2/8 That is indeed the key challenge, and one about whose resolution we should be very skeptical. For the yuan to become more open to market pricing and to secure a larger international role, Beijing would have to reduce and even remove restrictions on the capital account.

3/8 But this means that it would be external conditions (along with domestic confidence about internal conditions, including flight capital) that would determine, to a large extent, the size and direction of China's capital and trade accounts.

4/8 Given the huge swings in Chinese and foreign perceptions of both external conditions and of the Chinese economy, there is almost no way this could occur without changes that Beijing would find "destabilizing".

5/8 That's because the Chinese economy is structurally locked in to a fairly rigid growth model that makes it very difficult for the political and financial systems to absorb shocks.

6/8 This means that it is unlikely to have the flexibility to manage fluctuations in its external imbalance. Consider, for example, that the surge in China's trade surplus after 2012-22 was directly caused by Beijing's need to externalize the cost of its property-sector collapse.

7/8 Without Beijing's ability to control China's external account, and force it to absorb a surge in manufacturing investment, China's internal account would have had to absorb the direct consequences of the property collapse. This would have been very frightening for Beijing.

8/8 The less control Beijing has over its external account, in other words, the less it is able to force external imbalances to accommodate desired internal imbalances. In a system under increasing financial strain, I don't think this is something Beijing will allow.

Goldman's latest (still very early) analysis of tariff effects thru June 2025: -Foreign exporters absorbed 14% of US tariffs -US companies ate 64% -US consumers ate 22% -Protected US companies also raised prices -Consumers will see bigger price increases (70%) thru the Fall

Marc Sumerlin: Inflation isn't a serious problem right now. Tariffs are a tax hike. Tax increases lower inflation because they lower after-tax income. If the Fed had known the May & June jobs reports were as weak as they were, they could have cut rates by 25 bps in June & July

China’s trade surplus is surging: China’s overall goods trade surplus has reached a record $1.2 trillion over the last 12 months. Their positive trade balance has DOUBLED over the last 5 years. This comes as China’s exports have significantly rebounded, excluding the US.

It appears that Chinese policymakers may prioritize “increasing consumption’s share of GDP” as a key objective in the upcoming 15th Five-Year Plan. Zheng Xinli, former deputy director of the Central Policy Research Office, outlined the key directions of the 15th Five-Year Plan