🇺🇸🇨🇳 A successful tariff wall is set to slow growth (
https://archive.ph/OzFYq), but the downturn begins with a dollar liquidity crisis in China and ends with a crash in the US as funding pressures ricochet throughout the global banking system. Because they've historically run a large trade surplus with American consumers, Chinese banks have accumulated a large base of Eurodollars, with trade serving as their chief source of dollar funding. The tariff wall appears to target China, which will throttle the flow of Eurodollar deposits to the mainland, worsening offshore dollar funding stresses.
The payment chain is the supply chain in reverse. Since the trade war began just before Covid, China has successfully evaded US duties and kept the dollars flowing through entrepot trade via Mexico, ASEAN, and other countries, continuing to funnel goods to ultimate US consumers. Deploying a tariff fortress across all US imports, however, is an attempt to make that impossible.
Hardly a blind spot, China is of course aware of (
https://archive.is/0s5OX) this vulnerability, having been carefully preparing for (
https://archive.ph/jvas3) it with multiple points of leverage that go far beyond retaliatory tariffs and entrepot trade.
Chinese banks will transfer Eurodollar deposits to their New York branches - keeping them onshore and within the Fed's system - or park them into onshore nostro accounts with big US banks. That appears to have been status quo until sometime in 2023. Since then, Chinese banks have largely made Eurodollar deposits into nostro accounts based in Hong Kong - offshore and outside the Fed's system. Citibank, in particular, reports (
https://web.archive.org/web/20250403013315/https://www.citigroup.com/rcs/citigpa/storage/public/call-report-december-2024-02042025.pdf) a uniquely massive and uninsured (
https://web.archive.org/web/20250328223157/https://www.fdic.gov/sites/default/files/2024-03/fil13040.pdf) foreign deposit base, a large portion (
https://web.archive.org/web/20250307102008/https://www.ffiec.gov/PDF/E16/009a_202409.pdf) of which appear to be Chinese claims. An unprecedented 79% of Citi's domestic deposits are uninsured, a lurking solvency issue which would be realized in the event that Chinese banks need to raise dollars.
There are also problems with engineering dollar shortages, namely that if borrowing rates are too punitive, Chinese banks and non-banks would force liquidate dollar-denominated assets - equities, Treasuries and credit - at fire sale prices, an outcome that would not only have adverse consequences for the solvency of Chinese lenders, but for US lenders and the stability of the global financial system.
In any case, the US sees an opportunity for asymmetrik pain to develop - hurting China and forcing their banks into a role that is more subservient to the dollar - but likely overestimates its own leverage. This sets the stage for a battle in the ongoing war of Great Powers (
https://archive.is/PIiRQ), and there will be blood.
1. Recession? Crisis? "Detox"?
2. How Foreign Banks Obtain Liquidity
3. 'Chinadollars'
4. Dollar Shortages
5. Shoring Up USD & Hong Kong
6. Gold, Tariffs and the 'Three Strategies'
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https://archive.ph/UVOIk