Bankless - China vs. The Dollar | Diana Choyleva

Episode Date: July 31, 2024

China’s decoupling from the Dollar. Are we on the brink of using the yuan as the new global currency, or will crypto take the spotlight?  We’ve explored crypto’s role in disrupting the global monetary order before, but there’s another force that’s going to have just as much of an impact…some would say much more. China! What does it look like when the world’s 2nd largest economy dedollarizes? That’s what we explore on today’s episode with China expert and economist Diana Choyleva. Towards the end, Diana also reveals her eye-opening prediction about a potential US-China conflict over Taiwan.  ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium    ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠ 🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap  ⚡️ FUEL | EARN FUEL POINTS https://bankless.cc/fuel  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  🗣️TOKU | CRYPTO EMPLOYMENT  https://bankless.cc/toku  ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/41   ------ TIMESTAMPS 0:00 Intro 7:17 Is China Really De-Dollarizing? 10:16 Is De-Dollarizing A Priority? 14:14 China’s Objective & Progress? 16:04 Yuan as Unit Of Payment Or Store Of Value? 22:27 Usage and Progress From 2009? 25:34 US VS China Capital Market Difference 29:32 Motives Behind De-Dollarizing? 35:32 China’s Wants VS Actual Scenario 40:25 What Distant Future Looks Like? 47:41 China’s CBDC Plan, Issues & Expansion 55:13 China Participating In Crypto World? 57:50 China Using Treasury As Store of Value? 1:04:26 The Taiwan Conflict? 1:05:51 What If China Is Successful? 1:09:37 Closing and Disclosures  ------ RESOURCES Diana Choyleva https://x.com/choyleva  ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠    

Welcome to bankless, where today we explore the frontier of China's decoupling from the dollar. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. The question today, are we all going to be using the yuan soon? We laugh, but that may very well be the case, at least if we're not using crypto. We've explored crypto's role in disrupting the global monetary order before. That's kind of the genesis of the bankless podcast in the first place. But there's another force that's going to have just as much impact. on the global monetary order, and some would say even much more, and that is China. So what does it

look like when the world's second largest economy de-dollarizes? That process is ongoing now. That's what we explore on today's episode of China expert and economist Diana Shaleva. And what a ride this was, especially toward the end when she gives us her prediction on the probability of a U.S. versus China hot war over Taiwan did not make me feel very comfortable. Crypto is one technology out of a subset of technologies that are coming online this next decade. Cryptography puts power onto the long tail and many other technologies will also just kind of make us turn into a multipolar world. And this is what China wants, at least according to Diana, China wants to have a multipolar currency that the globe uses, that planet Earth uses. And I think this is especially relevant for us in the crypto industry because we are dealing in the world of new money form factors.

and new monies, but also just technologies at large. So understanding the second largest world power and what its motivations are and what it wants out of the world is just useful for anyone living through this decade. And especially for our industry, which is also creating technologies to, I think, definitely push towards that same like multipolar kind of a conclusion of where things go. So there's just an immense amount of information here. I think we're really just scratching that surface of where this goes. Thankfully, geopolitics moves in slow motion, at least in comparison to crypto, so we have time to absorb it before it actually happens. But understanding the destination that China is pushing their sphere of influence is definitely super important for any investor

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today and download the Uniswap app and claim your free username to get added to the extension waitlist. The Uniswap extension is available later this month to everyone. Just another way Uniswap is helping you swap smarter. Bankless Nation, very excited to introduce you to Diana Shoylova. She is an analyst and economist specializing in China's economy and its politics. And today, we're here to talk about China's plans to decouple from the dollar. And Diana, I think you're the perfect guest to have this conversation with. Welcome to Bankless. Thank you very much. It's my pleasure to be here. Well, we're very excited to dive into this topic. It's something we've been exploring around the

periphery and now we're double-clicking it. We're going right into China's plan to de-dollarize. And I I want to just spend a minute giving you some context for our audience and who you're talking to. So I think our audience has put a lot of time into understanding how global reserve currencies rise and how they fall. It's been kind of key to understanding this whole cryptocurrency movement that we're working inside of and so bullish on. And we understand that like the world reserve currency asset is kind of a denominator for everything else that we own. So that's why it's important as well as investors. So a few other things we know is we know the world reserve currency asset is that's kind of a denominator. status right now belongs to the dollar. The dollar is king. The dollar is dominant. That seems

pretty self-evident. We also know that China is a rising power. They might have a different set of preferences. So we don't know what those might be, but we expect they'll have a different take on the whole situation. And we recently did an episode, this is almost like a sequel of with a gentleman by the name of Luke Groman. And he gave us this vague idea, this notion that China is working to de-dollarize. He talked about, like, de-dollarizing into gold and other things. So in today's episode, we're really here to get into the specifics. So can we just start here with the broadest of context? So is China really trying to de-dollarize? That's how we've titled this episode. But like, how do you know that they're trying to de-dollarize? I think you think they are. But tell us why you

think that. Well, they definitely are. And they made that crystal clear at around about 2009, when they started talking about internationalizing the R&B. And at the start, a lot of the discussion was sort of surrounded or focused on the economic pros and cons of having the world's reserves currency, but even more broadly of using your own currency for denominating trade and capital flows. But at some point during the discussion, they really equated the idea of having a great country with a great currency. So it became a political concept that the rejuvenation of the Chinese nation, China's rise to global power will be and has to be accompanied with the rise for the global status of its currency. Now, that was sort of put to the side all the issues

of pros and cons of denominating trade and capital flows in your own currency or trying to remove or supplant the dollar as the world's reserve currency and made it a political agenda and it's been featuring in China's sort of regular five-year plans since then. But a few years ago, they changed the strategy. And that was because in the first years, the first 10 years, they didn't really achieve much success. And a lot of the use of the currency abroad was really very much tied into the expectation of Yuan appreciation.

And once that came out by around about, 2014, then of course the use of the currency for trade also started to come down again. So five or so years ago, China really put its head together and started looking at how it can internationalize the R&B. And the imperatives for doing so sort of changed over time as well. As you know, the US started to change this policy towards China. It started under Donald Trump, but it continued under President Biden. And the Ukraine-Russia war also was another further impetus to China really pushing and making it a priority that they want, at the end of it,

to buy the essential goods and services they need from abroad in their own currency. As the years have gone on, you've depicted a story of an increasing, like, urgency out of China to really make this effort happen. In the grand scheme of things, can you just kind of evaluate how much of a priority is this for China? Like, how badly does it really want to have independence and sovereignty from the U.S. dollar?

There's many different priorities that I'm sure China has. Like, where does this rank in the grand scheme of things? Well, we started looking at this in great depth about three. three and a half years ago. And we published a report in the summer of 2022 entitled China's quest for financial self-reliance, actually, but basically how Beijing plans to decouple from the dollar-based global trading and financial system. Now, at that time, that was actually a priority that was at the very top of the authorities' agenda. I've just returned from a two-week trip to Beijing and Shanghai, where I had a lot of meetings, ahead of the party

plenum, the all-important sort of economic-focused party plenum, the so-called third plenum, that sets out the economic and reform agenda for the next five or ten years. And in my conversations on this trip, I'm getting a sense that internationalizing the R&B has sort of come down a peg or two in terms of the priorities of Beijing. And the reason for that, I think, is that their hands are full domestically with the economic problems and challenges that China is dealing with. And actually, they feel rather safe at this point because they created the alternative payment infrastructure that will allow them to decouple from the dollar.

Of course, having your own infrastructure doesn't mean that people, and countries, companies will rush to use your own currency. But it gives them the security that if there is the urgency to do so, they have sort of the plumbing to make this work. And I think this was sort of to an extent the result of what they have seen as a response to, again, the Russia-Ukraine war. And if you sort of have followed this story before the war, Russia was really reluctant to use the RMB.

When Putin went to Beijing and they declared their sort of no-limits friendship, there was a gas deal signed at that time and it was denominated and paid for in euros. And now that Russia is in a more inferior position and doesn't have the negotiating power to the same extent with China, all the trade is being conducted in RMB, and it is through China's own payment plumbing system that circumvents entirely the dollar-based system. So I think that's also given them a bit of a comfort that, you know, they can progress with their strategy of how they would incentivize the rest of the world to use the RMB. But it's not such a kind of top priority.

Certainly that's my most recent impression. Okay, so it is a top priority generally, but because they have this infrastructure now in place, It's not necessarily a burning priority because the disaster scenario for China would be completely being financially sanctioned outside of like the global economy. And if they're using the U.S. plumbing, SWIFT and some of these other payment networks for this, then they could be cut out. Now they can't. So that makes sense to me. How far along are they in this process, would you say, in this process to like de-dollarize or to gain usage as far as a, I don't even know what that. the objective is maybe. Are they trying to be a dominant world reserve currency? But could you give us some

assessment of how far along are they? At this stage, they're not trying to be a sort of supplant, the dollar as the world reserve currency. I mean, very simplistically, what they want to achieve, as I said at the start, is to be able to pay for the goods and services and assets they need from abroad in their own currency. By the way, there is also, you know, we have to differentiate between paying in your own currency and pricing in your own currency. There are two slightly different things. For example, the trade in oil is priced in dollars, but you can pay for oil from Russia, let's say, in yuan or from, I mean, you know,

it's not the same thing. So putting that differentiation to the side for now, what China wants to achieve, first and foremost, is to ensure self-sufficiency within its own geopolitical sphere of influence. It doesn't want to be dependent on the US in any shape or form. And it wants to make the yuan the anchor currency within its geopolitical sphere of influence. So how far along, at some point in the future,

their aspirations might change. But at this point in time, they're not, aspiring to take the place of the US dollar. I just want to pause there and ask the question, but before we get into how far along are they? So in our parlance, we sort of classify what is a money, it is a unit of account, medium of exchange, store of value all of those three functions. And in your differentiation between kind of like pricing and payment, it sort of sounds like China wants their currency to be a mechanism for payment. So a medium of exchange, let's say, at least in the sorts of things that China buys to fuel.

its economy. And then it also ideally wants to be a unit of account for things like oil as well. Yes. But they probably, it sounds like what you're saying, is they don't want to be a store of value type asset as say UST bills are today, treasuries. That's not their at least short to medium term aspiration. Is that a right interpretation of what you said? Yes. So of course the discussion then has to be, can you have one without the other and how have historically global currencies emerged? And if you examine the historical evidence, actually the medium of exchange function comes first. And I think that's why China's focus has been on the medium of exchange. Because, you know, if we look at what is the problem, it's kind of a cash-22 situation for them.

Because there isn't that much yuan offshore, the cost of cross-border transactions in yuan is high relative to the dollar. But for it to come down, there has to be more. a yuan offshore. So you are into this chicken and egg cash-22 situation. And so I think the first priority is how to push the use of the yuan as a medium of exchange. And for that, actually, you don't necessarily need an open capital account, which you do need if you want your currency also to be a store of value. And with you, The medium of exchange, the idea is essentially that they create this closed loop of yuan use. So if you think of the Belt and Road initiative and all the countries they're trying to bring into their sphere,

originally that initiative was thought of using close to these developing countries that China hope will be in Yuan to develop their infrastructure. But these countries didn't want to borrow in yuan. and the majority of the borrowing has been in US dollars. So now the strategy has changed to building industrial capacity to create this feedback loop in the sense that, let's say, a factory in, trying to think of a country, at Tajikistan or, you know, let's say take one of the stance that would take a loan in R&B from a Chinese financial institution, would then import machinery that China produces to build a factory that will then produce goods

that will be sold back to China in R&B to get the R&B to pay back the loan that it took. And none of this requires an open capital account. And you think, well, you know, how does that change things? It changes them because more and more yuan keeps flowing in and out. and that decreases the cost of transacting in yuan. I see it. It sounds like a very smart strategy, also considering China's kind of strengths and weaknesses, right,

to pursue this circular economy approach. There is another strategy that's not so, I think, clear cut for people, and that is the use of e-commerce to circumvent the usual kind of trading channels. And as you know, they've just recently again reiterated that they want to promote cross-border e-commerce. And, you know, I've been asked by a few journalists, oh, you know, what does that mean that the Communist Party is directing Timu, you know, to achieve the national strategy. And I was like, that's not the rationale here of all the companies, you know, why would China care about directing this low-cost retailer in that sense? The issue, though, is that promoting e-commerce, again,

allows China to circumvent the existing system. And yes, if I'm here buying from Timo, I'll buy based in London in pounds, but actually it's priced in R&B and the exchange from R&B to pounds tends to happen offshore. So this is again a way of getting the currency out and also addressing the unit of account, the pricing that you brought up as well, because 75% of China's trade is still denominated in U.S. dollars, which of course carries with it the exchange rate risk. And when it comes to commodities in particular, China feels that since it is the largest consumer in most of them, its currency should be the one that is used for pricing these basic commodities. And China is vulnerable to some of these commodities that it has to import abroad. One bit of housekeeping before we

continue. Sometimes you've called it the R&B, sometimes you've called it the yuan. And just for American listeners who aren't familiar with these currencies. That is kind of one in the same. Is that correct? What's the difference between R&B and yuan? Yes, it's one and the same and the difference is like between sterling and the pound. I see. Okay. That makes sense. Yeah, I just wanted to clarify that for folks that are just like just not as familiar with China's currency denominers. Yes. I mean, trust me, when you write a 200-page report talking about the yuan and you're, you know, I have to call it, you're sort of coming up with ways of using a different word. Right, right, right, interchangeable.

Okay, so, and then just the last point on this is how far along are they? How much usage do they have today? Just like tying off this conversation. You started this quest kind of really began to accelerate in 2009. How is it going for China in those three dimensions of store of value, meaning of exchange unit of account? Well, they haven't made critical mass of progress. Let's put it this way.

And there is a lot of metrics by which you can sort of judge their progress. And if you look at the medium of exchange, they've been helped by events, as we discussed. There is now, you know, the numbers escape me, but the majority of the trade now between China and Russia is in R&B. And there are the occasional deals that do get paid in R&B with other partners. But if you look at the overall numbers, there has been an improvement in the overall trade or share of trade in R&B, but not back to the peak that was in about 2014, I think 13, 14 or maybe 15 was the peak of 20 cent of trade was denominated at R&B. It hasn't returned to that peak. Now, unit of account is very, very difficult to assess.

The data is just not available for us to be able to do. that or for anyone really and then the issue of a store of value that they have made very little progress actually although they have started changing or removing some of the obstacles to that first of all china is developing so so if you think of the strategy it's a business strategy about how to get the outflows and then a strategy you have to bring inflows and inflows of course is related to opening up China's financial system. And it might seem counterintuitive in the kind of of context of the great decoupling, this bifurcation of the world economy into a China and US sphere of influence, that China at that time is actually throwing finally the doors of its financial

sector open to foreign investors. But the reason is that they desperately need the know-how and expertise of foreigners because they kind of kept their capital markets sheltered, but they also want to promote, again, the use of the currency across the board. And so they've been opening up. They have not though opened up the capital account fully. And I think investors are still concerned, especially if those investors are in the West or in America in particular of investing in China, in China's capital markets and even less so these days in its private markets as it's become even harder to get out of those. Yeah, I actually want to double down on that point. One of the main reasons why the dollar circulates in and out of America is because when we send dollars outbound to developing

countries, developing economies, they send it back into Wall Street. They reinvest inside of like American capital markets. And I think you're identifying one of the frictions that China is feeling when trying to export their denominator is that China doesn't have the same capital markets that the United States has because of just like the cultural differences behind what like capitalism is inside of China versus what the United States is. Does that summary resonate with you? I think it's important to distinguish who they're trying to attract as well. Because they don't necessarily want to attract, let's say, US money. They sort of realize that the US will be in the US sphere of influence.

So it is how to attract those countries that they want in China's sphere of influence and who are interested or which are interested to be in China's fear of influence. Well, I think it's telling the fact that a lot of those countries China included their people would like to invest also in assets that are based in three democratic liberal economies with instituted rule of law. and property rights. So that's one of the reasons that China also keeps the capital account closed. So there is something to the institutional makeup that underpins U.S. capital markets that provides the security safety that investors feel when they invest their wealth. Having said that, though, on a short-term basis, and just in general, investors are swayed by profits in return. And so that plays a role. And I think it's also important to remember that China is not

necessarily planning or wanting to attract US money into its capital markets, especially not in the context of the great decoupling where it seems unreasonable. But it is interested in offering sort of the type of growth opportunities that it has and foreign investors can take advantage of to the countries that it would like to be in its sphere of geopolitical influence. Take, for example, the Middle East and the sovereign wealth funds in the Middle East have in the last couple of years being sort of a lot more focused on what investment opportunities they could find within China, both in capital markets and in private markets. markets. And China has, and this is part of its R&B internationalization strategy, focused on

basically making its capital markets broader, deeper, more professional. This is a priority, not just from the perspective of internationalizing its currency, but also from a domestic economy point of view. Because, again, I don't know how much to get into the depth of these discussions, but for China, it's critical that it moves household wealth from being stored primarily in housing to being stored in equity markets. Xi Jinping sees one of the goals of being common prosperity, not a big difference between rich and poor. He sees house price inflation as making rich people richer, poor people poorer, whereas if household

wealth is in equity markets, then even if. know, everyone can participate more equally, but also it will allow households to grow their wealth, and there is a push to give out more dividends, so they'll have income. So this is really a domestic economy priority as well as it's important for the global use of the currency. The United States definitely uses the dollar as a way to maintain its sphere of influence, and that sphere of influence happens to be like the majority of the world. The ratio between, you know, international trade that uses the dollar versus the part of that international trade that is actually the United States, there's a big gap there.

Like, United States has a very, like, subdominate amount of global trade, but, like, it's almost all denominated in the dollar. And that's kind of where the United States gets its, like, superpower strength from. There's no coincidence that we have the World Reserve currency and we also have the most powerful military. Does China want that for itself? And does it see the sovereignty of the yuan as a means of control? over like maybe just like its own local eastern sphere or does it have like bigger aspirational powers?

Like how far of a motivation is using the yuan as a means of control for like a larger sphere of influence is this for China? Or is it more just about reaching some better balance between the share of global trade that is China, which is large and the share of global trade that is denominated in the UN, which is smaller? Is it more about just balancing those two things out or is it more about China becoming a superpower? I think in the first instance, it is more about balancing those two things out. It wants to be one of the globally accepted currencies. However, looking out, China does want to you, returning China to greatness for China means returning China to the way they see it, its rightful place at the center of the world

as being the most powerful and biggest economy. You know, they would often talk about their 5,000 years of history during which, most of which they have occupied their positions, that position, and they sort of viewed 100 years of national humiliation as the aberration have been striving ever since to find kind of their new national identity. And originally they played with a few ideologies, settled on communism. It, you know, had a varied success at the start. But then since the era of reform and opening up, they see this as kind of, kind of the way forward. And yes, at some point down the line, they want to be the most important country

and economy in the world. But at this stage, they just want to be independent from the US. And one could argue that the world is big enough to sort of be bifurcated in two spheres of influence. But, you know, during the Cold War, the economies were not integrated at all. Now the world economy is highly integrated and sort of this bifurcation, this decoupling, is extremely costly for both sides. So that's kind of the whole backdrop in which China is pursuing these ambitions. The ambitions for the currency have a national security element for sure, but I don't think China is talking about at this stage really taking the place of the dollar

or even taking the place of the U.S. as a global hegemon. So, Diana, there might be a difference here. And I'm wondering if you could help us understand this a bit, between what China wants and what it can actually get, right? So let's say China, yeah, as we've made the case, does want to de-dollarize. And I think you've made the case very pointedly as to why they might do that,

why it might be in their national interest to kind of do that. But you also acknowledge that they're not very far along in their progress to de-dollarization. So I think there are some people who would kind of hear that and they look at the data, at least as it is right now, and they say, look, China may want to try to de-dollarize, but there's no way they can disrupt the U.S. dominance as the World Reserve currency. You know, the dollar is just this wrecking ball, and it is king, it has been king for many decades, and will continue to be king in the future. I mean, just look at what, you know,

emerging markets prefer to have their debt denominated in. It's always dollars. So what do you make of kind of the critic who sort of says that. And just like it's not worth talking about because China's just so far from actually being able to de-dollarize itself that we just don't even have to worry about it. And why have this conversation in the first place? Yes. I mean, I often joke that I agree with you. You might want to have something, but having the ability to have it is a very different thing.

And I often joke that I might want to have all the shoes that Imelda Marcos had. But I doubt I will get there. But sort of those people that dismiss China's ambitions outright as something that we shouldn't really worry about, I think miss the point. It's all those changes that happen as China attempts and moves up that reshape so many things of the way the world works that you have to be aware, you have to understand them, you have to analyze them in order to see what the impact is going to be. So, I mean, I've analyzed China for 25 years, and in that entire time, I've been so frustrated because it's always this extreme discussion. It's either the China dream or the China Armageddon. And there's so much that has happened in between that is absolutely critical to sort of where we've got to right now. I mean, even thinking about the facts, I mean, I can start from the very beginning of sort of incorporating China into the world economy and the low bond deal. conundrum, if you remember, in 2004. That was a direct consequence of that and of China's choice to keep its currency pegged to the dollar and had to recycle its excessive savings into the US. And then we have the global financial crisis as a result as well, because I bet you, obviously

we can't turn back time, but if China had actually allowed free capital movement and de-pecked the currency in 2004, we wouldn't have built up the debt in the West. It was almost like too rude to refuse if you want to give us all these free money. And China did that for its own industrialization sort of purposes and was willing to take the cost of investing its effects in such low-yielding assets. But then, you know, sort of the debt went excessive in the West. We had the global financial crisis. So I'm trying to describe that, you know, China is a huge economy and has been bolted on to the rest of the world. you can argue that essentially because it's so big

and it administers the price of capital, it actually distorted globally markets. And I often get very frustrated with putting the blame of the global financial crisis on capitalism. Yes, you know, certain things went haywire, regulation wasn't on the ball, all of that, ninja mortgages and crazy things like that. But ultimately, the driver was that you added

to the kind of free liberal economy that was before, this huge economy that was operating on sort of semi-command, semi-market principles administering the price of electricity and capital, and that severely distorted the market mechanism for everyone. So it wasn't the problem of capitalism as such. So, you know, from the very big issues to almost every aspect of how the world works, China is part of that. So if they're moving in a direction, changing things, we are decoupling. We can not. not ignore these developments. And it's not just a discussion about will they get a global reserve currency or not. It's about on the road there. What happens to everything else?

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or you're a user looking to claim some ownership on Mantle's Defi apps, click the link in the show notes. So getting started with Mantle. Can we talk about that? So it's a fantastic point. You're saying basically that China's weight and its impact in terms of global financial markets and the dollar has already been felt. I mean, it's been felt in the early 2000s and the global financial crisis and all of these things. And to ignore it, we're ignoring just like a massive macro force, right, so we can't ignore it. But between the extremes of the dollar will always be king, we don't have to worry about China at all, or no one has to worry about China. And like, you know, China will win Armageddon reserve currency status is now the RMB. It's like, can you paint us a

more realistic path of what you think could happen over the next, I don't know what the timeline is, five years, 10 years, 20 years, the next couple of decades at China works its way through this path of de-dollarization? What sorts of things? might we see next and in the years and decades to come? So, I mean, again, sort of stepping back and kind of going all the way to the moon and looking at the earth, we have to acknowledge that this great power competition between the existing and aspiring hegemon is not only making, as I said, everything more costly for everyone, it's lowering productivity, etc., etc.,

it also carries the risk of military conflict. And in fact, because you could argue we are in the Kindleberger trap of having the existing hegemon not being able to fulfill its role completely, and the aspiring hegemon not wanting or not being able to fill that void, you have this geopolitical void where third actors start pursuing the idiosyncratic goals and you have more instability, which is really a very important. I think what we are seeing with the Ukraine, Russia, with Hamas, Israel, with the Iranian sort of liberties they're taking with their various proxies. Oh, that's interesting. As you were saying, like, the U.S. is kind of stepping back and China's not stepping in all the way. And so just people are, like, countries and geopolitics left to their own devices.

Well, it just opens up the sphere to all these other regimes pursuing their own idiosyncratic goals. And it was very much what happened during the. kind of transfer of power from the British to the Americans and having that vacuum and Germany sort of stepping into that vacuum and, well, we all know what happened there. So this is an extremely unstable global situation. And as such, sort of forecasting has to really take this as the background of anything that is macro financial, but even more so, when we're to. talking about global payment systems, forget about the unit of account and the store of value.

Because, I mean, I've heard the anecdote, I've never had the chance to ask Alan Greenspan himself that when we had September 11 and he was notified of the planes crashing into the Twin Towers, his first question was, is the payment system working? I think we forget how fundamental the payment system is to our way of life. And so, you know, the payment system is a critical infrastructure. And as such, carries very heavy importance from a national security point of view. So anything to talk about the currency and the payment system really relates very closely to the geopolitical situation. And so as we talked earlier, China now feels more secure because it created its own alternative system to the U.S. correspondent banking system that uses

SWIFT as the messaging system. That they created in the form of their called SIPS system, which is a kind of hybrid of also containing the messaging within them. They still use SWIFT because in that domain, the network effects are just so large. But they have everything they need should there be, let's say, a military confrontation to have their own plumbing system to rely entirely in their interactions? And then it's in other countries' sort of domain of saying, we will trade with you and use this or not. And I think this is what they're seeing, that when push comes to shove and these guys have to make a choice, they would have what they need to offer that choice. I think another interesting development is the whole digital

currency story because originally China focused on the digital currency being for domestic use. And partly it was because they sort of didn't have control, full control, and didn't get all the data they've been asking and eating from the internet giants like Alipay and Tencent. And in the last few years, through the crackdown, they really brought those guys to heal. So I think now the authorities have great visibility when it comes to mobile payments internally. And then you sort of stop hearing about the digital yuan's domestic use. But it becomes very important for cross-border payment because actually the global cross-border payment system is very inefficient relative to domestic payment systems.

And if you use digital currencies, it really will be kind of a breakthrough and innovation that lowers the costs, it extremely efficient. And China sort of leads the efforts on that front. So of course, you know, the West is also looking into this and it will be interesting to see whether it will be two different systems, how they will talk, how will the chips fall, what will come out of this? But I think if China is the head of the game in producing a much, much more efficient system, as we've seen with loads of other things, say the use of mobile technology, convenience is a huge draw for most companies' businesses. So it's not to underestimate that if they create a more efficient system, that that will not

have its attraction to global users, again, within possibly more China sphere of influence than the US. Just to get up to speed on China's progress with respect to digital currencies, we had an episode, I think it was probably two years ago, the gentleman who wrote a book called Cashless, his name is Richard Turin, and sort of described China's digital currency aspirations. And, you know, like, if I were to kind of like recall that episode and break it down a little bit, you know, China's talked about a central bank digital currency, I think, and there's maybe some activity there. But like the bulk of the activity is really with big tech giants in China, right? It's like WeChat, AliPay, and the distribution of those apps domestically to just like most of people living in China, basically.

And that is kind of a de facto central bank digital currency, if you will, because the tech companies and the banking system of China and the central bank of China is all very tightly kind of controlled. So it's almost like a de facto central bank digital currency. And, you know, Richard was making the case. This has been great domestically. It's way better than going to like an inefficient bank. You're able to get this into kind of the countryside and rural areas. And you can basically do a thing that crypto has promised to do for a while, which is bank the unbanked. They're doing it with digital technology, although it is really very much a bank technology.

I guess to have a question for you, if that is kind of the latest and greatest with respect to a China's aspiration, they're basically doing a digital currency through their big tech companies, you know, like the Facebooks and the like versions of China, or if they have more at play there. And like, do you actually think they're going to be able to export that to the rest of the world? Because I will say for myself, there's no way I would use, you know, like China's central bank digital currency. And I don't think I'm an outlier here, even though I'm kind of like, you know, a crypto person who believes very much in self-sovereignty. But like, can they actually export this? Yeah, what do you make of these ideas? And just I don't advise you to go to China because you won't be able to use anything else.

You know, you'll have to stay in your own sphere of influence if you refuse, but it's been sort of improved for foreigners. Before, there was this period where you couldn't use cash and you couldn't tie in your Western bank account to AliPay or Ouichat pay. And you sort of, you couldn't do anything because you couldn't call a taxi or. So anyway, that's improved. But look, I don't want to go too much. into technical details, but I want to make one thing clear.

I mean, China seems like this monolith from outside, but it's not. So, yes, it leapfrogged the traditional kind of credit card system in the U.S. and check and all of that with mobile payment technology. But actually the AliPay, the Alibaba, the Ouichat 10 cents, these guys, you know, part of the problem was that they were not giving the central authorities full visit. of these payment. And this is partly why the authorities went on the crackdown. Now, I would say, yes, they have really brought them to heel,

so now they've got everything they need. And by having that, they have much bigger visibility across payments. And that's why the sort of digital currency initiative, which started in about 2014, sort of paled in importance. You know, I'm really, I mean, there's been pilots, it's been running, but the authorities doesn't look like they're really focused on pushing it forward, because actually they now have the control that they wanted through the visibility of the data. Now, can China export its mobile payments know how?

Absolutely. And they are on a push to sort of buy up, export technology, and collaborate across Asia in particular. But I'm sure it will just go across the whole, again, BRI concept of Africa, Asia, as much of Europe as they can get. And interestingly, Latin America, which is really annoying the US, because the US does look at Latin America as its backyard. So I think when you have a superior technology, it's attractive to people and only if at the national government level, countries decide to push back against that investment like it was with Huawei, for example, that then you can stop it. And that's why I'm saying that productivity is coming down globally

and costs are going up because we are making choices on the basis of national identity and national security as the driver on both sides of the equation. It's not one or the other, both sides are doing it. And from an economic point of view, those don't make sense. sense. I mean, in fact, if they were Martians, I'm sure they're sort of looking at earth and sort of shaking their head and saying, you know, I really don't understand why these guys are quarreling. If we look at the sort of global economy of the last 30 years, it's never headed as good before in terms of, you know, now most people have access to electricity, most have access to education, you know, just go back 30, 40 years and this is a very different world.

Loads of people have been pulled out of poverty. Admittedly, most of those are. were in China and India. But human beings as a whole, we've actually had a fantastic run. So now, though, if you look at it, and most of people in the world, 99% of people,

I remember I had a debate in 2018 when Bloomberg set up its Bloomberg New Economy Forum. They had like the big debate and it was, has globalization gone too far? And I was on the yes, it has. And then

there was a vote in the audience and the audience voted against the motion now however many years later I feel vindicated but the reason why that audience was voting differently was because they were the 1% that were you know global citizens very rich you know if you look across most of the rest of the world people really look at this through the prism of their own nationality and then the story looks very different so yes again you were taking a national stance. I'm not going to use the Alipay because I don't believe in that system. Not because, I mean, actually, otherwise it's super easy and convenient.

And I remember when I first downloaded WeChat, I was so sort of excited about using it. And then I was thinking, oh, my God, it's so easy to be sucked into this. And bear in mind that I grew up in communism. I was born in Bulgaria when it was communist. And like you, personally, I don't want to live in communism, ever again. I'm very happy if other people want to, but you know, you can see how this stuff can sneak up on you when it's so much more efficient, so much more convenient. In the United States realm of things and also in the crypto world, it's kind of a joke at this

point how many times we see our own United States Central Bank do research efforts into the world of a central bank digital currency. They'd love to research it. They never actually have ever put anything into practice. And it's been like five years since. Like the central bank digital currency conversation has happened in the context of the United States Federal Reserve. Meanwhile, in the crypto world, we have this massively growing ecosystem in a world of stable coins. Like hundreds of billions of dollars of stable coins are running around blockchain rails. And these are all dollars. These are all tokenized dollars on crypto rails.

And this is likely how the United States dollar takes its next step forward. It's with private banks taking dollars in bank accounts and putting them on Ethereum on Web 3 on tokenized rails. And then notably, China is completely absent from this online economy, from the Ethereum economy. And I'm wondering if there's any sort of conversation happening in the Chinese sphere where they would be interested in having the Chinese yuan being present inside of cryptocurrencies, like tokenized UN. Is there any sort of conversation happening in the Chinese context here? So, I mean, for an authoritarian regime and even for, democratic regime like the US, the sort of independence of the crypto world is not welcome.

You know, it doesn't again matter how much more efficient it might be or not, but it really makes it, you know, much harder to run the kind of government system that we have with the separate payment system that is, you know, not related to the dictator. of the government. So you can imagine that if the US is really reluctant, that China is three times more reluctant. And in that sense, they are very much opposed to the crypto world that is trying to think what the wording was. Decentralized. Decentralized. Yes. What they have created as a digital currency is very much a super centralized. digital currency. So this whole decentralization idea is anathema to them.

Dana, one last question to tie this off before we close out here is how about the store of value sort of case, right? It's like kind of the question of what is China's central bank buying? You know, they own a lot of treasuries, U.S. treasuries, and that's somewhat interesting. But Luke Grumman, when he came in the podcast, he talked about China increasing its efforts to purchase gold. And I like he has a thesis that gold is kind of like rebecoming an oil currency, maybe stealing some of the thunder from treasuries and the dollar being sort of the oil's reserve currency. What's your take on how this goes down? This part goes down. So what about the store of value? Will Chinese central bank continue to use treasuries, U.S. Treasuries as

store of value? Or will it look to alternatives as well? How does that happen in this de-dollarization story? You brought in a few different themes into the same question. So just to unpack them a little bit, given, you know, the shock of sort of the freezing of Russian FX reserves, China feels very vulnerable with its reserves in US dollar assets, in particular in treasuries, and of course it matters a lot where the custody isn't. So it would naturally want to kind of do anything it can, but it can't do much until most of its trade is not in dollars, if you see what I mean. So it's constrained. It would like not to be.

So it's trying to do anything in anything to minimize the risk that it holds by having a lot of its effects, reserves held in US dollars. But because it needs them for its trade, it can't quite sort of buy, you know, otherwise why not sell everything and buy all in gold? Because gold is not accepted as medium of exchange. So that's one thing. Then there is the thing of whether we are going to move to some sort of gold standard as a store of value. And of course, one of the connections brought in that discussion is the fact that they sort of have the futures exchange in oil in Shanghai and they also have the gold exchange.

So the idea is that if you sort of, you know, worry about the yuan, you can just exchange it into gold and you have that option there. I think it's fair to say that the US has taken the Fiat system to sort of, you know, interesting extremes that we are going to observe how they will play out. China has continuously tried to position itself as sort of a more stable currency. This is why I also don't buy this big devaluation of the yuan against the dollar kind of discussion in markets in the last few months. because China sort of spent 30 years during every crisis trying not to devalue in order to present the Yuan as a stable alternative to Asians in particular, but to whoever wants to become. So now that it's so even more focused on sort of ensuring that people accept the Yuan, why would it want to jeopardize it by a major devaluation? Unless we are in a scenario of actual conflict. I think a scenario of actual conflict, that's when we will see a major devaluation.

and maybe they'll repay to gold at that point. I doubt they will, though, because every seat seems government that has tasted Fiat money cannot sort of get off that drug. Well, I don't know. I'm describing it too, because it's getting late

and I haven't had dinner yet, but too dramatic. Drug is fine. We use that analogy. These are our words for sure. Morphine drip, if you will. Yeah. That makes sense to us.

So why are they buying gold? Again, as much as they can devourts, diversify away from the dollar, they would. And they would buy gold also, I think, because this is really, I mean, there is the central bank and then there is a lot of the retail buying. And again, it's one thing that's been rising recently. And so everyone's piled into it because you have to realize it in China, you know, all this money, I mean, after the global financial crisis, they flooded their economy with liquidity. So all this money is sitting there with very few places where it can earn any returns.

So I think at the moment that surge in gold prices and gold buying in China is more a reflection of the fact that they can't earn anything anywhere else internally and has become now impossible for the average person to get their money out of China. That's certainly again the message I got from this trip that, you know, sort of the very wealthy, let's say, 90 million, they got whatever they, you know, they started much earlier. is the 300 million middle class in China now that's really captive there. They can't get the money out and sort of they even given up trying.

And because, you know, their money will be redistributed towards the 900 million poor in this kind of common prosperity vision of the future of massive income and wealth redistribution. But, yeah, I think the story behind gold is simpler like that for this particular time. Rather than, I mean, some people even take it as a sense. an indication that, you know, China's about to invade Taiwan. Again, China, you know, outside of this whole Yuan thing, we were at the forefront of developing the idea of the great decoupling. And where we started in 2017-18, we sort of separated the whole issue in tech war, trade war, Taiwan war. So we are very well versed in, they have a specialized team in analyzing these probabilities.

And, you know, I think it's very simplistic to read so much into just one. thing that is happening. So I think the gold buying bit has been blown out of proportioning in various directions. Yeah, just because you brought it up and I was going to bring to close, but now I have to ask. So do you think we're on the cusp of a, you know, Taiwan conflict? Or do we still have some time here? So I would just give you our current probabilities and we'll have to leave it for another conversation or, of course, would love to engage any of your listeners sort of, you know, off the podcast. But what we forecast on a three to or within three to five year horizon and the probability of conflict, which could be accidental as well,

the intentional, we currently have at 70% having started at 10% in 2019 when we started doing this iterative work. But on a three to six month horizon, we have a 50% probability of an accident and only 15% probability of an actual sort of military conflict, not just necessarily invasion. There's all sorts of other variations of blockades and quarantines, et cetera, et cetera. So this is definitely the most important kind of geopolitical risk to watch out for and to have an understanding of. Yikes. Wow. Those estimates are not necessarily comforting. But as you said, Diana, another conversation. Let's close this out with this question. If, let's say, hot wars aside and that you know 70% probability of three to five years does not come true so hot

wars aside let's set that on the side for now because that would be a catalyst that would shake up everything if china's next phase the phase that it's in of deep dollarization is successful when it's fully realized what do you think the world looks like at that point what has changed what is different what is maybe the same i mean i still think that this grant thesis is that we have that the world is bifurcating is what unfolds over the coming here And often people say, oh, well, we are all kind of exercising our own strategic autonomy and the world is being multipolar. But my argument has been from the very start that there's no way we can get a multipolar world because of technology. And essentially, China and the US are so far ahead in the tech race than anyone else that no one else is able to offer an alternative.

And with technology permeating every single aspect of our life and with 5G, 6G, G, All of that would mean that countries, as well as multinationals, over time, we need to pick a site. They can't kind of have their cake and eat it. And what has been happening more recently is that, you know, not just the choice of Huawei or with Huawei or I recently thought we could be, you know, either Huawei or the highway or the highway. But, you know, using Huawei as the separator as the example of the technology side, actually it is the military conference. that are arising because of the geopolitical vacuum that are also forcing the picking aside. And so that's how I see the world. And ultimately, actually, if you sort of do some back of the envelope assessment on which

country is likely to end up in which fear of influence, you end up with a fairly balanced world, which could be a basis for a more peaceful existence. and again, I'm a mother of two children. I'm not rejoicing in looking at these scenarios and having these probabilities, far from it. So there is some hope that kind of we could maybe achieve a balanced position where we just sort of bifurcate, interact, but there are two systems that stay separated.

We could also have an ecological disaster that wipes half of us and that may then bring us all together and we might drop all the other quarrels. but that's also not necessarily particularly positive forecasts. I think on the positive side, what we could see, though, is I think kind of the human spirit, which has prevailed for so many centuries and millennia, that I think it will be remiss to just engage

entirely in this Armageddon type of scenarios. So hopefully we don't end up in this. those high probabilities. Well, we will be clinging to that hope as we close this episode, hoping for just peaceful transition as this new world order unveils. We're not in the 90s anymore. I got to say that, though. The 2020s is feeling more and more chaotic with every podcast conversation we hear. But thank you for exposing the reality of what's going on with China's de-dollarization. Diane, it's been an absolute pleasure. It was my pleasure, guys. Thank you very much. For the Bankless Nation, we've got some resources for you, some action items in the show notes.

There's a special report that we referred to that Diana co-wrote. It's called China's Quest for Financial Self-Reliance. We'll include a link to that in the show notes. Also, a free trial for some of Diana's additional research on China if you want to go down the China rabbit hole and figure out what's going on over there. Got to end with this, of course. We talked mostly geopolitics, monetary supremacy and that sort of thing. But none of this has been financial advice. Of course, you know, crypto is risky. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on. on the bankless journey. Thanks a lot.