Very useful WSJ report on how China gained control of rare earths processing/ permanent magnet production -- and how it kept control

1/ The Journal goes through past attempts to revive Mountain Pass/ US rare earths production -- including the now forgotten case of Molycorp from 05 to 14

"Beginning around 2005, China’s government tightened the screws, levying export taxes on rare earths that made it costlier for Western magnet makers to churn out products ... Rare-earth production became so limited in the West that an American company, Molycorp, attempted to revive the Mountain Pass mine and make its own magnets"

2/

Secretary Bessent has a bit of work to do to convince Americans (and perhaps the market) that the bailout of Argentina (and direct peso purchases):

a) will work
b) is a good idea

1/ My former colleague Mark Sobel

“Were the United States to offer Argentina a longer-term support package to back an unsustainable exchange rate, that would be a major folly and waste of U.S. taxpayer resources"

2/

The US -- not just the Trump Administration -- lost leverage when President Trump over-escalated in April.

The US could not sustain 145% tariffs and more or less had to unilaterally back down. Xi and his team know that

1/ Somehow I have managed to start using the same words as the Trump administration ("testy")

"“I have a great relationship with Xi,” Trump said, before quickly adding: “But sometimes he gets testy.”"

2/

The IMF needs to take a serious look at its methodology for forecasting the current account balance in key countries -- the current approach is yielding somewhat absurd outcomes that forecast real problems (notably China's surplus) away

1/ The WEO forecast for China's 2025 surplus is 3.3% of GDP (the h1 surplus) so an upward adjustment from the absurd $370b surplus in the ESR. That surplus is forecast to fall to 2.8% of GDP in 26, and then down to 2% of GDP in 2020. No problem here worth global concern ...

2/

Building out capacity (including refining capacity) for rare earths/ other critical minerals should indeed by a real priority now, and the risk of weaponization of this this and other supply chains should have been taken more seriously in the past. But it won't be easy

1/

https://twitter.com/TonyNashNerd/status/1977036957109866501

Just as an example of how far the political debate has come -- Bob Lighthizer (no China dove) excluded rare earths and permanent magnets from the 301 tariffs back in 18 and 19 ...

3/

China -- per the excellent reporting on the WSJ/ @Lingling_Wei -- appears to be pursuing a strategy of applying maximum pressure in pursuit of maximum concessions ... full tariff rollback, rollback of export controls, relaxation of nat'l security review on Chinese investment

1/ China though may have miscalculated -- Trump's "Truth" suggested real frustration. Betting on an even bigger (and more publicly visible TACO) has its own risks

2/

https://x.com/RushDoshi/status/1976655818889035923

There are rumors -- based on material reported in the Argentine press -- that suggest the US lifeline to Argentina will be funded using Special Drawing Right certificates, and that the BCRA will on lend some funds to the MoF to do bond buybacks ...

1/ The logic of using the SDRs (The Treasury technically borrows dollars from the Fed using SDR certificates as collateral) is simple: the ESF has $173b of SDRs, and only ~ $23b of dollars ...

2/

Bloomberg buried the lede here

The real story isn't that Kenya is saving ~ 200m in debt service costs by restructuring into CNY --

It is that China has already gotten $1.5 b of the principal on the original railway loan back

1/ It is well known in sovereign debt circles (but not among the foreign policy world) that the amortization structures on Chinese policy bank loans are super steep, and that China has taken big $$$ off the table between 22 and 25 ...

2/

Great reporting from Bloomberg

Argentina's governemtn has two pools of fx assets. The Treasury fx account -- which can be sold "inside" the band agreed with the IMF, and the BCRA's fx. The Treasury account is close to being empty

1/ The Treasury bought ~$2b in fx from the ag exporters when the ag export tax was dropped (irritating US farmers) ... but that pool of funds is about gone. The BCRA also has a bit of cash but that can only be sold at the edge of the band

2/

Bessent: US Treasury wants to support Argentina's strong policies ...

The message seems a bit off. Countries with strong policies don't usually need a second bailout in a year. Argentina already blew through $14b from the IMF

1/

https://twitter.com/SecScottBessent/status/1975299966701871257

Argentina's strong peso policy this has relied on borrowed money (hence the reserve sales) --

and some of the best evidence that the peso is overvalued has come from the big wave of Argentine outbound tourism

2/

batimes.com.ar/news/amp/econo…

Japan has attracted a bit of attention after the LDP's leadership election -- yen down, stocks up, long-term JGB yields up

Two observations -- one is that the increase in JGB yields over the last 12ms hasn't had much of any impact on US yields. At least not for the 10y

1/ The yen also hasn't recently moved with at least the 10y rate differential (and there is an argument that other rates matter more of course ... but the same would be true at most tenors)

2/

Have the tariffs reduced the trade deficit? The answer is actually not obvious ...

The headline data misleads because of massive swings in the pharmaceuticals balance and the gold balance

1/ many If you look at goods trade net of pharma and gold, imports are down a bit from earlier in the year (consistent with a tariff impact) but the base earlier in the year was inflated by a bit of front running

2/

One of the arguments I made at last week's Federal Reserve (Board +FRBNY) Conference on the international role of the dollar is that the dollar's share of reserves gets too much attention, and the absolute stock of reserve holdings gets too little ...

1/many Central banks did add a bit to their Euro holdings in dollar terms (or rather, they didn't sell euros just because the euro rose against the dollar in q2). But the bigger story is that dollar holdings are basically constant ...

2/

Thanks Glenn. Always appreciate your input.

A simple explanation of the changes that China made back in 2021 might help others understand the issue, and why many people (even some at the IMF) question the size of China's reported current account surplus. 1/

https://twitter.com/GlennLuk/status/1973416731142951099

The adjustments made to the data lowered the "BoP" goods surplus relative to the customs balance --

it though is easy to replicate the old methodology and report what the surplus would be absent the new "survey" rather than customs based methodology

2/

Saudi Arabia's balance of payments break even oil price is now in the 90s. With oil in the 60s, a large current account deficit should now be baked into the calculations of the desert kingdom

1/ The reasons for the deficit are well known: new cities in the desert don't come chief, and the PIF is spending a lot on other projects as well ...

2/

A good (upper level) essay question for a course on international economics (if folks still teach the balance of payments these days)

China's reported errors and omissions have collapsed. Does this make China's balance of payments data more or less accurate?

1/

https://twitter.com/Brad_Setser/status/1973139166473974112

A junior (BoP) analyst question -- how does the renewed rise in foreign asset accumulation by the state banks relate to the reported current account surplus?

a: it increased, as more reported outflows implies a higher surplus if reported errors needs to be zero

2/

One of the (many) annoying things about China's new (after 2021) balance of payments data is that the adjustment relative to the underlying customs and services data isn't constant. The q2 reported surplus even tho the underlying customs data showed a bigger surplus

1/many That gap had shrunk in q3 and q4 of last year, and in q1 -- but it widened again in q2 (see the chart below)

2/

Time to mark some views to market: I now think the preponderance of evidence suggests that the PBOC (SAFE) has reduced its holdings of long-term US bonds even after accounting for increased use of custodial centers

1/ There are a couple of important caveats (weasel words) in there -- I consciously said SAFE not China (that is a big caveat, as the state banks now have the money) and I consciously said long-term bonds ...

2/

Hardly the first time China has treated its agricultural imports as a source of leverage -- back in 2009 China responded to the "inside the WTO rules" tires safeguards case with tariffs on chicken feet and certain animal feeds ...

1/

https://twitter.com/acrossthecurve/status/1972414796504109347

Chinese ag imports have long been a hostage to the state of the relationship -- and Xi certainly is aware of its political impact in the US

2/

I would enjoy reading a careful analysis of the Glenn's counter-consensus claim that the "core" of China's EV industry is profitable (covers operating cost, paying off capital investment ... ) from @dunne_insights or an investment bank analyst

1/

https://twitter.com/GlennLuk/status/1971913037763252269

counter-consensus isn't necessarily wrong -- from a long time my argument that the state banks were helping the PBOC manage the currency ran against the DC consensus that China was moving toward a more flexible currency ...

3/

A little more on Bessent's commitment to help Argentina "within the mandate" of the US Treasury ...

1/ There is a huge difference between the Exchange Stabilization Fund (now the "peso stabilization fund") buying pesos to help Argentina defend the band and the ESF lending Argentina dollars (a swap is de facto a loan) so Argentina can support the peso ...

2/