakness.

2:49

In real terms, the yen is back

2:51

to its levels of the early nineteen seventies,

2:54

and so, you know, like if you think of Japan's

2:56

economy in the early nineteen seventies, that

2:59

is, before Pan's electronics

3:02

industry took over the you know, took on the

3:04

world, before Toyota's export

3:06

wave and the globalization of

3:08

Japanese automakers. It's just it's

3:11

returned Japan to a level

3:14

of purchasing power that does seem

3:16

a bit at odds with the underlying strength

3:18

of its economy. But that's I guess,

3:20

you can. You know, the debate is whether that's a natural

3:22

consequence of interest rate differentials

3:25

which are large and now there's

3:27

less of an expectation that the Fed's going to cut,

3:29

so the interest rate differential

3:31

will persist, or whether the yen has

3:33

overshot a little bit.

3:35

It's reached such.

3:36

An extreme level of weakness that it

3:38

is divorced even from

3:42

an interest rate differential that supports

3:44

a weekend.

3:45

So we're speaking to Brad Setzer, senior

3:47

fellow at the Council on Foreign Relations

3:49

and someone we like to talk to to connect

3:52

a lot of different things that are going on in

3:55

the world. And I'm just going to ask one more question

3:57

on the yen. And maybe it's sort of rephrasing

4:01

Joe's question about should we be worried? But

4:04

we have seen all the talk

4:06

about yen intervention recently,

4:09

and since that supposed intervention,

4:12

it looks like the yen is weakening again.

4:15

Is that something to worry about?

4:17

I guess it depends on what you mean by worry.

4:20

If you're the Ministry of Finance, you would

4:23

rather that the yen sort

4:25

of just stay in a like a range

4:27

of one fifty to one fifty four.

4:29

So if you're the Ministry of Finance, I

4:31

think you are worried because the yen is drifting

4:34

back towards one sixty, or

4:36

drifting back towards levels where you'd be expected

4:38

to intervene again the

4:41

goal of intervention. Some people argue the goal

4:43

of intervention is to change the direction and

4:46

go from yen weakness to yen strength. I

4:48

think that's an unrealistic goal, and I don't

4:50

think that is Japan's goal. I think the goal

4:52

of the Ministry of Finance is

4:54

to limit, to set a

4:56

floor under how weak the yen is.

5:00

As the yen continues to

5:02

depreciate, as it gets closer to one sixty,

5:05

I think there'll be increasing expectations

5:07

of intervention. And you know, in the

5:09

short run, the intervention works, and

5:11

I think the longer one, I mean it works

5:13

in the sense that it will move the market back

5:15

towards one point fifty, and

5:17

then it becomes a question of whether the Ministry

5:20

of Finance has to continuously intervene,

5:23

in which case eventually you will have a

5:25

question about whether it's running out of firepower,

5:28

or whether the Bank of Japan

5:31

needs, if it's really worried, needs to

5:34

join the Ministry of Finance and

5:37

adjust short term rates in Japan as

5:39

well.

5:39

Tracy, can I say something that has always

5:41

bothered me? And I don't mean

5:43

Brad, don't listen to this part because I'm

5:45

going to question something that a professional

5:47

economists say all the time. But

5:50

I'm always confused, and oh,

5:52

they didn't have enough inflation. They can't

5:54

generate like we have inflation now in the US. It

5:56

doesn't seem that great. Meanwhile, Japan doesn't

5:59

have much inflation. I don't know, it doesn't

6:01

seem that bad to me, Like, maybe just don't

6:03

worry about making inflation higher, doesn't wait.

6:05

I do want to hear Brad respond to those.

6:08

Look, I actually think it's a real debate in Japan.

6:10

Okay, you know, Japan's

6:12

economy did function for a while.

6:15

I've never been there, but every time I've looked

6:17

pictures, it seems like a peaceful,

6:20

prosperous society with great

6:22

consumer and food and not

6:24

inexpensive housing and working

6:27

rail and all these things that we supposedly want.

6:29

Like, okay, so it's not there's not much

6:31

inflation.

6:32

Who cares.

6:33

I mean, it did generate some

6:36

you know, it was perceived to generate some

6:38

significant problems. I mean, zero interest

6:40

rates. Zero inflation and zero

6:42

interest rates doesn't leave much scope

6:45

for monetary policy to respond to downturns,

6:47

and then it makes wage adjustments

6:50

more difficult. If some sector

6:52

needs a reduced real wage, you

6:54

have to accept weaker nominal wages

6:57

and that yeah, that's just hard and people don't like seeing

7:00

there the dollar or yen value

7:02

of their paycheck fall. That said,

7:04

I do think that there is a question about

7:07

whether whether low interest

7:10

rates in a global environment where

7:12

other central banks have much higher interest rates,

7:14

and so your main transmission mechanism

7:16

in theory is a week en, about

7:18

whether that's generating the right kind of

7:20

inflation In Japan, it's pushing

7:23

up the price of imports. Imports

7:25

in Japan feed into

7:27

consumer prices. They're also an input

7:29

into some Japanese industry.

7:32

But in general terms, a weekend

7:34

raises the cost of imported energy and food

7:37

and reduces real wages, which we've seen. There

7:39

was a headline yesterday about

7:41

falling real wages for close

7:43

to two years in Japan. And so

7:45

it isn't clear that if the main effect

7:47

of a week in is reduced real wages

7:50

and you have less fewer yen to

7:52

spend on Japanese services,

7:55

you can't go out as much because you're spending more

7:57

on imported oil, whether that will

7:59

generate rate a healthy, self sustaining

8:02

process of appreciation. The

8:04

winners of a week yen in Japan

8:06

are the multinationals the big

8:09

exporters, some of the financial

8:11

investors who had long dollar position

8:13

in their portfolio. But there isn't any

8:15

immediate transmission from a big

8:17

company which is making more gives

8:20

me more yen on its operations

8:22

in Thailand in the United States

8:24

to real wages

8:26

in Japan to increase spending

8:29

in Japan. So it hasn't

8:31

yet generated the kind of inflationary

8:34

dynamics that you've seen in other economies.

8:37

And so I do think there is a concern, and

8:39

that's why the Ministry of Finance is intervening

8:42

and trying to separately limit yen

8:45

weakness. There's a concern that yen weakness

8:47

isn't actually helping reflate Japan's

8:50

economy.

8:51

Brad, you mentioned wages there,

8:53

real wages, and I was just thinking

8:56

back to my wage when I was

8:58

in grade school in Japan, and I

9:00

used to get one thousand yen every

9:02

week for my allowance, which was

9:04

ten dollars. And I have to say that

9:07

exchange rate is forever fixed

9:09

in my mind as like what the yen should

9:12

be. It should always be around like one

9:14

hundred to the dollar. And when I look at

9:16

the chart now, it's really kind

9:18

of stunning. To me, But you also mentioned

9:21

imports getting more expensive, and

9:23

this is something that we wanted to speak to you about. Did

9:25

you see the China export data that

9:27

came out this morning.

9:28

I did.

9:29

Yeah, So exports going

9:31

up more than expected.

9:33

I think it was like a one point five percent

9:35

increase in dollar terms versus a forecast

9:38

for one point three percent. And

9:41

this has kind of burst into the public

9:44

consciousness of at least finance

9:46

Twitter recently, this idea that China's

9:49

exports have been relatively

9:51

strong and this is one of the few bright

9:53

spots perhaps in the Chinese economy.

9:56

Can you talk a little bit more about that. Some people

9:58

are couching this as like a China a shock

10:00

that we should be worried about that the rest of the world

10:03

will struggle to respond to.

10:06

So I guess you know, if you just look at

10:08

the headline increase in dollars,

10:10

an increase of one or two percent doesn't seem

10:12

that dramatic. So there's another

10:14

important component, which is that

10:17

Chinese export prices have been falling quite

10:19

significantly, you know, because of yuan

10:22

weakness, because of lower

10:24

price war for electric vehicles, a price

10:26

war for solar panels, a price

10:29

war for a lot of China's exports, so

10:31

export volumes are actually up more

10:33

like ten percent. I mean, I don't think the numbers yet

10:35

available for April, but that was certainly

10:38

the case for the first quarter, and

10:40

so it is in that context

10:42

that one can think of a

10:45

new China shock. I think that the

10:47

notion of a new China shock is very much

10:50

tied to the auto

10:52

sector and both the electric

10:54

vehicle sector and traditional

10:56

combustion engines, where China

10:58

has gone from basically being a

11:01

source of import demand. China

11:03

imported high end luxury cars

11:06

from Germany, not so many from Japan,

11:08

but few from Japan, a lot from

11:10

Germany, and five years ago it wasn't

11:12

a big export or not of cars. Produced

11:15

some trucks for export, but not much. Past

11:18

few years, that's changed. China is now the

11:20

world's biggest exporter of cars.

11:22

It's electric vehicle manufacturers

11:25

are exceptionally competitive. They're taking market

11:27

share from the foreign joint

11:29

ventures in China, and they're really

11:32

starting to try to export. And

11:34

then some of the old capacity that

11:36

made traditional internal

11:38

combustion engine cars in China is

11:40

being repurposed to serve global demand.

11:43

So this is just combining to really

11:46

push up export volumes

11:49

in autos in an important way.

11:51

There's also just enormous

11:54

capacity inside China to

11:56

produce solar panels, to produce batteries,

11:59

and so you know, China can

12:01

meet global demand for

12:04

these products as it expands out

12:07

of its existing capacity, which

12:09

makes it very difficult for other countries

12:12

who want to build up their own solar industry

12:14

or their own battery industry to get those

12:16

industries going. I think that's the

12:18

sense in which China's exports

12:22

are a bit of

12:24

a shock to the global system and why

12:26

there's been a bit of pushback. There's some technical

12:29

factors as well. We

12:31

all remember that during the pandemic, everybody

12:33

bought a lot of computers, bought a lot of household

12:36

appliances. That drove China's exports

12:38

up to a really, really high level. Two years ago,

12:41

they kind of dip back down and now they're coming

12:43

back up. But there's a dynamic

12:45

around China's traditional exports, and

12:48

then there's a separate dynamic around

12:51

cars and clean energy exports, and

12:53

I think the China shock is much more now

12:56

around cars and clean energy.

13:11

You know, I remember in the post

13:13

twenty ten environment, and there's a lot of talk about,

13:15

you know, currency wars. In this

13:18

idea, everyone doing this beggar thy neighbor

13:20

policy of trying to have their currency weaker

13:22

so that they could sell more. Is

13:24

that still a dynamic because the end

13:26

can fall, can keep falling. But

13:28

it doesn't mean they're going to have a national

13:31

BYD. In fact, Toyota isn't even really

13:33

that into evs as far as I can tell,

13:35

or the Malaysian ring it is pretty weak.

13:37

But they don't have a BYD either, or

13:40

a Shoumi or a comac or whatever.

13:42

It is, Like, how much do currencies

13:45

today play and trade

13:47

competitiveness or in an environment

13:49

in which the big source of action seems

13:51

to be non commodity more cutting

13:54

edge technological exports.

13:56

I'm super retro on this question,

13:59

Okay, in my view, still matter,

14:01

they matter.

14:02

There's our headline, you know.

14:04

Oh, I'm really going out on a limb there. I

14:07

look. I think the response of

14:09

Japanese exports to yen

14:11

weakness has been relatively modest.

14:14

I think there's a lot of different reasons for that. I think

14:16

Toyota has wanted to protect

14:19

its transplants, its factories

14:21

in the United States. It hasn't wanted to engage

14:23

in a price war. It has preferred

14:25

to basically take the yeek week

14:28

in as a source of greater profit

14:30

rather than really engage in a fight

14:32

for volume. If you look at the weak

14:35

Korean wand which is also veriry.

14:36

Which always going to bring up because it sort of shows

14:38

that there is this commonality and it's not just a yen

14:41

story.

14:41

But yes, anyway, you know,

14:43

if you look at Hyundai's sales in the US

14:45

and they're exports to the US, they've responded

14:48

very clearly to the to the week one.

14:50

You know, there's been an enormous actually increase

14:52

hasn't gotten a lot of attention in

14:55

Korean auto exports to the US. And

14:57

I also think the fact that in

15:00

real terms, because Chinese inflation has actually

15:02

been very low relative to inflation

15:04

and the rest of the world, and the yuan

15:07

has come down against the dollar, you

15:09

know, there's been a roughly ten percent weakening

15:13

of the yuan in real terms,

15:16

and I think that is one of the factors

15:18

that is contributing to this export boom.

15:20

You see all these comparisons of China's

15:23

EV prices versus prices of evs

15:25

elsewhere, and of course part of that

15:27

is just you know, byd had got really

15:30

good at making evs really fast.

15:32

But part of it is that the Chinese yuan

15:36

is below where it was fifteen years ago

15:38

against the dollar, and inflation differentials

15:40

are now bringing cost in China

15:42

down. My rule of thumb is that if

15:44

the Chinese yuan is not going up, if

15:47

it's not appreciating, China tends

15:49

to gain global market share. And I think

15:51

that is a general rule that's held over

15:53

time, and I think it's asserting itself

15:55

now. The interesting thing

15:58

about China is that it is not giving

16:00

up its old competitive advantages

16:02

as it is introducing these new advantages.

16:05

It's just exporting more. And I think that

16:07

is in part a function of the week you on.

16:10

So there's been some

16:12

weirdness. Certainly a

16:14

lot of relationships broke down during

16:16

the pandemic. But my baseline

16:19

thesis is that you're going to see a reassertion

16:21

of the traditional, well established

16:23

relationship between currency

16:26

values and export volumes

16:29

pretty clearly over the next couple

16:31

of years.

16:31

Wait, this is my chance to ask you about

16:34

Chinese excavators

16:38

and what they maybe say about

16:40

what's driving the export boom

16:42

and the debate between you know, interest

16:44

rate differentials and maybe currency contributions

16:47

versus excess capacity, because

16:49

that's the other thing that people are talking a lot about,

16:52

this idea that, well, there's so much

16:54

excess capacity in the Chinese economy.

16:56

If you can't sell into your domestic

16:58

market, then you're going to try to sell

17:00

more outside of it.

17:03

Look, the reality is the two

17:05

those factors tend to go together. If you've

17:08

got weakness in your domestic market,

17:10

you're going to have low interest rates and a weak currency

17:12

as a general rule, and that exchange

17:16

rate signal helps you take

17:19

products that previously were produced

17:22

for your own market and sell them to the

17:24

rest of the world. They're not mutually exclusive

17:27

explanations. A weak currency

17:29

helps you take excess

17:31

capacity and sell it globally. There's

17:33

two different things that have happened with excavators,

17:36

which are like the big construction equipment with

17:38

like a backo that helps you dig out the

17:40

foundation of a new building or

17:43

help build a road. They're like the base

17:45

construction equipment you

17:47

know in the US would be like the thing Caterpillar

17:50

makes.

17:51

It's the thing that every guy I've

17:53

ever met always dreams of

17:55

operating.

17:55

Because they're cool.

17:57

Exactly by the way, So

17:59

on the point, sorry to intervine, but

18:02

on this point, Tracy, you know, I'm going to Las

18:04

Vegas next week to see Dead and

18:06

Co. With a few friends at the sphere, and

18:08

we're looking at a few of the things that we

18:10

can do, like we're gonna go see the big

18:12

dam that's out there and other stuff. One

18:15

of the things that possibly will be on our itinerary

18:17

is this big amusement park where adults

18:19

and kids can dig up stuff with excavators.

18:23

So you may get a business model.

18:24

You may get a.

18:25

Picture of me in about a week from today

18:28

sitting in an excavator or in the bucket

18:30

part of it.

18:30

Anyway, So yes, confirmed, all

18:32

right, gor.

18:33

And in my youth, I think

18:35

I had a Lego set that where you had like the

18:37

fancy gears and you could like make

18:39

it move and it was an excavator and it was

18:41

the total list. There's something amazing

18:44

about the mechanics of an excavator

18:46

excavator. But you know, two things

18:48

have happened. Like twenty years ago, there

18:51

were a lot of excavators made in China.

18:53

Even then, those excavators were

18:55

often made by Caterpillar or Komatsu.

18:57

The big Japanese construction equipment company.

19:00

And so over the past twenty years, Chinese

19:02

companies have sprung

19:05

up, developed, been able to produce

19:07

at a lower cost point, probably gotten

19:09

a little local preference. You know, if you're a

19:11

state back construction company, you're probably going

19:13

to use a Chinese excavator

19:15

if it is price competitive. And

19:18

so inside the Chinese market,

19:21

the Chinese companies, the Chinese

19:23

marks have gained at the expensive foreign

19:25

companies. And then the second thing

19:27

that happened is that as China

19:29

went through, you know, one of the world's biggest

19:32

property booms, there was just

19:34

a lot of demand for excavators. So capacity

19:37

increased and China was producing

19:39

a lot of excavators. Chinese companies were producing

19:41

a lot of excavators that were mostly

19:43

being used in China as part

19:45

of the construction boom. Construction

19:48

boom turned to construction busts. Chinese

19:50

companies are making competitive

19:52

excavators, and guess what those excavators

19:55

are being exported globally. Same

19:58

dynamics a little bit in steel. It

20:00

is not just a clean tech ev

20:03

dynamic. The set

20:06

of inputs old industry inputs

20:09

into construction. You know, construction

20:12

activity in China's down. It's going to go down

20:14

further, given all

20:16

the difficulties in the property development

20:19

sector, and given the fact that China's

20:21

overbuilt and you're going to have to have an extended period

20:23

of much reduced

20:26

property construction. Those

20:28

inputs are in some small part

20:30

being exported. I mean, China could export

20:32

more steel, but Chinese steel exports

20:35

now exceed US steel production. I

20:37

think they exceed Japanese steel production. I

20:39

mean, that's just a and that

20:42

has not exhausted Chinese export

20:44

capacity. There's still capacity to export

20:46

more. So that's the kind of thing

20:49

that makes a lot of China's

20:51

trading partners nervous. You know, China's can

20:54

export one hundred million tons of metric

20:56

tons of steel and still export another one

20:58

hundred million. China's exporting

21:01

five million vehicles, but there is clearly

21:03

capacity inside China export ten

21:06

wow. And you know five is

21:08

more than Japan, it's more than Germany. Ten

21:10

would be record breaking.

21:12

So it's that forward

21:15

looking concern is very real.

21:17

Tracy two things.

21:19

I'm on Alibaba dot Com right now, and

21:21

there's apparently excavators you can buy

21:23

for two thousand dollars from China. I don't

21:25

understand how that has.

21:26

To be any man.

21:28

Yeah, but they look like something. But then the other

21:31

thing is like, you know, Tracy, just I just

21:33

had this light bulb moment where, you know, when the

21:35

Internet bubble happened in the US, everyone is

21:37

like, well, yeah, but there were some good spillovers

21:39

because we got all this unused fiber

21:41

optics and that laid the groundwork for the next twenty

21:43

years China real estate bubble,

21:46

creating this incredible unused

21:48

capacity of excavator and I know

21:50

how to make excavators for the rest of the world.

21:53

So there you go.

21:54

Okay, Brad. The other thing we

21:56

wanted to ask you about, we could just

21:58

turn this into an excavator.

21:59

At the We got to get that guy on TikTok who

22:01

sells the Chinese excavators

22:03

sometime.

22:04

That would be fun.

22:05

Brad.

22:06

The other thing we want to ask you, and this kind of

22:08

ties into the discussion around

22:10

well, it very much ties into the discussion

22:12

around China's export boom. You just

22:15

published a paper at the French Institute

22:17

of International Relations called Power

22:19

and Financial Interdependence, and

22:21

you're sort of tackling this idea of

22:24

the China and US financial

22:26

systems being intertwined so China

22:29

buys a lot of US treasuries because it

22:31

has to, basically because it's exporting a lot

22:33

to the US. But you make

22:35

the point that there's a difference between financial

22:39

intertwining or interdependence versus

22:41

the sort of real economy interdependence.

22:44

Could you talk a little bit more about that.

22:46

Well, I mean, I think the paper has

22:49

an ambitious title, so hopefully people will

22:52

read it as a paper with some ambition,

22:55

even if the conclusions are nuanced.

22:58

I guess I make a number of different observations

23:01

about the link between financial interdependence

23:04

and real economic interdependence. One

23:06

is the one you made that if there

23:09

is an enormous trade imbalance,

23:12

by definition, there has to be offsetting

23:14

financing, and there will be a financial imbalance,

23:17

even if that imbalance is a bit hidden, and

23:19

even if it is hard to trace. And

23:21

one of the clear trends over the past

23:24

fifteen years is that China

23:26

has gone from more or less taking

23:28

its export surplus, having the central bank

23:30

buy it up, buy up the dollars in

23:32

investing in treasuries and agencies doing

23:35

a lot of more diverse things with its foreign

23:37

exchange reserves. There's a phrase that

23:39

safe uses which I like called the diversified

23:42

use of foreign exchange reserves, which actually

23:45

it would be putting them things into financial

23:47

assets that are in no way foreign

23:49

exchange reserves. And then

23:52

because of low interest rates, right now,

23:55

the accumulation of financial assets

23:57

on the Chinese side has moved to the export

24:00

to the private side of China's economy,

24:03

and so it doesn't show up as this huge

24:06

sustained bid for treasuries. So

24:08

that's kind of one theme. The other theme

24:10

is, hey, if you're thinking

24:12

about the exercise of power,

24:15

there are conditions when you really need financial

24:18

assets. If you have an

24:20

overvalue currency and you want to defend that

24:22

currency, you don't want the currency to weaken, or

24:24

if you have foreign currency denominated

24:26

debts that you really want to pay, you need

24:29

financial assets, and losing access to

24:31

financial assets can be

24:33

a very powerful sanction. But

24:36

China buy and large, doesn't need

24:38

access to its legacy

24:40

financial assets to do much of anything right

24:42

now. It's got this big ongoing

24:44

trade ser plus, it doesn't

24:47

have much foreign currency external debt. Obviously

24:50

it does help with respect to intervention,

24:53

but if at the end of the day, the worst

24:55

outcome that for China from

24:57

losing access to your foreign exchange reserves

25:00

is a weak Chinese yuan, that's

25:03

probably something China can manage. Actually,

25:06

Conversely, those countries that are selling

25:08

financial assets to China, they're receiving

25:11

real goods and surfaces, mostly

25:13

goods, and if you lose access to

25:15

real goods in a crisis in

25:18

certain contexts, that can be quite devastating.

25:21

You lose access to imported components,

25:24

and then the rest of your production

25:26

process can't continue until you find an

25:28

alternative source. And for some products

25:31

there is no alternative source that's also not Chinese.

25:34

So I think you have to worry a

25:36

little bit in this. In a world where

25:38

you know, so called interdependence has been

25:40

weaponized, and the US

25:42

has weaponized interdependence chip

25:45

export controls or the classic example,

25:47

financial sanctions or the other. China

25:50

has weaponized interdependence economic

25:52

coercion, not buying

25:55

commodities or at least some commodities

25:57

from countries where it don't say nice

25:59

things about China, famously with Australia

26:02

are squeezing Korean automakers

26:04

after Korea agreed

26:06

to the deployment of a powerful US radar

26:09

in Korea, or losing

26:11

access to Chinese tourists, because the Chinese

26:14

State Tourism Bureau doesn't sell

26:16

package holidays to your country if you're not

26:18

saying, if you're rude and mean

26:20

to the Chinese people. So you know,

26:22

there are various ways in which interdependence

26:25

can be weaponized, and some

26:27

of those involve limits

26:29

on the use of your foreign assets,

26:32

financial sanctions, and

26:34

some of those involve restrictions on the real

26:36

flow of goods. And I think in

26:39

the most extreme scenarios,

26:42

the restrictions on the real flow of goods may

26:44

be more significant for

26:46

the Sino American leverage

26:49

than financial right.

26:52

That's basically my takeaway here that if

26:54

the US did to China at

26:56

some point in the future what it did to Russia, which

26:58

I'm not even.

26:59

Sure that that effective.

27:01

Against Russia, but against China it

27:03

wouldn't have a big impact necessarily,

27:05

But if the China converted

27:08

conversely did the opposite, it

27:10

would.

27:10

Have a big impact on US. So it seems like a bad

27:12

situation for the US well.

27:14

But to be fair, one of the side

27:16

effects of the property boom

27:19

in China, you know, Xi Jinping

27:21

has this idea that he can reduce

27:24

his dependence on the rest of the world by substituting

27:26

out all the goods that China

27:29

now imports, all at least the manufactured

27:31

goods that China imports, and

27:34

building up stockpiles of all the

27:36

commodities that China imports, And

27:39

so if there was a big interruption in trade,

27:41

China's economy could continue

27:43

to function fair enough.

27:46

One thesis. It's a pretty aggressive

27:48

thesis. It's aggressive in the sense

27:50

that it's preparing for a negative

27:52

contingency. It's aggressive in the sense that

27:54

it it engineers

27:56

out all of other countries' exports

27:59

into manufactured exports into China.

28:03

But it doesn't change the fact that an

28:05

enormous part of the Chinese economy

28:07

and a growing part of the Chinese economy. All the

28:09

people making excavators, for example, are

28:12

internal combustion engine cars

28:14

for export. They their jobs

28:16

depend on access to export markets.

28:19

So China's dependence

28:21

on external demand has

28:23

gone up very, very significantly

28:26

over the past three or four years, even

28:28

as China's reliance on imported

28:30

manufactured inputs has gone down. So

28:33

China does have its

28:35

own very significant vulnerabilities

28:38

in that respect.

28:40

We're back to excavators as the

28:42

prism through which to understand

28:44

China's Economy,

28:50

lots More is produced by Carmen Rodriguez

28:52

and Dashel Bennett, with help from Moses Onam

28:54

and kel Brooks.

28:56

Our sound engineer is Blake Maple's Sage

28:58

Bouman is the head of Bloomberg Pucks.

29:00

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