Odd Lots - What Needs to Happen for the Renminbi to Seriously Compete With the Dollar

Episode Date: May 22, 2023

There's a lot of discussion these days about de-dollarization and whether the US dollar will lose its standing as the world's sole reserve currency. Generally, people seem open to the idea, but they also don't see many good alternatives out there. The renminbi is the obvious candidate to take share away from the dollar, given the size of the Chinese economy and China's role in global trade. But for various reasons, the currency isn't suited to be a global reserve currency. So what would it actually take to become one? And what would be the effects if it started to play a major role in global trade? On this episode of the podcast, we speak with Karthik Sankaran, a longtime FX veteran, about what China would have to do if it really has global aspirations for its currency, and why a more multipolar FX landscape might be good for world financial stability.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, dollar strength, dollar dominance, conversation is not going away. No, I mean, it's never really gone away. That was our intro for the last episode we did on this topic, which is, it seems like every couple of years you get this resurgence about, oh, the end of the dollar, the dollar's going to lose its exorbitant privilege. I remember my dad sending me articles about,

like, oh, Iraq is invoicing oil in euros, like in 1998 or something. Lots of conspiracy theories around that one. But I will say we had that conversation with Paul McNamara. It was a really good overview of some of the talk that's happening right now and why certain countries specifically emerging markets like China might want to get away from the dollar. But I feel like there's more to say. All right. I'm going to make a confession, which is that in all of these conversations, there are certain things that people say. And I just sort of like nod in my head to like, mm-hmm, that's right, that's right. But I don't totally get them. And one of them, and it's not even so much about the dollar per se, but about dollar alternatives. Right.

And the big one is like, well, the Redmond B cannot be a real dollar alternative until China runs a current account deficit. And I go, mm-hmm, that's right. That's right. But like, beyond that, like, I actually, like, do not totally get what that means or what actual constraint China's trade position with the rest of the world means for the future of Renminbi internationalization. Well, I think the way I would frame it is one thing we hear is that there isn't a viable alternative to the dollar. There are no other currencies slash country economies that are at the level of the U.S. is that could possibly replace the dollar. And so I think we need to talk about why that is and what exactly that means. What does?

does it mean? So I get the idea that, okay, maybe a country doesn't have enough financial assets for savers to buy to put their excess money in. I get that. But what does it mean that it's not a viable alternative? Right. And I guess the question is like, okay, but what would it take? Yeah. Right? Like it's like, yes, we can sort of agree this basic premise. Maybe there's some impulse for some countries to move away from the dollar. Also, there are no real alternatives at this point. But maybe at one point there will be. But actually, what would it take for another currency, maybe the renminbi, maybe the euro, to actually become a meaningful global reserve.

No, if China woke up tomorrow and put this like at the top of its agenda, I don't think it's going to, but what would that sort of 10-step plan actually look like? That's a great way to sort of frame the conversation. What would it actually look like? So we're going to sort of be having part two to our recent conversation with Paul. Actually, a friend of Paul's, so maybe a similar, different perspective, but sort of like follow on of what would it take for some other currency to be a meaningful global reserve currency. I'm very excited. We're going to be speaking with Karthik Sankaran, a true FX veteran recently

at Corpay. He's been at Eurasia Group, multiple banks, an avid maker of dad jokes and puns on Twitter. And he used to actually cover Paul when he was trading, right? So a perfect guest for this conversation in many respects. And to someone who I feel like I've wanted to have on the show for like years and is like in my mind and odd. Lodd's guest, even though he hasn't been on the show before. Karthik Sankran, thank you so much for finally joining us here. Thank you very much for having me. It's an absolute pleasure to be here, and honor.

What does that mean? Actually, before, I want to get to the alternatives. Just before we do, though, real quickly, I mean, you listened to our recent episode with your long time friend and colleague, Paul McNamara, in which he said, there is some global impulse for countries to stop using dollars, but there really aren't many alternatives. Do you basically agree with that premise? Yeah, I mean, there are, I'd say two things about that. One is, I think going to replacement, and that's how this usually gets framed as replacement, I think that's silly.

And the way I think about it is, would it make sense to see creeping regional displacement rather than replacement? And I think that's a possibility. And I would argue that the euro has already done that to some extent in, you know, not just in the euro area, but also in central and eastern Europe. You know, and I remember when I started my career, you know, if you wanted to trade this lot, the zladi, you traded dollar Polish. And if someone asked for a price in March lot, you traded through the legs. Now it's the other way around. You know, if someone asked for a price in dollar Polish, you trade your Polish and euro dollar. So it's taken a long time.

but, and I think that's this regional displacement idea. But what this also brings out, to me at least, is everyone is so excited about their MMB, kind of this bricks currency and so on. And one way to frame why I think, you know, there is a desire, but it's a very long way from being fulfilled, is that look at what the euro has, which is kind of a solid number to, pretty, you know, kind of like avis to the dollars, hurts, at least that's the way the old commercials used to go. But the Remmbi is really, really, really far behind. And one thing, just because I've been introduced as an avid maker of dad

judge. Okay, here we go. First one of the, first one, here it is. Which one of the evening is, or more, whenever this is it played, but, you know, you mentioned a 10-step program for Rembembe Internationalization. And I was reminded that the last person who had a 10-step program that really worked with Jenghis Khan? Okay. That's just a mild chuckle. That's not going to go anywhere. Okay.

Sorry, I'm going to lose it at the dad jokes. Just to back up a second. Oh, it took me a second to get that one. Actually, sorry, it took me a second to get that. That's a good one. Okay, we're going to have a fun time here. Just to back up and ask this question in a different way. But, I mean, there is this assumption that China would want to have Renman be

internationalization. Should they want that? You know, if you consider China as an export-driven economy that exchanges goods in return for U.S. dollars, which are a relatively stable currency, does it make sense that it would want to have a different economic model? What are the benefits that it gets out of that? I mean, I disagree with this, you know, and this stuff that Joe mentioned in the beginning, does the country at the center of the international monetary system need to run deficits. And I don't think that's necessary, in fact, because you have a model Britain under the gold standard with a huge exporter of capital. The U.S. until the mid-1960s was the center of the Brettonwood system and was also a huge exporter of capital. So what that suggests

is that it is possible for a surplus country to run a, to be at the center of the monetary system. You just have to find a way to get that currency out the door in size, in massive size. And you can do that either through the trade account by running very large external deficits, or you can do it by exerting great gobs of capital either in your currency or that other countries are denominating in your currency. So I think that's one way to think about it. But clearly, China is not there and not have a very very, long time getting there, not just because of, you know, the issues with capital account

convertibility, but there's a lot of things in the basic way that Chinese financial markets operate that make it difficult even for other people to issue in rem and be in size. So let's jump into this because I think this is a point that I have not really heard many people make. So people make the point that it's like, okay, one way to get your currency out. there into the world is to run a big trade deficit. But as we know, and I'm even thinking back to some of our conversations with like Lev Menin about the rise of the shadow banking system and Euro dollars, the other pot way is just for other entities to start issuing your currency or assets that are denominated in your currency. And theoretically, I could issue a Renminbi denominated

loan and tell someone I'm going to pay them back in Renminbi. But you made this point with respect, a great thread with respect to Brazil, which is that actually like what we need to see is countries like Brazil being willing to take out renminbi denominated debt. Can you talk a little bit about the importance of that? Like, I think that's a very powerful thing. Not many people have talked about like this element of it. Yeah. And I think there are actually two issues. In some ways, it might actually be a good idea for Brazil to issue reminby debt, right? Because you have a, and I think this is one of the arguments for a multipolar system more broadly. is if you're a country whose terms of trade are driven by what's happening in China,

if your business cycle is much more responsive to China, that it makes sense to be able to issue in the Chinese currency. Because what you don't want to be in the situation that you see emerging markets end up in all the time, they've issued in dollars, the commodity exporters, commodities are priced in dollars, the world slows, China slows, commodity prices tank, the dollar goes up, and they're host. I mean, this is like, you know, this is like this rinse and repeat cycle in the international financial system. So it might actually make sense for, you know, in that thread for, you know, I was saying like, I'll get excited when CBRD issues like a huge amount in panda bonds.

But that's difficult. That's really difficult. And there's so many different reasons for that related to the way Chinese financial markets work. One is if you issue in REM, Rambi, which Remi do you want to issue it? Do you want to issue in the onshore market, which is deeper? Or do you want to issue in the offshore market, which, you know, which, where you might have more people able to transact, but it's a much seller market. If you do end up issuing the onshore market, obviously, they're, you know, and you may not want to, the reputation that Chinese investors have is of being somewhat more excitable. I think we've seen that in the equity markets. On the other hand, if you issue offshore, the problem is that China not only has two

currency, CNY and CNH, and not your currency and offshore currency, that trade reasonably closely together a lot of the time. But one of the ways they do that is by having different interest rates. And one of the things the Chinese do periodically is when they're worried about the speculative pressure on their MNB, which they think is coming from offshore players, is they will jack up interest rates on CNH. They will take it to the moon. We've seen it a few times, which might work in deterring the speculators, bring, you know, speculative pressure back down again, get CNY and CNH to converge. but that's really not that comfortable if you've issued in, you know, in the offshore currency. So, you know, and one of the things that the U.S. has, the dollar has, is incredibly deep derivative markets, for instance. So if you want to issue, if you issue in dollars and you want to

head your interest rate risk, you can do it by trading your dollars, probably the most like, one of the most liquid financial futures contracts in the world. I remember financial futures, interest rate futures are just a are like a very very very small fraction of that the other issue with issuing onshore is you know what's your and i'm china has this huge domestic debt market it's the world's second largest debt domestic debt market but to a very significant extent it's composed of entities with opaque finances right the cgb market the chinese government bond market is a relatively small fraction of the onshore market, just true, you know, which and treasuries are not the entirety of the U.S. market either. But the opacity of entities issuing domestically is significantly

hard. You know, my one line around this is everyone talks about China not having a rule of law. My view is that the real problem that China doesn't have rule of accounting. That's the real issue here. So I was expecting another dad joke. Yeah, I was expecting. I was stealing myself. So I guess this brings me to the big question, which is. how much of this boils down to just capital controls and the fact that China does not have an open economy. And you might expect that one of the requisites for having an international currency would be to have relatively free movement of that currency. Absolutely. I mean, that's, I think capital controls are a, you know, and that's the obvious, that's the obvious one. And they're trying

to tinker with it at the edges, allowing inflows and outflows, but even as, at those edges. What I was trying to get at was this idea that you have an offshore rememnb that's much, that's more freely tradable than the onshore rememnb. But there are very sizable disincentives to issuing and sizing the offshore remandb because of these things like on a smaller market, how do you hedge? So capital controls are a huge part of it. But if you dig deeper into the capital controls issue, I think it raises more questions.

Well, then I would sort of want to maybe just go back to a question. Tracy asked, which is like, is there a reason China should pursue the internationalization of the Rinminbi or should pursue having more global central banks hold Renminbi as part of their reserve stock? Like, is there some obvious reason why, you know, it's not going to be number one on the agenda, but is there a reason why it should be in the top 10 or top 20 of the agenda? I mean, one of the things that they've said for years is that they want to see a more international internationalism. But I think when they look at the tradeoffs that they might need to make, I don't think they're ready to, you know, take a huge jump. And I think the other issue is that we've seen this before, right? Japan didn't want to. Japan didn't want to either. And, you know, about 30 years ago, people were talking about the extent to which. Japan and the yen could act as another reserve currency.

The Japanese just decided they simply didn't want to because of the pressure it would put on the profitability of their industrial base. Things are somewhat different from China in the sense that they seem to have a hankering for kind of broad spectrum global power in a way that the Japanese did not have. And maybe having an international currency is part of that. But to the extent that it happens, it would likely be much more halting. but they've got a really, really long way to those regards. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed.

Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations. But they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes.

So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify or anywhere you listen. So Carthick, just going back to the deficit idea, and I know you kind of spoke to this already, but what if instead of telling China to run like a massive deficit, what if China was able to retool its economy in some way where, I mean, the reason it runs this big ball of savings

that tends to roll around internally is because there isn't that much of a social safety net. there isn't that much of a, you know, social welfare in the state. And so people tend to accumulate a lot of savings or maybe rely on their children, but given the one child policy that's been in effect for a long time until recently, that wasn't really viable. What if China just built a social safety net to reduce the excess savings? Would that go some way towards retooling the economy in such a way that you could have R&B internationalization? Yeah, I mean, I think so. I mean, to my mind, it would actually take care of two or three different issues.

And one is the underlying growth model in and of itself, right? Because you've kind of, you know, all the low-hanging fruit on investment, particularly real estate investment, you know, they're gone. And I've kind of tended to be an optimist about China because I think you kind of need two things. one is a kind of demonstrated capacity for technological convergence and income convergence for the rest of the world, which they've shown. But the other thing you really need is internal convergence between kind of the coast and the interior.

More middle income in the middle kingdom. That's my dad joke. Oh, that's a good one. Thank you. Nice. I like that. Thanks. And you kind of look at, you know, works about what rural China is like.

there's just there's a huge incentive both socially and economically to do that to do that. I think the other thing that lower precautionary savings would achieve is that would be a contribution to ending this kind of like really horrible nexus of excess savings, no place to put them, and underfunded mandates for local governments, which then end up having to sell real estate to developers. in order to in order to get the money to provide the services

the central government won't. So there's this really nasty nexus right there that a larger social safety net would also help with financial stability, I think. Joe, this is something that I've never really understood about China that it's ostensibly a socialist country, but it actually doesn't have that big of a social safety net. Not much of a safety net, I think, like, anti-unions.

And weren't there like some stories like they didn't want kids reading marks and stuff like that. I think I read something like that anyway. I don't want to speculate on things that I don't know. Well, you know, this is the socialist, the Chinese road to socialism is the Leninist road to capitalism. That's kind of how you could think of. There you go. Going back to the U.S. real quickly. So you pointed out that like Japan decided in the end, it didn't want to make the tradeoffs that would have required for the, for the yen to be a big international currency. And maybe China will not anytime soon choose to make those tradeoffs. But that, of course, brings back to another sort of like other debate that people have. And again,

Klein Pettis and some of these others, it's like, well, is the dollar strength of burden? And, you know, should we reverse that basically, should we try on some level, at least at the margins to de-internationalize the U.S. dollar that maybe it's not so great? I'm curious like where you stand on that question. My personal view is that the My response to the burden discourse is check your exorbitant privilege. Because, you know, I've been around, you know, E.M long enough that I think that if you think being able to print dollars to pay your debt is a problem, try owing dollars without having any, right? So that's, you know, that's extreme. But I guess more substantively, I would say that there are lots of reasons I don't think the dollar is a burden.

It certainly is a burden for certain sectors of the U.S. economy that are very exchange rate sensitive and very exposed to kind of catch up growth in other countries. You know, and those regions also fall basically along America's political fulcrum, which is the Upper Midwest and Western Pennsylvania. So I think that adds a political urgency to this debate. That said, you know, the U.S. in total, I think, is a much more interest rate-sensitive economy than it is an exchange rate-sensitive economy. It's basically, it's a much more close economy than either China or Europe. And if you think that the flip side of dollar centrality leading to dollar strength, which I'm also not convinced is always true, is lower interest rates than otherwise, then you have to ask the question. why are we not doing more with that windfall from low interest rates? Why did we sink at all in countertops as opposed to doing things like, you know,

improving LaGuardia, you know, 15 years ago or building a better BQE? I've only been here five years. So all my analogies are still East Coast. But, you know, and I think they're, and I think finally we're moving that direction of having a more activist government that uses that potential windfall. from issuing currency to do something more in terms of building out essential infrastructure, rather than being, oh, the government always do stupid things. Let's give it to the household.

So, you know, then you end up what happened before 2008. But that said, the evidence that dollar centrality, which has been true basically since 1945 in one form and since 197, one another, always leads to dollar strength, I think is not really true. because in the 50 years since 1971 and Bretton was essentially ended, the dollar, you know, I'm an FX guy, the dollar has appreciated for 55% of that time and depreciated for 45% of that time. The period of maximum current account deficits by the U.S. is between 2002 and 2008. We were running a current account deficit of close to 6% of GDP in 2006. the U.S. current account theft is the largest in terms of rest of the world GDP back then close to 2.5%.

And no one wanted to hold dollars. I remember that. I remember, you know, that was when, that's when Jocel wanted euros. That's when, you know, so this idea that you have an excessive demand for the safety of U.S. assets that leads to dollar strength is not true. It's not true in the 1970s. It's not true between 2002 and 2008. People want to hold it. dollars when U.S. interest rates are rising, when you have terms of trade shock like shale, when you have a perceived technological and productivity miracle like the internet boom in 1995 and 2002, those are strong dollar moments. But the dollar goes up and down all the time it's been central. And I think that's not appreciated enough in the burden discourse.

So what about XUS? And, you know, I take the point about maybe, you know, the dollar's centrality doesn't always lead to dollar benefits necessarily. But one argument that has been made, and I think it came up in the episode with Paul, is that the dollar can be a problem for the rest of the world at various points in time. And, you know, we've had Hyun Sung-Sing on the show talking about this idea that the stronger dollar basically acts as an economic drag on other economies because of its role in the world and in trade and business activity. is there an argument to be made that maybe it would make sense from a financial stability perspective,

for instance, to have alternatives to the U.S. currency? Absolutely. I am 100%. I am like a total multi-polaritarian on that front, right? And the reason is, this idea, you know, like I was saying earlier, if you think about the global real economy is organized around some hubs and there are spokes, right? And if you think about Germany or kind of Germany, France as being a hub, what the EU has done and what the Eurozone has done and the extended EU has done has created a financial cycle that kind of parallels the real cycle in the hub, right? Because if you're borrowing in euros and you're highly exposed to what's happening in Germany or the broader core European economies, when that economy is slow,

the euro will go down. The ECB will cut rates, unless it's doing something really stupid, which it does periodically. That cannot be excluded. But still, you have this kind of, and to me, that's, that kind of coincidence of real and financial cycles

is really important. And a world in which the dollar is the, only currency and the most important cross-border liability currency, which is something also I keep harping on, is that the big role is as a liability denomination, not as reserves, not as invoices, none of this stuff. And that's where the financial stability issues come from. If you are indebted in a currency that tends to strengthen every time the global economy slows, it's bad news for everybody. And that's consumption. This is also like, not to diverge, But this is also like what the Bitcoiners never get.

The liability aspect because people are like, oh, right? Sure, some people may like the idea of like getting paid in Bitcoin. But no one really like wants to like take Bitcoin denominated debt. And that's like, and I understand. I don't want to like have like a big like crypto or Bitcoin tangent. But it really is like this like this idea of like the liability side is being like really crucial. And like you have to ask yourself, are you willing to take on debt denominated in this currency? and I don't think many people would say yes.

And that really like sort of like blows up the whole thing. Yeah. But I mean, I think the other thing that the, you know, this is also, I think the liability side is also really important to the broader discourse about this because you see all this excitement as I, you know, about, oh my God, they're going to do their trade. They're going to do their trading dollars. And yeah, it's interesting because this is your classic economic comparison, right? And one of the ways you end an argument with an economist is you're confusing stocks and flows.

But I think that's exactly what's at issue here. People are focused on the invoicing, which is a flow. But the stock of debt is a multiple, both of reserves and of trade flows. So, okay, classic stock versus flow thing going on there. But one of the things you do hear from China every once in a while is, you know, it might talk about doing, invoicing more. stuff in Renmin B, but it also talks about special drawing rights, so SDRs, which I have never quite understood exactly what these are. But this idea of like, I think it's basically a basket of currencies, like a super currency that would involve a lot of, you know, different currencies from different countries. How viable is that?

Like maybe instead of trying to create a multipolar currency reserve system, maybe we, we should just move on to STRs and use those? I mean, I think that's even less likely, frankly. I mean, China's big tantrum over SDRs was in 2009. And one of the reasons for that was the Fed did QE. And you had a situation where the dollar had resumed weakening again after this huge dollar spike, you know, post-Sleiman. And what China was concerned about at the time was that it was holding all these dollars.

The Fed was doing QE and commodity prices were rising again, partly because of Chinese, in good part because of Chinese stimulus, you know, post-crisis stimulus. And also because, and also because of QI. So that conjunction, China was like, oh, my God, these Europeans are doing things that's making the real value of our reserves go down. It's kind of very similar to the Arab reaction in the 1970s, for instance. And I think that's one of the things that kicked off OPEC was not just the Yonkipur wall on all this other stuff. It's like, we're holding all these dollars.

And now they're worth less because the U.S. is now floating. This is the old Dick Beauvais argument that QE was actually like a currency war in disguise almost, right? That's what it's reminding me of. Yeah. I mean, it's a, I mean, interestingly enough, I think to some extent, not so much currency war, but more just a way to reflate, to reflect the U.S. economy. And I think the Fed was kind of coy about that. The Fed had been, has been pretty coy about the dollar until 2014,

2015, when it was finally like, okay, we'll just come out. We'll just come out and say it. And that's wonderful. The Fed's been much more open about the way the dollar figures into his sinking. You know, the world needed reflation. And it got it from U.S. monetary policy and Chinese fiscal policy. And together, that's what did a good deal to pull the world out of, but it's something 2008 was this combination of U.S. monetary policy, you know, Fed QE and Chinese fiscal policy. Huge investment. I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and

regulators and the legal moves driving the markets. From corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else. else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grasso. Subscribe today wherever you get your podcast. I want to go back to Chinese domestic tradeoffs. And this idea, you know, I think we have

some idea that the elites might lose out in China where there to be some domestic reorientation towards more robust household consumption or maybe. just from the question of Japan in terms of they didn't want to make those tradeoffs that would take, you know, that would allow the yen to become more international. What are we actually talking about in terms of the potential costs either to the country as whole or to a certain category, maybe the coastal elites within China? And what kind of like hit, loss or meaningful shift? Because it's hard to like, okay, yeah, there's going to be some domestic shift that happens everywhere. What are we really talking about in terms of how significant that would be?

I'm honestly not sure to be, frank. And this is probably a question for, you know, for time. Tom Or Lake or Mike Pettis or, you know, I'm not a deep, I'm not a deep, you know, China expert to the same extent. I pretend to be an expert on FX for anything else like that. But, but, you know, one thing you do know about China is that it sets a fair amount of store. The leadership sets a fair amount of store in kind of output legitimacy, right? In that, you know, we're doing things that make people's lives better, which is a very significant difference from the Soviet Union, you know, or, you know,

you know, where the big calling card was, we won the war. What do you want from us? We won World War II. And increasingly that kind of became, you know, this is all we have to show. The Chinese leadership is not like that. It's had real gains, I think it can point to. And presumably it makes sense for them to want that to continue. Now, the question is, can the leadership deliver on those things?

And to what extent are the forces, are powers that be within China that are not the leadership, at this kind of intermediate level, to what extent are they against that? The one thing I can actually think of, which seems to be a concrete issue, is changing Hoku registration requirements, affects the relatively privileged status of people who have that and the ability to live in cities. This is allowing people from the country to move more freely into cities and vice versa, although no one ever really does the versa part.

And then the other one, which is more obvious, obvious is issuing some kind of tax on residential real estate so that you kind of increase the cost of carry on housing, on housing, which is otherwise basically considered a pure appreciation asset. I can see those two being concrete disincentives to people that I can distinctly identify, but as to why you shouldn't, why China doesn't have, you know, a larger healthcare, you know, a better social provision of health care, for instance. They only spend, I think, 6% of GDP on health care, at one third of the United States.

And France is kind of the sweet spot at 12, according to me. But I don't really see where the actual, maybe I don't have enough granular understanding of the social structures as to why people might be opposed to that. Well, I mean, I guess in the U.S., we have the same argument all the time about, well, why don't we just reform the health care industry? Just do that.

Right, right, right. It's so easy. And, like, clearly there are. major issues with doing that. But Carthick, just to go back to the original premise of this conversation, I don't expect you necessarily to come up with a 10-step Genghis Khan-style plan on the fly. But what would be the steps or the prerequisites that you would look out for in order for the Renmin B to achieve some degree of internationalization? I think the most logical place to look for it, given capital controls and so on,

is slow incremental rammiization of bridge and road lending. That's the most logical place to look for it. Because you have all these other issues, I think that capital controls, just the structure and nature of Chinese financial markets, that makes it much harder to achieve more on that front. But bridge and road lending in particular seems to be a place where, you know, you have a very large stock of debt owed to China. Almost all of it is in dollars, not in remand-b, which is interesting in love itself. And in the question is why is that?

It's because they're just long a ton of dollars. Some of it is because of shadow kind of shadow intervention by other entities that then pass those dollars that pass those dollars along. Now, what you're doing in many of these instances opening up exactly those kinds of kind of real financial cycle mismatches, stock flow mismatches that I talked about more broadly. So could there be a way to change that stock of dollar-denominated debt in BRI that's basically owed to Chinese development banks, is that it would change that a way to change that gradually into Remem-B? I mean, that seems like the most immediate, likely prospect right now. And one interesting thing here is this idea that, you know, Argentina is going to denominate all its trade with China and Rememble. And obviously, you know, that trade is small. There's, you know, Argentina's problem is that has, I think, $200 billion of debt, $120 billion of which are owed in dollars.

But there's a very interesting thing from Brad, from Brad Sester and Daniel McDonald's. this morning talking about how this is really about how Argentina really wants to hang on to its dollars. So what they're doing is changing the invoicing of their trade with China into it, to Remembe, but over a very, very long time, what this allows is a replacement of a stock of dollar debt owed to the rest of the world with owing Remembe to China because of the swap line they run a deficit with China. So you're gradually changing liability structure,

but an incredibly slow pace. My joke is, you know, this is like the Ron Paul, it's happening gift only played at the slowest possible speed. It's imagining that, like a very slow. It is, so it's happening. Yeah, you know, how do you replace a stock with flows very, very slowly, right? And it may happen, you know, they'll probably end up having a restruction before then.

I mean, the other places people have talked about with this are Laos and Cambodia, which gives me an opportunity to say, you know, Cambodia might find a new nominal anchor. Anchor of what? Oh, sorry. Thank you. Thank you. Sorry. Can I just ask what one quick?

Sorry. Can I ask one quick follow up question, which is why didn't China denominate built-in-road loans in, in Remmenby? And that's a complete mystery to me. And someone who knows immeasurably more about this, Brad, I've asked him, and he's like, he's not really sure about it either. I think it's just because they had a ton of dollars. And one of the things that we're seeing around the world, this reminds with conversation

with Paul on this economist story, is that as reserve accumulation goes up, then countries find, you know, if you're above precautionary reserves, you can find. other things to do with those excess reserves for a set of, you know, political, geopolitical gains or influence, right? So it's not, and that's not just China doing that by BRI. It's what the GCC is doing with Turkey and Egypt, for instance. And so in your view, like in a world in which Brazil, maybe we're doing, Renminbi denominated dead or Cambodia or someone else, some of these countries.

that have a lot of dollars. And we talked about this with Paul that maybe have some political tension with the U.S. And Saudi Arabia comes to mind as a country that accumulates tons of dollars. And, you know, depending on the administration at a given point, the political tension ebbs and flows may want to acquire Brazilian-issued R&B denominated debt as a way to diversify its big, you know, it's money. It's portfolio. I mean, it's certainly possible, and I would argue that, I mean, for me, the argument to do that is that if what you know about the way the global financial cycle works is that countries with dollar-denominated debt that are commodity exporter get into a lot of trouble, and this happens to them repeatedly, then it might make sense for you to look at buying their debt in a currency that more closely cars. response to a real cycle. Just, you know, it's like asking from the point of, from a financial stability point of view, would you rather buy Polish debt in Zladi, in euros or in dollar?

And I would put it precisely in that order. I buy a lot in first, that in euros, than in dollars. Right. Because every once in a while, you hear those stories about like in some European country and people had mortgages in dollars. Swiss rank or something like that. And then it's cheaper until one day, then they can't print them domestically and there's a huge shock. And so it's like a macro version of that story that you hear about from time to time. Yeah. I think dollar centrality, I'm kind of mixed on that for the U.S.

in particular. One thing I do want to mention about dollar centrality as an advantage to U.S. I have no faith in these kind of beliefs that, you know, the loss of dollar centrality will lead to it crash the U.S. economy and no old treasuries. I mean, that, that's, that's crap, right? because, I mean, you know, the UK, Australia and New Zealand, you have all these countries that kind of print in their own currency. Currencies go up and down. Investors hold them. I think the one more concrete benefit to the U.S. is the U.S. has much lower inflation passed through. When the currency weakens, basically what ends up happening is that the combination of invoice currency effects is inertia there.

And the sheer size of the U.S. economy means that when the dollar weakens, prices are slow to change. And wanting access to the U.S. market, which is the biggest market in the world, means that exporters to the U.S. will mostly just eat it in their margins. And that's something that Gita Gopinath, you know, who's now the, who she was the ex-chief economist, now first deputy MD of the IMF, she's written a lot about it. So that's kind of a very concrete benefit, which kind of brings us to another point, which is China is the world's largest manufacturing exporter. They're paying their workers in Rememble.

There's got to be someone somewhere who wants these rem MBB. It can't be, you know, even taking into account the peculiarities of its financial system. But I think this is where it's not the people who are buying the most from China are the U.S. Right? Because that's the largest bilateral trade deficit. And there's no way that the U.S. is going to re-denominate its trade with China into RM&B. which kind of means that this idea that, you know, being the world's largest exporter means someone is going to want your currency.

I think that runs into a problem. Carthick Sankaran, this was such a great conversation. I feel like in that, in like that span of time, so many like these longstanding things were like tied up and like several light bulbs went off. So really appreciate you coming on odd lots for the first time. It's been too long, but definitely won't be the last time. That great. I really love being there. Thanks very much. Thanks so much, Carthick. That was a lot of fun.

That was great. The anchor lot was a beautiful moment of like too great. She's contagious. I love this. Podcast history. Two great wordplay aficionados making magic happen live on air. Tracy, I love talking to Carthic. And the thing that like when I said, you know, at the end, the light bulb moments for me was not even actually like the questions about the future of the in this idea that it would like solve some of these problems that we talked about with Hune-sung all these times. That there is, there's like the economic cycle and the dollar cycle.

And we know that like that's a big problem all around the world. And so maybe there's like story as like in a more multipolar currency world, you just have fewer of those mismatches. Right. And you have less pro cyclicality in the system. I mean, I thought his point about like, is this actually possible? Yeah. It feels like we're converging, I guess, getting to a consensus where, you know, we've switched from never going to happen to, it might happen, but it'll take some time.

But I think Carthick laid out the reasons for that really clearly, which is the whole stock versus flow argument. Like, it takes time to actually replace all those liabilities with something other than dollars. Right. So you can have these announcements. Like you talked about the recent announcement with Argentine. Tina, like you can have these announcements where you just improve the flow a little bit, or you could have like a big change in stock. But if we're just going to do it through like these sort of bilateral announcements,

we're going to denominate this in Renmin B. We're going to denominate. It'll happen just really slowly. It'll just take a really long time. As opposed to something sort of big, which is like, okay, like China decides we're going to start making all these loans in Renmin B, which is really interesting. It kind of makes me feel good that like even Brad Setser doesn't know the answer to that one. Yeah, well, that was like the big question for me, because it would make sense in a lot of different ways.

But the other thing about that episode is I think it's another one that's just going to lead to further episodes because now we got to get Brad Setser on to ask. Gita Gopanath. Yes. And I know we've had Michael Pettis on before, but I feel like we should maybe dive in a little bit more to the China social safety net question. Yes, absolutely. He and Matt Klein have written about in various ways. So we need to do that. Many follow-ups to come.

All right. Shall we leave it there for now? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart.

Follow our guest, Carthic Sankaran, all many, many puns a day, even beyond his wisdom. Just an absolute must follow in my view. His handle is at Raja Corman. Follow our producers, Carmen Rodriguez, at Carmen Armin, and Dashel Bennett at Dashbot. and check out all of our podcasts under the handle at podcasts. And for more Odd Lots content, go to Bloomberg.com slash Oddlots, where we have transcripts, a blog, and a newsletter, and check out the Discord.

Discord.g.g. slash oddlots. Talk about all of these topics, 24-7 with fellow listeners. And stream Bloomberg originals on Apple TV, Roku, or Samsung TV. Tune in at Bloomberg TV at 10 p.m. Easter. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes. Because no one's story can capture all that's happening in this big, crazy world of ours on any given morning.

Listen now to the Up First podcast from NPR.