The Second China Shock - How This Time Is Different with Brad Setser | Markus Academy | Ep. 165-1

Follow the link for the full summary: https://markusacademy.substack.com/p/the-second-china-shock-how-this-time Link to sign up for the webinar series: https://markusacademy.substack.com/ Read the Financial Times' discussion of this episode: https://www.ft.com/content/a5e9dfe7-6b4d-476d-93a0-193a753b885a?syn-25a6b1a6=1 For our latest episode, Brad Setser joined Markus’ Academy for a two-part conversation on the second China shock and the second coming of global imbalances. This video is the first part. Setser is a Senior Fellow at the Council on Foreign Relations and a former official at the US Treasury and the Office of the US Trade Representative. A summary in three bullets: ● Concentration and bifurcation: compared to the imbalances of the 2000s or 2010s, today surpluses are concentrated in East Asia, China above all. China’s economy is now bifurcated: exports surge while domestic demand stalls, and due to import substitution policies domestic demand has decoupled from imports ● The financial flows have reversed: the pre-GFC’s safe-asset scarcity has ended. Reserve accumulation has stalled and surpluses are no longer recycled into Treasuries ● The mismeasurement of China’s investment income account understates its true surplus, lifting the yuan's implied undervaluation to ~30%, versus the ~19% implied by the officially-reported surplus (the IMF's own estimate of undervaluation is smaller still) Timestamps: [00:00] Markus’ Introduction [05:17] China’s unprecedented surpluses [21:00] An export boom bolted to a stalled economy [35:11] This time the surpluses are not recycled [50:11] China’s statistical puzzles and the undervalued yuan