Panda Power -- Arthur Hayes
Arthur Hayes covers the recent developing relationship between China and America. As always he extrapolates how this will cause the cryptocurrency market to moon. I split his essay into a few different parts:
ChiMerica Aligned
The state of the Chinese Economy
Weak Dollar
Time for a change
How do these $ flow into crypto?
ChiMerica Aligned
Xi (Chinese president) recently went to San Francisco to visit Biden - speculation that there is a reignition in the China <> America relationship
To signal the new relationship the Biden team announced the Presidential campaign will now use TikTo
k
Joe biden had asked for 105B from Congress a few weeks back to help with Ukraine + Israel and increase defense spending in Taiwan
If China could aid in removing these issues, that means less spending on defense, which means oil price doesn’t moon, and inflation stays in control
A strong economy and recency bias is a helluva drug in winning elections
Looking at past data, good economy during election years dramatically increases the odds of a re-election
So what about the ongoing conflicts (Russia, Iran)?
Russia could be convinced to settle if Xi pushes for it (more so than if he didn’t) given their relationship with China
If a deal is made, the US can drop any Russian sanctions so its commodities can enter the global market, further depressing prices + curbing inflation
Iran receives a lot of support from China, so even with the conflict going on, any input from Xi will have a huge impact on the particular direction of foreign policy
Xi has also agreed to stop the flow of fentanyl into the US from China and reaffirmed that China has no plans to invade Taiwan
Current state of China’s economy
The China economic model is built on selling stuff to wealthy Americans/Europeans
The West had implemented tariffs to reduce certain Chinese imports
Given a reignition of the China <> America relationship, it is likely that some of these tariffs will be reduced/removed in the immediate future
Foreign dollars flowing into China have slowed down a lot, and recently turned negative
More foreign capital means manufacturing, infrastructure, etc is financed with offshore credit vs. debt issued within its own local banking system
Given flows have turned negative, this is really bad for onshore investors still bagholding
If we see a reignition between the Chinese <> US relationship, foreign capital would feel safe returning - further incentivizing the removal of potential sanctions on China
China once again presents a great market for growth again, and capital will flood back into projects and financial markets
Chinese index is down 8% while the world index MSCI World is up 14%
Housing market in China is completely wrecked - and the issue is that ordinary Chinese people are the most affected
So who is on the hook for these real estate losses? This is a complicated political issue
There has been some attempts by the local governments to incentivize lending and back banks + developers behind these real estate losses, but it's clear that they are hesitant in actually using the money printer (probably given the US dollar tightening)
The narrative is that China’s real estate crash is similar to Japan’s in the 90’s (down only)
Weak Dollar
China needs another round of stimmies to pump the property market, and increase spending overall to juice up the economy
If the Fed continues with tightening monetary conditions and China issues a significant amount of credit, the yuan will get completely wrecked
If yuan weakens, then capital flight intensifies therefore leaving the Chinese market (even if they get a pump, what does that do in a weakening market)
Yellen is holding rates steady and weakening the dollar by issuing more T-bills
Overall trade imbalances are still really out of whack, and something needs to be fixed so that China is allowed to export more into the West so that officials can raise the confidence level of the Chines
e
It probably won’t have a short run impact - the US will do what it takes to have a good economy so the democrats can win again in 2024 election
Similarly, Xi is taking his 3rd term as chairman, so he needs to do what he can to rejuvenate the economy
These incentives align for a very good economy in the coming years
China is Uninvestable
Chinese index is down 8% while the world index MSCI World is up 14%
Housing market in China is completely wrecked - and the issue is that ordinary Chinese people are the most affected
So who is on the hook for these real estate losses? This is a complicated political issue
There has been some attempts by the local governments to incentivize lending and back banks + developers behind these real estate losses, but it's clear that they are hesitant in actually using the money printer (probably given the US dollar tightening)
The narrative is that China’s real estate crash is similar to Japan’s in the 90’s (down only)
Time for Change
Yuan has room to weaken (aka print more supply) now that the dollar strength is flat
The Chinese economy is in a deflationary state. Given this and a weakening dollar, they now have the signal that it is ok to start printing Yuan
The most obvious way for China to funnel credit into the economy is by bailing out the property developers
Major banks will be ordered to lend at affordable rates and loans related to land/property will be rolled over without penalties, lowering the real cost of interest in China
This means cheaper debt, means more debt, and more debt means a portion of the financing will flow into financial assets
How do these $ flow into crypto?
They will flow in directly and indirectly
Directly through Hong Kong aka China’s window into capital markets
Pre-2020, China was heavily involved in Bitcoin (home to some of the largest miners) - if there’s a legal way to move money from mainland to HK, it’ll find its way into BTC
Indirectly…
China is a very supply led economy (aka build a lot of infra, exports) - Chinese authorities have been attempting to balance this out to being more demand led
They do this by making credit more expensive on shore which incentivizes a shift towards building more consumer goods and services
So property developers will borrow $ offshore - increasing the demand for dollars and the dollar value + credit more expensive globally
As Chinese banking system provides more onshore credit, global credit becomes cheaper
If the price of credit falls, hard assets like btc and gold skyrocket - it doesn’t even require Chinese firms and wealthy individuals to buy any bitcoin
China has one last obstacle - they need a pro-China party in Taiwan to win the presidential election
If that happens, Arthur expects the China credit bazooka to be very strong
Arthur says he is starting to move his t-bills into bitcoin