Huarong 

Doug Noland 


New data this week confirm the “global government finance Bubble” is alive and unwell. 

In the past, a $660 billion U.S. federal deficit over the course of a year would have been concerning. 

In today’s crazy world, it’s now accomplished in a single month. 

March’s shortfall compares to the $119 billion deficit posted in March 2020. 

Last month pushed the deficit for the first-half of the fiscal year to a frightful $1.71 TN.

For the month, spending of $972 billion was up from the year ago $356 billion, while receipts increased to $268 billion from $237 billion. 

Washington borrowed 70 cents of every dollar it spent last month. 

About 50% of the $3.41 TN first-half expenditures were debt-financed. 

Our federal government is on track for back-to-back years of $3.0 TN plus annual deficits.

The battle of rival global super-borrowers: China’s Aggregate Financing (their measure of broad system credit) jumped $512 billion during March, pushing Q1 growth to $1.569 TN. 

Over the past 15 months, China’s Aggregate Financing expanded an unprecedented $6.9 TN – or 17%. 

For perspective, this was 50% greater than the preceding 15-month expansion, a period of exceptionally strong credit growth in its own right. 

China’s Bank Loans expanded a stronger-than-expected $416 billion in March and $1.17 TN for the first quarter. 

First quarter lending was 8% ahead of booming Q1 2020, and 32% above growth from Q1 2019. 

China’s total Bank Assets ended 2020 at $49 TN, having expanded $7.9 TN, or 19%, over two years, and $18.5 TN, or 60%, in five years. 

Amazingly, Bank Assets have ballooned 10-fold since 2005. 

China’s Consumer Loans gained $176 billion in March, 16% ahead of March 2020 growth, and second only to January’s $195 billion. 

At $393 billion, record Q1 Consumer Loan growth was more than double Q1 2020’s $185 billion. 

Corporate Loans gained $246 billion (down 22% from March ’20), with Q1 growth of $821 billion down 11% y-o-y. 

Corporate Bonds expanded $132 billion during the quarter, about 50% below record Q1 2020. 

With system Credit growth in overdrive, a booming Chinese economic recovery is neither a surprise nor cause for celebration. 

One could argue March’s 34.2% y-o-y surge in Retail Sales, 18.5% annualized Q1 GDP growth, and the strongest monthly apartment price inflation (0.41%) in seven months point to overheating. 

With recovery having attained momentum, Beijing has turned more assertive in signaling tougher oversight and a tightening of Credit conditions. 

Global markets have been dismissive of the Chinese tightening narrative, convinced a wary Beijing will retreat at the first inkling of systemic stress. 

According to IIF data, Chinese debt ended 2020 at a record 329% of GDP. 

A spectacular 15-month $7 TN Credit splurge has temporarily masked festering Credit and structural issues. 

The upshot is a deranged Credit system increasingly at risk of market instability, blowups and crises of confidence.

China Huarong International Holdings’ Credit default swap (CDS) prices began April at 147 bps and closed last Friday at 436 bps. 

In Thursday trading, this CDS price spiked to 1,466. 

Some offshore Huarong bond yields spiked to nearly 100%, signaling market fear of imminent default. 

Crisis management operations were at full-throttle Friday. 

Huarong wired funds for a bond payment due on Sunday. 

Chinese regulators, staying mum during the week, Friday announced Huarong’s operations and liquidity management were functioning normally, while requesting banks not withhold lending to the company. 

Huarong CDS prices ended the week near 1,000, down from Thursday’s panic but still indicating alarm.

At this point, it’s easy to dismiss Huarong as just another troubled Chinese institution that will be resolved well before it becomes a systemic issue – providing further proof that the great Beijing meritocracy has everything well under control. 

I would caution against this Halcyon interpretation. 

This week’s Huarong eruption marks a significant escalation in China’s unfolding Credit drama.

Huarong was one of four major “asset management companies” (AMCs) created in the late-nineties to acquire non-performing loans as part of Beijing’s plan to restructure its major (troubled) banking institutions. 

As a quasi-government institution, Huarong has enjoyed unlimited access to cheap bank and market finance. 

April 14 – Dow Jones (Mike Bird): 

“Whenever a Chinese bond market panic begins, similar arguments are rehashed: The blowup is idiosyncratic, deleveraging has generally been going in the right direction and increasing openness to foreign capital presents opportunities for foreign investors. 

But this time around, the upheaval is particularly large and sudden. 

China Huarong Asset Management failed to publish its 2020 earnings in late March, saying it needed more time to complete a transaction. 

The company is a behemoth, with a total debt load of $162.34 billion as of the middle of last year, according to Capital IQ. 

The situation also has a certain undeniable irony: The firm began life as one of four large bad banks designed to clean up the country’s financial sector in the late 1990s. 

It has since become a broader financial holding company.” 

Best I can tell, the various Huarong entities have assets of about $260 billion, with total debt between $162 billion and $209 billion (per Nikkei Asia’s Narayanan Somasundaram). 

Huarong has $44 billion of outstanding bonds, of which about half were issued off-shore (foreign currency denominated) and half due within a year. 

Huarong’s former CEO was executed in January for, among other things, accepting $277 million in bribes. 

With its implicit backing from Beijing (and associated top bond ratings), Huarong borrowed crazily and expanded into myriad businesses. 

It appears the company has struggled with most endeavors, including its core debt restructuring operations. 

The company recently delayed financial reporting until the completion of its own restructuring. 

Clearly, Beijing is mighty perturbed with the whole Huarong fiasco. 

Beyond its now exterminated ex-CEO, Chinese officials point blame to bond investors having thrown money at Huarong without regard to shady management or a reckless business strategy. 

This is a widespread issue. 

With Huarong – and the system more generally – Beijing has a newfound determination to push back against moral hazard risk. 

April 14 – Bloomberg (Richard Frost): 

“Market turmoil surrounding China Huarong Asset Management Co. intensified on Wednesday as investors interpreted government silence on the embattled firm as a lack of official support. 

The Communist Party has yet to comment on the distressed-debt manager, which is controlled by the finance ministry, even as concern about a potential restructuring sent its dollar bonds plunging to distressed levels. 

China’s State Council, the country’s top administrative body, instead reinforced the idea that struggling state-backed companies shouldn’t rely on government support. 

In a statement late Tuesday, the State Council urged local government financing vehicles to restructure or enter liquidation if they can’t repay their debts. 

While it’s unclear if the comments were meant to send a veiled message about China Huarong, they added to the perception that the government is taking a tough stance on reining in risks to the financial system.”

I’ll assume at least PBOC officials are familiar with the U.S. GSE debacle, where implicit government guarantees were fundamental to a prolonged period of ill-advised leveraging, worsening market distortions, Credit and asset Bubbles, economic maladjustment and, in the end, the worst U.S. financial and economic crises in decades. 

Moral hazard has traditionally played an integral role in financial booms. 

It became momentous during this age of unfettered market-based finance. 

Beijing made a catastrophic mistake in waiting this long to address implied Beijing guarantees for the AMCs, the banking system, and the entire Chinese Credit apparatus more generally. 

April 13 – Bloomberg: 

“Chinese authorities want failing local government financing vehicles to restructure or go bust if they can’t repay their debts, suggesting the state-linked sector is closer to seeing its first defaults on publicly traded bonds. 

The LGFVs should ‘implement bankruptcy proceedings or liquidation in accordance with the law if they lose their ability to pay,’ according to… the State Council -- or China’s cabinet... 

Local governments should not rely on LGFVs to finance their activities, the statement said, and LGFVs are banned from accepting documents offering guarantees from local officials or departments. 

The statement may further undermine investor faith in implicit support for state-backed companies as doubts over bad-debt manager China Huarong Asset Management Co.’s future continue to roil credit markets.”

How serious is Beijing about reining in government guarantees and moral hazard more generally? 

Clearly, they belatedly recognize some of the dangers associated with market distortions, resource misallocation and structural impairment. 

They’re surely also quite apprehensive with the scope of central government obligations that will be required after a deeply impaired financial system forces Beijing into massive bailouts and recapitalizations. 

An analyst appearing on Bloomberg Asia Television stated Chinese banks have lent “Trillions” to the AMCs, essentially providing the funds necessary to offload the banks’ non-performing assets. 

This conveniently gets sour loans off the banking system’s books, though problems are allowed to fester on the AMC's balance sheets (reminiscent of how the U.S. savings & loan industry mushroomed from a few billion dollar problem to a several hundred billion fiasco). 

The Bloomberg guest analyst suggested actual Chinese bank non-performing assets could be 15 to 20% of assets (versus about 2% reported) – which implies a problem approaching $10 TN. 

And with Bank Loans expanding an unprecedented $4.2 TN over the past 15 months, it’s a fair bet the problem loan issue is poised to get a lot worse. 

It’s worth repeating the “Terminal Phase” Bubble Dynamic, whereby a rapid rise of Credit of deteriorating quality ensures a parabolic surge in systemic risk.

Such a spectacular Credit boom is vulnerable to waning growth momentum. 

Arguably, the ongoing wild Credit inflation rests on the market premise Beijing support underpins the entire system. 

As such, China’s now colossal shadowy Credit apparatus collapses without confidence in Beijing’s implicit and explicit backing. 

The entire edifice has become “too big to fail” – which markets have viewed in nothing but the most positive light. 

There’s troubled Huarong and the other vulnerable state-owned AMCs. 

The solvency of China’s fragile multi-Trillion “small” banking sector has been an issue. 

Solvency is also a concern for a few Trillion dollars of local government financing vehicles (LGFV) and other local government debt. 

A tremendous amount is riding on Beijing’s shoulders. 

Many believe the “great financial crisis” could have been avoided if only Lehman Brothers had been bailed out. 

Ben Bernanke and others are convinced the Great Depression was the result of a negligent Federal Reserve failing to print sufficient money to recapitalize the banking system. 

Dr. Bernanke’s flawed doctrine unleashed the greatest runaway global monetary inflation in history. 

Especially after 2006 “Terminal Phase” excess (including $1 TN of subprime mortgage derivatives), there were literally Trillions of debt securities whose market prices had completely detached from underlying fundamentals and values. 

Crisis was unavoidable. 

A Lehman bailout would have only prolonged “Terminal” excess.

A post-1929 crash bank recapitalization would not have averted the Great Depression. 

An historic decade-plus Credit boom had created deep financial and economic structural maladjustment. 

Enormous amounts of speculative leverage had accumulated over a prolonged cycle, with a parabolic rise following Benjamin Strong’s infamous 1927 stock market “coup de whisky.” 

The critical policy blunders were made accommodating the boom. 

Ebullient markets are today much too complacent. 

Credit crises tend to advance at a glacial pace – until something suddenly triggers an avalanche. 

China’s resurgent boom applies added pressure on Beijing. 

Chinese officials would prefer to see some modicum of market discipline in China’s $18 TN bond market, along with a slowdown in lending. 

Reminiscent of the Fed in the late-twenties, Beijing would today hope to promote Credit flows to productive uses, while restraining non-productive and speculative Credit. 

But when Credit expands at such a feverish pace late in the boom cycle, resulting Monetary Disorder ensures liquidity flows in overabundance to inflating speculative Bubbles and uneconomic endeavors. 

The system turns dysfunctional, and it becomes impossible to effectively manage the confluence of destabilizing financial flows, and the system’s progressive addiction to ever-increasing quantities of Credit. 

Chinese Credit has been growing at a blistering pace, and Beijing has so far done little more than talk of cautious tightening measures. 

Yet we’re already witnessing a major blow-up. 

It’s worth noting CDS prices for the other AMC’s jumped this week. 

China Orient Asset Management CDS surged 20 to (at least a one-year high) 136 bps, with a two-week jump of 36 bps. 

According to ANZ research, China's high-yield corporate spreads widened 44 bps this week, with China investment-grade 29 bps wider. 

Asia's high-yield widened 26 bps, with investment-grade 16 bps wider. 

Interestingly, even China’s sovereign CDS traded above 45 mid-week, up from 38 to begin the week to the high since October. 

This is how I would expect a Credit crisis to commence in China. 

Focus turns to implicit Beijing guarantees. 

Marginal borrowers lose access to cheap borrowings. 

Debt at the “periphery” begins to lose its perceived moneyness. 

Foreign investors in the crosshairs. 

Risk aversion and de-leveraging begin to gain some momentum. 

Financial conditions tighten.

All eyes on the Haurong and the AMCs. But pay attention as well to the small banking sector and the local government financing vehicles. 

But these are likely just the tip of the iceberg. 

Many things have surprised me over the course of this extraordinary cycle. 

That confidence has been sustained in Chinese Credit in the face of historic Bubble excess is at the top of the list. 

Trump’s grip on Republicans is still growing

The party, pro-worker in word but pro-billionaire in deed, is also inching closer to white nationalism

Edward Luce 

   © Matt Kenyon/FT


One-term US presidents almost never get another bite at the apple. 

That is because they acknowledge their defeat at the ballot box. 

Donald Trump, on the other hand, has been telling supporters that he will be tempted to beat Democrats “for a third time”.

Most Republican voters still think last year’s election was stolen. 

It is difficult to imagine Trump would face a serious conservative rival, should he run again in 2024. 

To some extent he should thank Joe Biden for that. 

Having championed popular spending bills in his first two months, Biden has deprived Republicans of a populist economic critique.

Trump showed in 2016 that embracing big government was no obstacle to becoming his party’s nominee. 

The libertarian impulse is barely perceptible among today’s Republican voters, many of whom are happy with Bidenomics. 

The party’s energy is thus increasingly spent on cultural resentment. 

More than half of Republican voters support the use of force to defend the “traditional American way of life”.

Elected Republicans now often refer to themselves as “the party of the working class”. 

In western democratic terms, Republican ideology has more in common with Marine Le Pen’s Rassemblement National in France than, say, with the British Conservative party, let alone the German Christian Democrats. 

The party is moving closer towards white nationalism.

What does that mean for the future of US democracy? 

The first quarter of 2021 provided a tale of two wildly different national moods. 

During the first three weeks, non-Trumpian Americans were gripped by fears that Trump could somehow overturn Biden’s electoral college victory before he was sworn in. 

The violent storming of Capitol Hill on January 6 lent credence to those anxieties.

Then night turned to day as Biden capitalised on the vaccine rollout and enthusiasm for his legislative agenda. 

It is all too easy to forget Trump’s nightmarish closing days and proclaim America’s return to democratic health. But that would be premature. 

One of two main parties now openly rejects the rules of the game and is making a concerted attempt to ensure any replay of the 2020 election would produce the opposite result.

Republicans across the US are moving in lockstep to enact stringent curbs on voting. 

Georgia, which has just passed a bill that makes it an offence to provide food or water to voters standing in queues (a burden that Georgia’s Republicans ensure falls disproportionately on black-majority precincts), has led the way. 

Similar measures are poised to be enacted in other Republican-controlled states. 

Meanwhile, Republicans in Washington are unanimously opposed to a Democratic bill — the “For the People Act” — that would make voting easier across the nation.

None of which means the party lacks an economic agenda. 

Republicans continue to oppose any kind of business regulation and almost all taxes. 

But the public mood, which has tilted towards collective action during the pandemic, has forced them to muffle these priorities. 

In a memo leaked to Axios last week, two leading Republicans argued that the party should pursue a pro-business, anti-globalist agenda.

The party will sound as if it reviles Wall Street even as it blocks attempts to raise the capital gains tax. 

It will be anti-corporate in word, but pro-billionaire in deed; blue-collar on the airwaves, but protective of offshore tax shelters in practice; the party of law and order that insists the 2020 election was stolen.

The gap between the Republican party’s working-class rhetoric and its plutocratic fiscal agenda will continue to widen. 

The bridge between them is culture, which is being made to bear an increasingly heavy load. 

Old-style panics about issues like marriage equality bring diminishing returns. 

There may be some gain in opposing vaccine passports and complaining about shuttered schools. 

Teachers’ unions often provide a deserving target. 

Yet these are trivial compared with the existential dread of a multiracial America.

Republicans have two big pluses going for them. 

The first is anti-incumbency. 

If history is a guide, Democrats will probably lose control of both the House of Representatives and the Senate in next year’s midterm elections. 

That would halt Biden’s domestic agenda, which would make it easier to defeat him two years later. 

The average loss for a first-term president’s party is one Senate and 23 House seats. 

Biden can only afford to lose five in the House and none in the Senate.

Their second plus is what the Republican memo describes as the left’s “cultural elitism”. 

Much of this is hype that has little to do with most people’s lives. 

Biden has been careful not to encourage the more woke elements of his party. 

Moreover, it is hard to paint him as unpatriotic. 

Biden may be the Democratic party’s closest thing to Ronald Reagan, a genial old-timer with a spirit of optimism.

But the immigration crisis on the US-Mexico border is only likely to worsen. 

Biden has given Kamala Harris, his vice-president, the unenviable job of finding a solution. 

Likewise, the cultural left is unlikely to be quiescent for long. 

Were Biden to stand down in 2024, Republicans would find it easier to depict Harris, or almost any other candidate, as the “anti-American” Democrat they crave. 

Trump looks likely to hang around for just such an opening.

Margin call of the wild

Archegos, a family office, brings Nomura and Credit Suisse big losses

More bad news may follow. But the episode already raises disquieting questions



Before friday March 26th, few people may have heard of Archegos Capital Management, an investment vehicle run by Bill Hwang, a former hedge-fund trader with a chequered past. 

But it has emerged as the entity behind a fire sale of at least $20bn-worth of equities, which roiled stockmarkets on an otherwise unremarkable Friday and has left at least two global banks—Credit Suisse and Nomura—facing multi-billion-dollar losses. 

Financial regulators in America and Europe will have a say before the affair has run its course.

The plotline has already taken shape. Archegos is a so-called family office. 

It manages the private wealth of Mr Hwang, who once worked for Tiger Management, a celebrated hedge fund. 

One of Archegos’s strategies was long-short equity. 

The main idea is to be indifferent to the direction of the overall market by betting that the share prices of some stocks will rise while the prices of other stocks fall. 

The hope is that the longs do better than the shorts. 

But when markets are volatile the strategy can come unstuck. 

This is what seems to have happened to Archegos.

The first sign of trouble came that Friday when Goldman Sachs and Morgan Stanley, two Wall Street behemoths, began selling large blocks of shares for an unnamed client who had missed a margin call—a demand for more collateral to cover losses on trades that had gone awry. 

The stocks that were forcibly sold might best be categorised as “second-tier tech”. 

They included Baidu, a Chinese search engine, and Viacomcbs, an American media conglomerate, with a streaming service that gives it the flavour of a faddish tech stock. 

Their prices crashed under the weight of the selling. 

The price of Viacomcbs shares, for instance, fell by more than a quarter.

By Sunday March 28th it had emerged that the mystery client was Archegos. 

More familiar names were caught up in the drama. 

On Monday Credit Suisse said it was in the process of liquidating the positions of a client that had defaulted on margin calls, and that the related losses would be “material”. 

Unofficial estimates put these at $3bn-4bn. 

Nomura, a Japanese bank, said that it was on the hook for about $2bn, possibly more if stock prices fell further. 

These are significant losses. If not quite a lost limb, they amount to more than a flesh wound. 

The banks’ share prices tanked.

The full reckoning will only become clear over time. 

But evidently Nomura and Credit Suisse were slower to pull the plug than their American rivals, after an attempt to co-ordinate an orderly unwinding of Archegos’s positions failed. 

By making the margin call on Archegos early, and then liquidating positions quickly, the Americans seem to have limited the damage to themselves, but left the others nursing bigger mark-to-market losses.

The fire sale raises some disquieting questions. 

How was Mr Hwang, a little-known figure, able to run up such big losses? 

Leverage played a big part. 

Why then was he able to lean so heavily on Wall Street to enhance the size of his bets? 

What makes this even more puzzling is that Mr Hwang had already blotted his copybook. 

In 2012 he pleaded guilty to charges of insider trading.

One answer is that banks are desperately searching for profits. 

Rules drafted after the global financial crisis make it expensive for Wall Street banks to trade on their own account. 

The days when they could make much money from slow-moving, unleveraged asset managers—the “long-only” crowd—are a distant memory. 

Such investors mostly buy and sell stocks cheaply on electronic platforms. 

So Wall Street banks increasingly rely on fees and commissions from fast-trading hedge funds or family offices that act like hedge funds, such as Archegos. 

Fees on bespoke derivatives, such as equity swaps and contracts for difference, are especially attractive to the brokerages. 

The appeal for the fast-money hedge-fund crowd is that such derivatives allow them to magnify their positions. 

They can make large bets without having to put up lots of their own capital upfront.

In short, Wall Street can’t easily make money out of people who do not take rash bets. But people who make rash bets can lose you money, too. 

It is probably not a coincidence that Credit Suisse and Nomura are based in countries (Switzerland and Japan, respectively) where long-term interest rates have been stuck near or below zero. 

With few opportunities to make money from lending at home, they turned to Wall Street for excitement. 

Unfortunately for their shareholders, they found it.

Parallels are naturally being drawn between Archegos and ltcm, an ill-fated hedge fund. 

In 1998 ltcm was prevented from blowing up itself and the banking system by the Federal Reserve, which co-ordinated a bail-out by its Wall Street brokers. 

ltcm, too, was afforded breathtaking leverage by its brokers, who were dazzled by its principal shareholders, who included John Meriwether, a star trader formerly at Salomon Brothers, and Robert Merton and Myron Scholes, Nobel-prizewinning economists. 

It appears that several of the banks that acted as Mr Hwang’s brokers tried to come to a standstill agreement, of the kind that the Fed mediated for ltcm, in order to avoid a fire sale of the stocks they held to hedge their exposure to Archegos. 

Those discussions are now the subject of regulatory scrutiny. 

The tentacles of Archegos evidently do not stretch anything like as far into the financial system as ltcm’s. 

The wider damage from the Archegos affair has so far been limited.

Archegos might be a one-off mishap, albeit a large one. 

But it is not too much of a stretch to link it to some recent market themes. 

Since November there has been a general shift away from tech-and-media stocks, which profited greatly from the stay-at-home economy, towards cyclical companies, such as banks, airlines and industrial firms, which benefit from reopening. 

Archegos may well have been at the wrong end of this, at times violent, rotation. 

Events are moving unusually fast in the world economy and in financial markets. 

And when events move fast, some things get broken.

The Arc of Instability in Eastern Europe

The question now is whether, when and how Russia will continue collecting territory. 

By: Ridvan Bari Urcosta


It’s no secret that President Vladimir Putin, taking pages from the playbooks of Russian leaders of yore, is trying to secure strategic depth. 

Much of that depth naturally lies in Eastern Europe and the Caucasus, which have been contested since at least the 16th century as Russia began to reclaim lands of Kievan Rus. 

Stalin continued to incorporate these territories before and after World War II, and in 1991, when the Soviet Union collapsed, they became vast borderlands from the Baltics to Central Asia comprising newly independent states.

Russia’s latest attempts to recreate its buffer zone have created an arc of instability from Eastern Europe to the South Caucasus. 

Many of these states were already unstable, of course, and Russian revanchism has only made things worse. 

The question now is whether, when and how Russia will continue collecting territory.

Existing Instability

To briefly recap Eastern European instability: The region has been essentially dissolved three times in the past few hundred years. 

The first was when Eastern Slavs lost Kievan Rus, a loose federation stretching from present-day Ukraine to present-day western Russia. 

The second time was when Moscow partially lost its control over Eastern Europe in 1917. 

The third and greatest happened in 1991, when the Soviet Union collapsed. 

In 2014 or so, modern Russia returned to the idea of rolling back some of the geopolitical “successes” of the West, creating a line of confrontation with the West in Ukraine, Moldova, Crimea and the Caucasus.

Four main factors contributed to Russia’s success in reclaiming lands it holds as its own: an international order that favored the geopolitically ambitious; political instability in the areas it meant to reclaim; the emergence of domestic groups in these countries that want to be part of Russia; and a strong military. 

Notably, actual military invasion has rarely been Moscow’s preferred course of action. 

It tends to rely on a mix of other tactics For example, in Moldova, Belarus and Armenia, Moscow relied heavily on pro-Russia groups and on regional geopolitical factors. 

In Georgia, Moscow worked hard to maintain close relations with the Orthodox Church and conservative groups. 

Elsewhere, it has leveraged its role as diplomatic mediator to gain a foothold. Russia believes that resolving the Ukraine issue would resolve geopolitical tensions in the entire region. (It isn’t resolved, and it didn’t.)

Turning Point

The turning point for the entire region happened late last year, starting with the Belarusian presidential election held last August. 

Pro-Russia incumbent Alexander Lukashenko won in what many considered a sham election. 

Partly with Russia’s help, Lukashenko fought off protesters by redirecting their anger and undermining their resources.

Then, in late September, war broke out in Nagorno-Karabakh, a disputed territory de facto managed by ethnic Armenians located entirely inside Azerbaijan Moscow helped negotiate an end to hostilities, and in doing so made Armenia much more beholden to it. 

Its generally pro-West prime minister, Nikol Pashinyan, is now fighting for his political life as pro-Russia officials reap the benefits. 

Moreover, the war’s resolution established a Russian military presence in the Caucasus through its deployment of peacekeepers. 

It’s also important to note that the West did not resolve the crisis. 

Washington either couldn’t or wouldn’t, leaving Russia and its historical competitor Turkey as the guarantors of regional security. 


A few days later, on Sept. 31, Georgia held parliamentary elections. 

The results were disappointing for opposition parties, which refused to recognize the results and abstained from any political dialogue with the ruling party. 

Now they are demanding new elections. The incident has put the West in a tough position. 

It has tried but failed to manage the crisis – odd, considering both sides in Georgia are generally pro-NATO and pro-EU. 

The West’s failure has given Russia the tools to further undermine democracy and stability in the country. 

Moscow can, and does, discredit Western influence and legitimacy and provides support for various groups. 

For Moscow, it will be important to see if things deteriorate further and, if they do, whether they lead to the emergence of non-democratic groups, since that would also complicate ties between Tbilisi and the West.

Then there is Moldova, a country with a population of 2.6 million that is likewise in the throes of instability. 

Last November, the country held presidential elections in which pro-West candidate Maia Sandu won over pro-Russia candidate Igor Dodon. 

Yet Dodon and pro-Russia forces have a majority in parliament, and they have vehemently resisted Sandu’s attempt to consolidate control. 

Naturally, Russia keeps a close eye on Moldova. 

Moscow would like to see strong and effective pro-Russia policy, but the country is too geographically isolated for Russia to intervene even if it wanted to. (This might be possible only if Moscow establishes control over southern Ukraine.)

Finally, there is Ukraine, where three distinct and important trends have emerged. 

First, President Volodymyr Zelenskiy has failed to deliver on his promise to stabilize Donbass, the breakaway territory in the east. 

Russia expected that he would be at least partially successful, perhaps by creating a new grey zone or frozen conflict like in Abkhazia, South Ossetia or Transnistria. 

But the situation has only grown worse. Second, local elections returned Ukraine to the pre-Maidan revolution era, at least somewhat. 

Pro-Russia forces made serious gains in regional parliaments, the biggest of which were in the so-called region of “Novorossiya,” which Russia considers extremely important. 

Third, Zelenskiy started to prosecute pro-Russia oligarchs and to close pro-Russia TV channels and newspapers despite the fact that such measures would be considered undemocratic in any country.


Ukraine is a unique challenge for Russia. 

It is vitally important, but Moscow won’t simply invade; it considers much of the local population to be part of “Russian civilization,” and it would be immediately opposed by the West. 

Both Russia and the West would like to minimize direct contact there.

In short, within the past six months, Russia has achieved serious successes in Belarus and Armenia. 

It helped the Lukashenko government survive against well-organized democratic protests, and military integration is at historic new levels. 

It managed to increase its military presence in the South Caucasus by keeping Nagorno-Karabakh under Armenian control. (And it did so without the participation of the West.) 

Relations with Yerevan and Baku remain stable for now. 

In Moldova, Georgia and Ukraine, however, the situation is less certain. 

Russia would like to use Georgia against the West, but the most it can hope to achieve there is a normalization of relations in the next few years. 

In Moldova, Moscow would like to see a friendly political regime, ready to maintain a status quo and avoiding any joint anti-Russia actions together with Ukraine. 

The arc of instability, for now, is here to stay. 

The bigger danger, however, is that this arc could extend from the political to the military realm, especially in Ukraine. 

The Dollar’s Fragile Hegemony

Today, it seems to be an article of faith among US policymakers and many economists that the world’s appetite for dollar debt is virtually insatiable. But a modernization of China’s exchange-rate arrangements could deal the dollar’s status a painful blow.

Kenneth Rogoff


CAMBRIDGE – The mighty US dollar continues to reign supreme in global markets. 

But the greenback’s dominance may well be more fragile than it appears, because expected future changes in China’s exchange-rate regime are likely to trigger a significant shift in the international monetary order.

For many reasons, the Chinese authorities will probably someday stop pegging the renminbi to a basket of currencies, and shift to a modern inflation-targeting regime under which they allow the exchange rate to fluctuate much more freely, especially against the dollar. 

When that happens, expect most of Asia to follow China. 

In due time, the dollar, currently the anchor currency for roughly two-thirds of world GDP, could lose nearly half its weight.

Considering how much the United States relies on the dollar’s special status – or what then-French Finance Minister Valéry Giscard d’Estaing famously called America’s “exorbitant privilege” – to fund massive public and private borrowing, the impact of such a shift could be significant. 

Given that the US has been aggressively using deficit financing to combat the economic ravages of COVID-19, the sustainability of its debt might be called into question.

The long-standing argument for a more flexible Chinese currency is that China is simply too big to let its economy dance to the US Federal Reserve’s tune, even if Chinese capital controls provide some measure of insulation. 

China’s GDP (measured at international prices) surpassed that of the US back in 2014 and is still growing far faster than the US and Europe, making the case for greater exchange-rate flexibility increasingly compelling.

A more recent argument is that the dollar’s centrality gives the US government too much access to global transactions information. 

This is also a major concern in Europe. 

In principle, dollar transactions could be cleared anywhere in the world, but US banks and clearing houses have a significant natural advantage, because they can be implicitly (or explicitly) backed by the Fed, which has unlimited capacity to issue currency in a crisis. 

In comparison, any dollar clearing house outside the US will always be more subject to crises of confidence – a problem with which even the eurozone has struggled.

Moreover, former US President Donald Trump’s policies to check China’s trade dominance are not going away anytime soon. 

This is one of the few issues on which Democrats and Republicans broadly agree, and there is little question that trade deglobalization undermines the dollar.

Chinese policymakers face many obstacles in trying to break away from the current renminbi peg. 

But, in characteristic style, they have slowly been laying the groundwork on many fronts. 

China has been gradually allowing foreign institutional investors to buy renminbi bonds, and in 2016, the International Monetary Fund added the renminbi to the basket of major currencies that determines the value of Special Drawing Rights (the IMF’s global reserve asset).

In addition, the People’s Bank of China is far ahead of other major central banks in developing a central-bank digital currency. 

Although currently purely for domestic use, the PBOC’s digital currency ultimately will facilitate the renminbi’s international use, especially in countries that gravitate toward China’s eventual currency bloc. 

This will give the Chinese government a window into digital renminbi users’ transactions, just as the current system gives the US a great deal of similar information.

Will other Asian countries indeed follow China? 

The US will certainly push hard to keep as many economies as possible orbiting around the dollar, but it will be an uphill battle. 

Just as the US eclipsed Britain at the end of the nineteenth century as the world’s largest trading country, China long ago surpassed America by the same measure.

True, Japan and India may go their own way. 

But if China makes the renminbi more flexible, they will likely at the very least give the currency a weight comparable to that of the dollar in their foreign-exchange reserves.

There are striking parallels between Asia’s close alignment with the dollar today and the situation in Europe in the 1960s and early 1970s. 

But that era ended with high inflation and the collapse of the post-war Bretton Woods system of fixed exchange rates. 

Most of Europe then recognized that intra-European trade was more important than trade with the US. 

This led to the emergence of a Deutsche Mark bloc that decades later morphed into the single currency, the euro.

This does not mean that the Chinese renminbi will become the global currency overnight. 

Transitions from one dominant currency to another can take a long time. 

During the two decades between World Wars I and II, for example, the new entrant, the dollar, had roughly the same weight in central-bank reserves as the British pound, which had been the dominant global currency for more than a century following the Napoleonic Wars in the early 1800s.

So, what is wrong with three world currencies – the euro, the renminbi, and the dollar – sharing the spotlight? 

Nothing, except that neither markets nor policymakers seem remotely prepared for such a transition. 

US government borrowing rates would almost certainly be affected, though the really big impact might fall on corporate borrowers, especially small and medium-size firms.

Today, it seems to be an article of faith among US policymakers and many economists that the world’s appetite for dollar debt is virtually insatiable. 

But a modernization of China’s exchange-rate arrangements could deal the dollar’s status a painful blow.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.