Several ‘interesting’ developments are being reported out of China today, and it isn’t difficult to derive a Gestalt from them - to see a coherent pattern that they jointly constitute. First the stories, then the pattern.
First up, China’s new Swap Connect system, planned for some time and delayed in the implementation at least once, is at last poised to launch by this autumn. By enabling investors in renminbi-denominated debt instruments to swap interest rates with holders of non-renminbi instruments, the platform will enable investors to hedge agains interest rate risk.
This is of course a risk class not only made salient to Americans by the tech industry’s and Silicon Valley Bank’s recent fates, but also made salient both to those who invest in China and to recipients of those investments thanks to significantly shifting differentials between Chinese and American rates - differentials that stoke investment flow volatility, which few would consider desirable.
There are at least three important implications of this development…
Proceeding from least to most momentous, these would be (1) that China will now attain to incrementally greater stability where capital inflows and outflows are concerned; (2) that China is seeking this form of stability, in the interest of continuing, nonvolatile growth; and finally (3) that with this move China is edging now one step closer to greater integration with global capital markets, on its own terms, in a manner that looks destined eventually to afford the world an alternative to the ‘dollar system’ where trade and investment are concerned.
These implications are all important, to varying degree, in their own rights. But please hold that though for a moment until we’ve considered the other developments to which I’ve alluded, which when added to the immediately foregoing appear to bode changes of even greater importance.
Next up, after trying to make a go of it for several years now, US investment company Vanguard appears to be pulling up stakes and leaving China. Details remain murky, with Vanguard’s Chinese partner Ant declining to comment on what it calls ‘market speculation.’ But whatever the final details of the scale-back, what is important here is why Vanguard has failed in China…
The reason appears to be that Chinese investors, unlike American ones, are not particularly interested in passive, rentier style investment of the index fund variety that Vanguard pioneered in ‘70s America. They’re more like day traders, eagerly researching and deliberately choosing which firms in the real economy that they will invest in.
In a sense, these investors appear to harbor the preferences once dominant in newly industrializing America. Investors in now ‘mature’ America, by contrast, perhaps partly because ‘mature’ themselves, are more accustomed to living as absentee rentiers. Like your grandparents in their ‘easy chairs’ watching ‘[their] shows’ on the television, they’re fine with sitting back watching the returns, managed by others (always for a fee), roll on in.
Of course the perception I’m riffing on here might be exaggerated. America, after all, has its cowboy investors too, it’s just that they are outnumbered by passive investors of the middling sort who are only now coming of age in China. Presumably as China ‘matures’ it too will see growth of a rentier class. Indeed, in view of Xi’s laudable ‘Shared Prosperity’ initiatives, that middle class likely will dwarf America’s very soon.
Nevertheless, the fact that ‘China has arguably the most open architecture on distribution anywhere in the world, [where anyone] can put any product on any platform,’ suggests that there will for some time to come be in China a raucous and real-economy-focused investment culture that the U.S. has not seen, outside of Wall Street, for many decades now.
This takes me to the third item I think worth highlighting today - namely, the fact that Chinese direct investment, into the productive sectors of the U.S. economy, appears to be spiking. This is of course potentially good news for the cause of revitalizing U.S. domestic production, and might also be viewed as a small triumph of President Biden’s efforts to discourage imports, and encourage domestic production, of items America once made for itself. But there’s a larger significance here that strikes me as rather more interesting …
Followers of global financial developments will recall an observation made some years back by Ben Bernanke, to the effect that global financial flows had reversed their longstanding and theory-explained direction of earlier times - from ‘mature’ to ‘emerging’ economies - and that the implications of this anomaly were as yet difficult to trace.
At that time, however, the reversal was not very surprising. Asian economies had then recently been burned, after all, by speculative attacks on their currencies during the so-called ‘Asian Financial Crisis’ (AFC) of the late 90s. They were accordingly thereafter set upon building up foreign reserves as a form of self-insurance against possible repeat performances in future.
That in turn accounted for the compositions of Asian investments in dollar-denominated instruments - primarily U.S. Treasuries, the safest of ‘safe assets.’ (That’s why we still often hear dark augurs of Chinese and Japanese Treasury hoarding.)
What is interesting about today’s investment news, against this backdrop, is that it adds a new face to the anomaly that Bernanke once highlighted. For piece of the flow reversal story cannot be explained by - or perhaps better put, reductively waved off as - mere self-insurance against future currency attacks. (And note that China, after all, never had to worry about that problem.) No, in this case the development actually fits better the schema that Bernanke had cited as surprising…
For in this case, it really is a successful country with plenty of accumulated surplus - like the ‘mature’ economies of the late 19th and early 20th centuries - finding advantage in investing directly in production within a putatively already-‘developed,’ but in fact now degraded, economy. Which takes me straight to the Gestalt I alluded to in beginning …
What today’s developments appear to indicate is a quiet replacement, at least for the moment, of America as dynamic and ever-growing productive economy, with stable development finance and a hunger for additional productive (or exploitative) opportunities abroad all facilitated by issuance of the world’s sole hegemonic currency, by a newcomer that’s playing the game much as America did when it had more common sense.
The Chinese grand strategy, in short, is America’s own forgotten Hamiltonian strategy. That strategy emphasized massive investment in real, productive sectors, first using foreign (primarily British and Dutch) capital and then gradually employing more home-grown capital as surpluses were steadily generated and accumulated.
This was, of course, a species of public-private partnership - but one in which private sector participants were unambiguously the junior partners. Hamilton knew financiers well, and was well aware both of their planning strengths and of their avarice. He established means - in essence, a productive-financial architecture - to harness and channel, collectively, the drives and abilities businessfolk had individually.
It was a formula that worked, and indeed might at the time - the late 18t and early 19th century, a time of scarce capital and underdeveloped state institutional capacity this side of the Atlantic - have been the only formula that could work. What ever the alternatives might have been, what is clear at the present is that we’ve abandoned that model in recent decades, and will remain a pathetic, if not prostrate economy till we recover it.
Against that backdrop, the fact that China has now discovered and implemented it before we ourselves have yet rediscovered it would seem to portend quite a show just ahead.
A putative Chinese curse is said to run, ‘may you live in interesting times.’ In ancient China, ‘interesting’ did indeed often mean chaos and internal strife, while to American ears the word has traditionally connoted stimulation or ‘living life to the fullest.’
It is ironic, in this light, that ‘interesting’ seems to be sounding much better in China these days, just as it’s feeling more curse-like in America. (If noting else, the lunatics in the U.S. House of Representatives and the now-indicted Orange Julius are indeed ‘interesting.’)
May we, then, course-correct quickly and make ‘interesting’ sound … well, interesting again.
Money is political. Recent sanctions and geopolitical events contributed to today’s shifting winds in the desirability of transacting in US dollars.
While swap rates are a positive development, a better solution would be something like the SDR.
Like you’ve explained in your book on money, money is an IOU. It’s build on faith.
For international commerce, it makes sense to build an international IOU. Wouldn’t Xi’s and Putin’s efforts to shift away from the dollar be more successful if they went the route of an international IOU?
I think it would benefit them more and simultaneously all other nations. The issue is that no leader wants to give up that much power.
Some international democracy would be required. That’s a tall order for the US (much less Xi and Putin).
Until we put in an international political framework, international debt settlement will be a game of the most credible IOU.