GIC Member Perspectives

October 15, 2020

An October 8 article from The Economist, titled Ant Group and fintech come of age, sparked a conversation among GIC members, David Kotok, Leland Miller, Megan Greene, and J. Paul Horne, that we are happy to share with our readers. 

Click here to read the original article, published in The Economist.


Saturday, October 10 | David Kotok

In my opinion, Trump’s policy of isolationism and protectionism has pushed China into independence instead of interdependence.  China has realized it does not need NY capital markets. ANT will be the test case. Huge implications for stock markets and allocation shifts in global market terms.   

For bonds. China onshore market is huge and second to US.  For this calculation I’m dividing Eurozone by country and netting off ECB target 2 credit support of deficit country debt (Italy) by surplus country like Germany.  

Today China offshore market is tiny and fledgling and through Hong Kong. That is changing.

I expect China to use Hong Kong systems to extend and expand China bond offshore markets and expand Chinese currency into a global reserve status. Think about the economic size and scope of yuan versus euro (by member country) or pound or Sweden or others. Think about yield on China debt today versus Italy or Spain or US or so many others. China rating agencies rapidly improving standards.  It is clear that China will not default on its national debt and it provides yields 200-300 basis points above others. 

ANT successful IPO is huge and becomes a global standard.  Imagine a publicly traded financial firm the equivalent market value of JPM that exists and trades worldwide through Hong Kong and Shanghai exchanges and has no NY listing or presence.  

That is where Trumps isolationism and protectionism has taken us.  The implications are massive. 

For GIC, a series of issues and questions fit the global GIC mandate.  Has the US moved from positive interdependence to negative interdependence?  Catherine Mann’s 2011 Stockholm lecture to GIC is appropriate today.  What does a China’s growing reserve currency status mean?  For trade? For monetary policy?

In US, can isolationism and protectionism penalizing of America’s citizens and businesses be reversed?  Or does it continue?  Worsen?   How? 

Is there political will in America to change it?  With a second term Trump the answer is no. But has Trump’s policy trapped Biden?  It seems that the answer is yes. Latest Pew research supports this view. 

GIC is the only organization that leads in the discussion of positive versus negative interdependence and about interdependence versus independence.  

-David Kotok is the CIO of Cumberland Advisors and a
Member of GIC’s Board of Directors.

Sunday, October 11 | Anonymous

Hi Everyone, 

I hope that you are doing ok these days.  It is still a long time to normal, which itself will be different.  Better for sure, but different none-the-less.  Go future! 

As to globalization/interdependence vs. de-globalization/isolationism…  dare I say ‘third way’? 

Global integration increases the size of the economic pie through so many channels (references… hundreds of articles that go back decades, my various books and monographs… Dani Rodrick notwithstanding).  It is abundantly the case that domestic policy has failed to do the redistribution that is always assumed in the pareto-improving globalization models.   This is also something that GIC could lead on.  

However, the ‘third way’ for globalization needs more emphasis:  Patterns of global integration evolve in the face of changes in relative prices (that’s old school) and changes in the shape of the distribution of risks/costs/strategic pressures (this is the new insights). 

  1. Relative prices change the mean of the distribution of comparative advantages of producing ‘here vs. there’ (this can be finished products — wine vs. wool, or supply-chains — chips vs. phones, etc.).  
  2. The shape of the distribution of costs (not just the mean of the distribution)  increasingly factor into the strategic decision of where to produce.  Tail risks:  reputation-Rana Plaza, climate–lots of examples, earthquakes–Fukashima, are different types of tail risks, some more frequent than others, and therefore different size sigma.  These sigmas increasingly are recognized as not tail risks at all (which can be ignored),  but need to be fully incorporated into the strategic decision regarding the global footprint and global costs for a firm.  So, we are in the mean-variance-skew framework that we are all so familiar with from finance played out in the globalization space; clearly increases the complexity of how globalization might be manifest.  

Where GIC could play an active role in the question of ‘new globalization’:   

  1. Politics/national security/technology security:  When do these objectives put a thumb on the scale of how firms decide to evaluate the tails of the distribution?  For example, tax incentives for domestic production of certain manufactured products  — what are the trade-offs that should be weighed?  (Of course, this is a question with a 20 year half life.  I remember well the computer chips/potato chips discussion and Sematech–we’ve got it again.  And steel and chemicals so frequently come into this domain it is silly).  
  2.  Climate: Does more complete incorporation of climate footprint yield  more local production/less globalization or maybe not via more diversified production, that is not necessarily at-home production.  Customer preferences for low carbon footprint products is a very real market demand, but this may not mean local (compare the carbon footprint of Netherlands greenhouses with EuroMed vegetables to reach the Euro area marketplace). 
  3. Financial intermediaries:  What role do financial intermediaries play in facilitating the thumb-on-scale or the internalizing the climate-costs?  If investors want ESG, then financial intermediaries will search for those assets — will that induce firms to change production local (since cost of debt or equity is one component of overall production cost). 

Enough musing for the evening… 

(On David’s topic of RMB vs the dollar — that’s for another evening.)

Keep well.

-Member of GIC community that for legal/compliance reasons is anonymous

Monday, October 12 | Leland Miller

David et al, thanks for including me on this thread — the issues here are absolutely critical.  I’d like to build on the points mentioned but also push back on a few others mentioned in the earlier emails, since I disagree with certain swaths of the original thesis in regards to US-China interdependencies.First, I would suggest the ANT IPO is not the test case for much of anything.  ANT (and a handful of other protected Chinese national champions) could raise capital on the moon.  That is a far cry from replicating the US capital-raising universe in Hong Kong.

Second, it is unfortunate that companies are leaving US exchanges for China/HK (or at least actively hedging their bets via secondary listings.)  But what is the price of keeping them here?  US exchanges are world class in large part because they have strict and transparent listing standards, including allowing PCAOB access for audits.  These standards are adhered to, including by ALL US firms, because the exchanges — and underlying financial system — in turn provide credibility to the companies on them, as well as comfort to investors who want to avoid dime store frauds.  This does not work if one bad actor decides unilaterally that the rules do not apply to them.  Until Chinese and HK companies at a minimum provide ramped up PCAOB access to auditors, their existence on US exchanges is not a benefit.  It is a structural risk.

Third, what do we do about US regulators and politicians who are threatening to kick these companies off the exchanges?  I keep hearing over and over how critical it is that we act to stop that from happening, because of how horrible it will be for [INSERT VESTED INTEREST HERE].  I suggest that this focuses on the wrong problem.  No one has seriously proposed booting Chinese companies off without an extended runway to correct their shortcomings — not even Trump.  But if Beijing fundamentally will NOT allow Chinese companies to adhere to US disclosure regulations, why are we protecting them?

For me this is the single easiest issue in all of US-China relations, specifically because it is NOT a US-China issue at all.  Every single company and country should play by the rules — period — or they should not be permitted the benefits of a US listing.

Lastly, there is way too much ado these days about the growing rule of the Yuan.  The idea we’re moving towards, or even abetting, the Yuan’s move towards global reserve currency status at this point is a total mirage.  There is no movement right now, and more importantly, Beijing doesn’t wish for there to be movement, considering their entire financial system is dependent on the stability and mass availability of USD — which the Yuan just happens to be pegged to.  As we know, reserve status requires numerous prerequisites, including a deep and highly liquid bond market, the ability to move cash out of the country, and most importantly, rule of law.  None of those exist yet in China.  This is not to say that there won’t be continued, rising inflows into the Chinese bond market, because  who in this age can resist a 3% yield?  But this has little to do with reserve status.

Of course, it goes without saying that the US should also avoid jumping into its own ocean of stupid.  Attacking Chinese companies like ANT without any coherent rationale is utterly counterproductive.  Same with WeChat.  Or TikTok for that matter, since the WH’s proposed solution with Oracle is even worse than the original problem.  Even so, these issues should be assessed thru a lens other than Wall Street’s 12-week cycles.  Many US-China problems are tough tough tough to deal with.  But these aren’t.I agree with others that we now live in a very different world than we did just a few yrs ago.  IMHO, GIC’s most critical mission going forward may be less promoting global interdependence than thoughtfully helping to manage the disintermediation of it.  That’s not because I want things to be going in that direction.  I fear that is simply where we are headed.

-Leland Miller is CEO of China Beige Book International and GIC Member.

Monday, October 12 | Megan Greene

Amen on that!

On November 7, 2018, Megan Greene submitted a column in The Financial Times on the US dollar’s status as the world’s reserve currency. Click here to read “The dollar can defend its global reserve role against EU and China.”

-Megan Greene is a Senior Fellow at the Harvard Kennedy School and a GIC Member.

Monday, October 12 | J. Paul Horne

In the 1980s, I was voted by Greenwich Associates, a consulting firm that measured Wall Street analysts and economists, the 2nd and 3rd best FX forecaster.  In my view, the rating was pure serendipity. I would have done just as well by raising my finger in the air. In 1998, when we took over Citibank, we had the input of the biggest FX player in the world, Citi having 8%-to-9% of the FX trading market. Their experts also considered FX forecasting on a medium-term basis serendipitous. But they were among the best on a short-term basis because they knew where the big institutional FX players had placed their bets for overnight, one-week and one-month.

I still feel the same way but am willing to put forward some fundamental reasons why the dollar might, rpt might weaken significantly during the next several years. I am not, however, willing to forecast that the dollar will cease to be the main reserve currency any time soon.

Today, the dollar massively dominates FX trading relative to second reserve currency, the euro; with the yen and RMB far, far behind. The euro today figures today in around 30% of total FX trading but the USD well over 80%. (These should not sum to 100%.) See: .

Another measure of the dollar’s important is the currency that central banks choose to hold in their FX reserves. Of the $12 tn in central banks’ total official FX reserves in the 2Q20, the USD accounted for 57%, the EUR 19% and the JPY 5%. See the latest IMF data at: .

Stephen Roach outlined some of the risks for the USD’s premier role in the attached collection of FT pieces bearing on the FX outlook. The most important would be a loss of foreign confidence in the USD as a store of value. The reasons this might happen include a sharp fall in the U.S. net domestic saving rate (this includes household, corporate and government saving or dissaving). This is quite likely after the pandemic has run its course.

The U.S. now has and will continue to run giant twin deficits: the federal budget deficit (adding to government debt) and the U.S. current account deficit. In recent history, it was only in the Clinton years that we ran a fiscal surplus. Since 1981, the U.S. has run large C/A deficits. We have depended on inflows of foreign capital to finance both deficits and because they are growing, we need even more foreign capital.

But the Fed has promised that it will continue with ZIRP (zero interest rate policy) through 2023, meaning the nominal yield on USD-denominated government securities is minimal and the real yield negative. At the same time, fears are growing that inflation will be politicians’ policy choice for servicing the growing government debt burden in the future. If, in fact, inflation picks up while the Fed continues with ZIRP, that means the real interest rate on USD-denominated debt securities will be a growing negative. And that should discourage foreign investors.

If foreign capital inflows decline, and the Fed refuses to raise interest rates, then the dollar will depreciate until it reaches a price foreign investors consider competitive  with the EUR or, possibly, the RMB.

China is fast freeing up foreign access to and trading in its currency. As the world’s fastest growing economy and offers positive real interest rates, China looks attractive to foreign investors eager to diversify from the U.S., Europe and Japan. The attached FT report on foreign buying of China’s “policy bank bonds” is an indicator.

Digital currencies are another source of competition for the USD. Fed officials from Powell on down confirm that the Federal Reserve is concerned about the implications for Fed control of money and credit if cryptocurrencies gain widespread usage. They seem to agree that the Fed should be ready to issue a risk-free digital currency but how to make it work smoothly with the dollar fiat currency is a major puzzle. The attached FT report on the ECB’s move toward creating an ECB digital currency is another indication of what’s ahead. The Bank of China is also moving quickly toward a digital RMB controlled by the BOC.

If Trump were to be reelected and continue his denial-of-climate-change policies implemented during his first term, there could be a move away from the USD by climate-sensitive investors such as BlackRock. The attached report on BlackRock’s sovereign bond ETF including a climate risk weighting in its portfolio is a good indicator of the direction investors want to go in the future. A U.S. government antagonistic to moderating climate change is not likely to attract more foreign capital.

Most of the above negatives, except for the digital currency idea, have happened before and the dollar has weakened, sometimes dramatically. But it has also recovered dramatically. The best indicator of the dollar’s strength is the Fed’s index of the real trade-weighted value of the USD against its major trading partners. Attached is a chart of the index between 1971 and 2020, as depicted by There have been some mighty ups-and-downs, as you can see. But it is worth noting that the low point coincided with the financial crisis and after, between 2007 and 2012.

Today, the index is close to its trend line since 1971. But it is a safe bet that it will not remain there. I think the odds are that it will head lower irrespective of who is elected president. But remember that FX forecasts are … risky.

Specific triggers of dollar weakness are even more difficult to identify. But the following are candidates:

  • An equity market correction around the time of the election, no matter who wins
  • A U.S. Treasury debt correction with yields rising sharply.
  • A second sharp economic contraction caused by a resurgent Covid-19; which causes more fiscal stimulus, an even bigger deficit and even lower Treasury yields.
  • A health crisis for Trump or Biden.
  • Foreign causes are unlikely because they usually drive foreign capital into the USD

-J. Paul Horne is an Independent International Market Economist, a Member of GIC’s Board of Directors and a Member of GIC’s College of Central Bankers Advisory Board.


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