This is the final video in a four-part series that addresses some of the major themes we expect to shape the investment landscape for years to come. Click here for parts one, two and three.
ERIC WINOGRAD
I think that so much of the discussion about the trade war between the US and China misses the point altogether. Markets seem to think that, okay, well, if we reach a trade agreement, everything will be great again. I don’t think that’s the case.
DOUG PEEBLES
I can’t think of another country that has ever become this important this rapidly in the global economy and, importantly, in financial markets.
ERIC WINOGRAD
I strongly agree with that. If you think back to the beginning of my career or the beginning of yours, China wasn’t something that was even a consideration.
DOUG PEEBLES
That’s right.
ERIC WINOGRAD
And now the markets move on China news just about as much as they move on US news.
DOUG PEEBLES
On US news. Even more, I would say.
ERIC WINOGRAD
And correctly. Right, for a very long time, China’s influence on the global economy, particularly through the channel of commodities, has been much larger than that of the United States, right? China has been the marginal buyer of commodities. And with many emerging markets leveraged to commodity markets, China has mattered a lot more to many countries than the United States has.
DOUG PEEBLES
Than the United States has. Do we think that, over the next 15 years, that China will continue to have either its current level of influence in global economies and financial markets, or an even greater one?
ERIC WINOGRAD
So I think it will at least have its current level of importance. Whether it has a greater level of importance or not depends very much on Chinese policymakers and what their objectives are.
One of the ways where China could become extremely influential is by making their currency freely traded, and freely convertible, around the world. I think if they were to do that, it might rise as an alternative reserve currency to the dollar.
The dollar is still the global hegemon when it comes to currencies. It is the de facto currency of the world. I think that’s by default, rather than because of people necessarily desiring dollars above all else, based on their love or their respect for the United States.
If an alternative currency were to rise, then I think that it would most likely be the Chinese yuan. But that requires some serious policy decision to be made in China that that’s the direction they want to go. Whether that happens over a five-, 10-, 15-year time horizon, I’m a little bit skeptical. But at some point I suspect that that will be the case.
DOUG PEEBLES
Yeah, I… it’s interesting you say you’re a little skeptical. I would say over the next five years I would equal your skepticism. But I think over the next 10 or 15 years I wouldn’t be surprised if—
ERIC WINOGRAD
I wouldn’t either.
DOUG PEEBLES
—China’s capital account were actually open, and then we’ll see other interesting aspects of the US-China rivalry—
ERIC WINOGRAD
That’s right.
DOUG PEEBLES
—in terms of fighting for that status as a reserve currency. As you correctly point out, the dollar is essentially the world currency.
ERIC WINOGRAD
China’s currency, it is more or less linked, if not directly pegged, to the dollar. And so, when we tighten monetary policy, it has an implication for the Chinese economy as well as our own.
China’s economy is slowing, and the more we tighten policy, the more difficult it becomes for them to manage that slowdown. An opening of the Chinese capital account that allows their currency to float freely and allows them to operate monetary policy truly independently will be beneficial for them and, frankly, for most of the rest of the world as well.
DOUG PEEBLES
Yes, and I think it probably takes away the sort of freebie that the US has. No matter how many Treasury bonds they issue at the moment, the world needs to buy them. If there’s an alternative means of savings, then it would provide some discipline on the fiscal-policy makers in the United States.
ERIC WINOGRAD
It’s really a remarkable thing, and you know, we’ve talked about this in our investment discussions. We can’t find a real correlation between the amount of government supply—
DOUG PEEBLES
Right.
ERIC WINOGRAD
—being issued and the level of yields, or even the change in yields. It appears for the time being that, however much debt the Treasury wishes to issue, the market will take it at the prevailing rate.
And you’re exactly right. If the dollar ceases to be the only reserve currency in the world, or almost the only reserve currency in the world, it’s very possible that that changes.
This is a long-term rivalry—a long-term relationship, if you want to put a positive spin on it—that goes well beyond any near-term sort of trade dispute. That’s something that’s going to outlast the current presidential administration in the US and quite probably the current administration in China too. This is a reality that we’ll be dealing with for the rest of our lifetimes, not just our professional lifetimes.
DOUG PEEBLES
Right.
