The King of Carry Trades 

Doug Nolan


The Shanghai Composite sank 4.3% this week - and was down as much at 6.7% at intraday Wednesday lows. 

The Hang Seng China Financials Index was down 5.7% at Wednesday’s lows, before closing the week down 3.8%. 

The China’s Financials Index closed Friday down 8.4% y-t-d. 

Hong Kong’s Hang Seng Index dropped 5% this week (9.3% lower at Wednesday’s low), trading down to the lowest level since November.

Chinese private education, real estate development and technology stocks were hammered on a confluence of central government regulatory actions. 

While media attention has been focused on the tech and education crackdowns, more far-reaching policy measures are directed at overheated apartment markets. 

July 28 – Bloomberg: 

“After a years-long campaign to tame property prices, China is upping the ante to break a stubborn cycle of gains that’s made homes increasingly unaffordable. 

In recent days, China jacked up mortgage rates in a major city, vowed to accelerate the development of government subsidized rental housing, and moved to increase scrutiny on everything from financing of developers and newly-listed home prices to title transfers. 

Echoing Xi Jinping’s famous words that ‘housing is for living in and not for speculation,’ Vice Premier Han Zheng added that the sector shouldn’t be used as a short-term tool to stimulate the economy. 

The intensified focus on real estate -- an industry that was already under the scanner -- mirrors broader crackdowns on businesses such as education that are seen as widening social inequities.”

Additionally, from the above Bloomberg article: 

“Another signal came from the unusually large number of government entities that vowed recently to strengthen measures on everything from project development and home sales, to rental and property management services. 

Eight policy bodies said in a joint statement that they would step up penalties for misconduct. 

In the line of fire will be developers that default on debt repayments, delay deliveries on pre-sold homes or elicit negative news or market concerns. Local bureaucrats' careers are on the line. 

Officials in cities that lack sufficient regulations and experience rapid price spikes will be held accountable, Zhang Qiguang, an official for the Ministry of Housing and Urban-Rural Development said on July 22.”

Markets were rattled by Beijing’s aggressive policy approach, despite increasingly unstable securities markets. 

There was confusion, and at least a few analysts voiced a newfound worry: perhaps Chinese leadership no longer cares about market reaction. 

What might this mean for the beloved “national team” repeatedly called upon for the patriotic duty of propping up sinking stock prices? 

Yet, things clearly go beyond domestic policy measures and market reverberations. 

Beijing has adopted a new approach generally – and their determination suggests they’re moving forward irrespective of what anyone thinks. 

They don’t care.

July 28 – Bloomberg (Chang Shu): 

“For decades, China’s economic and financial policy has followed the logic of international engagement and constraints. 

In setting monetary policy, the People’s Bank of China took its lead from the Federal Reserve. 

Seeking capital for growth, major firms aspired to a prestigious U.S. IPO. 

Friday’s meeting of the Politburo confirms that, going forward, China will attempt to chart a more independent course. 

The spirit of China’s new catch phrase -- ‘set our own agenda’ -- pervades the politburo statement, and has far-reaching implications for China’s monetary policy, and engagement with global markets. 

The emphasis of macro policy autonomy in Friday’s statement is in line with our view that the People’s Bank of China is ready to go separate ways from the Federal Reserve.”

A semblance of normalcy seemed to have returned by late Wednesday. 

From Bloomberg: 

“Wednesday’s hastily arranged meeting led by China Securities Regulatory Commission Vice Chairman Fang Xinghai was the latest sign of Beijing’s discomfort with a selloff that sent the nation’s key stock indexes to the brink of a bear market. 

State-run media have published a series of articles suggesting the rout is overdone, while some analysts have speculated government-linked funds have begun intervening to support the market.”

And from Reuters: 

“In a front page commentary on Wednesday, the state-owned Securities Times said that systemic risks ‘do not exist in the A-share market overall.’ 

The macroeconomy is still in a steady rebound stage, and short-term fluctuations do not change the long-term positive outlook for A-shares’…”

Systemic risks might not “exist in the A-share market overall,” yet renminbi volatility Wednesday was beginning to suggest vulnerability for the Chinese currency. 

The dollar vs. renminbi abruptly spiked to 6.51, the high since April 19th. 

Meanwhile, China sovereign CDS surged three points to trade to the highest level (41.5) since April, this after beginning 2021 at 29 bps. 

July 27 - Bloomberg (Jeanny Yu and Livia Yap): 

“A deepening selloff in Chinese stocks spread to the bond and currency markets on Tuesday as unverified rumors swirled that U.S. funds are offloading China and Hong Kong assets. 

The speculation… triggered a late afternoon bout of selling by traders in Asia who had already been dumping stocks in the crosshairs of Beijing’s sweeping regulatory crackdowns. 

The Hang Seng Tech Index plunged as much as 10% in Hong Kong, the yuan slid to its weakest since April against the dollar and Chinese bonds sank. 

The dramatic moves underscored how fragile investor confidence has become after a months-long regulatory onslaught by Beijing that only seems to be getting worse.”

The PBOC was ready to do its part to calm the situation, injecting extra liquidity ($4.6bn) into the system early Thursday. 

The Shanghai Composite rallied 1.5% in Thursday trading, with the growth stock ChiNext Index up 5.3% and the Hang Seng Tech Index surging 8%. 

The renminbi rallied, closing the week up 0.31% versus the dollar to 6.46.

While the renminbi and Chinese stocks mustered a late-week rally, the same cannot be said for key bond prices. 

Behemoth developer Evergrande’s bond (8 ¾ 2025) price sank nine points to a record low 44.7. 

Yields surged 700 bps this week to 36.33%, with a two-week gain of almost 1,400 bps. 

Evergrande yields ended May just below 14%.

An index of Chinese high-yield bonds surged 220 bps to 12.79%, up 310 bps in two weeks to the high since March 2020. 

This index yielded 8.20% at the end of May. 

Developer offshore bonds were under heavy liquidation. 

Easy Tactic bond yields spiked 1,300 bps to 28.9%, and Kaisa Group yields surged almost 500 bps this week to 19.6%. 

Troubled “asset management company” Huarong’s CDS jumped 50 bps, ending the week at a two-month high 1,177. 

Huarong CDS closed March at 149 bps. 

Huarong bonds (5.5% 2025) dropped almost 6 points this week to 73.4, with yields surging 156 bps to 15.79%. 

The week was notable for Chinese contagion gaining momentum. 

Yields for the Bloomberg Barclays Asia USD High Yield Bond Index surged over 100 bps this week, surpassing 9% for the first time since March 2020. 

Yields have jumped 150 bps in two weeks, after trading at 6.65% in late-May.

July 27 - Bloomberg (Ameya Karve): 

“Pain from regulatory crackdowns in China is starting to spread to some of the safest corners of Asian credit, adding to mounting signs of fallout across the region’s financial markets. 

Yield premiums on Asian dollar bonds rose as much as 3 bps Tuesday, traders said. 

That leaves them set for the biggest expansion in over 3 months and for a third straight day of widening, according to a Bloomberg Barclays index. 

The moves mark a shift after such higher-rated securities had been doing better recently, even as junk bonds in the region felt the pinch from rising concerns about Chinese defaults. 

Prices on some Asian high-yield dollar bonds also fell Tuesday, extending losses after recently hitting their lowest levels in almost nine months.”

“Pain… in China is starting to spread to some of the safest corners of Asian Credit…” 

Now that’s a development that should pique our interest. 

Prior to this week, heightened Credit stress was mainly contained within China’s high-yield sector – and for the most part isolated to offshore bond issues. 

But trouble at China’s “periphery” has broken loose – with (de-risking/deleveraging) contagion negatively impacting perceived safer Chinese and Asian Credit. 

This week witnessed an important escalation of mounting global market instability. 

Faith in Beijing took a hit this week. 

Chinese officials have an agenda, and they clearly don’t care as much about global markets – including their offshore bond market – as market participants have wanted to believe. 

But there remains the view that Beijing will ensure adequate system Credit growth and ample liquidity. 

Yet the policy backdrop has clearly become more uncertain and the market environment increasingly hostile. 

The levered players have to rein in risk.

It’s central to my thesis that China has been a hotbed of “hot money” inflows. 

In an era of unprecedented global leveraged speculation, I believe China evolved into the King of Levered Carry Trades. 

How could the enterprising global leveraged speculating community not have gravitated to China’s enticing yields, especially with a currency essentially pegged to the U.S. dollar. 

Better yet, China’s major developers and “AMCs” offered high yields coupled with implicit Beijing backing. 

Resulting market distortions and excess overshadow even those from the U.S. mortgage finance Bubble period.

I believe Beijing today recognizes the Bubble got completely away from them. 

They clearly failed to learn the lessons from their study of the Japanese Bubble fiasco. 

And it is today worth remembering that the Japanese government belatedly moved to rein in Bubble excess in response to increasingly deleterious impacts to equality and social stability. 

While they recognized Bubble risk, they were blind to the degree of financial and economic fragility that had accumulated over the cycle. 

President Xi and his communist central committee must recognize the enormous risk to social stability posed by ongoing Bubble excess. 

Is there any country in the world experiencing a more inequitable distribution of wealth than China?

“Houses are built to be lived in, not for speculation.” 

Difficult for me to believe President Xi has a more favorable view of bond market speculation – a dynamic key to funding fiascos at Haurong, Evergrande and so many others (companies and local governments).

If I had to venture a guess, I would say Xi and friends have had about enough of the current global financial structure. 

Seeing trouble on the horizon, they’re going to attempt to get their house in order. 

Beijing is coming down hard on speculation – in stocks, apartments and bonds. 

They’ll assume state-directed bank lending and deficit spending can ensure adequate Credit growth to meet growth objectives. 

But if they recognized the degree of underlying fragility, they would have moved years ago.

This week, I heard analysis that Chinese reform efforts are a positive development, ensuring long-term growth and stability. 

I recall similar commentary regarding the tightening of U.S. subprime mortgage Credit back in late-2007. 

Arguably long-term constructive, but not before unwieldy end-of-cycle excess followed shortly by a collapsing Bubble. 

July 30 - Bloomberg (Rebecca Choong Wilkins): 

“China’s riskier dollar bonds once beloved by global investors for their juicy yields are now dragging down returns. 

Single B rated notes have lost 17.5% this year, spurring a 7.3% retreat among the broader universe of junk debt... 

Fresh property curbs and China Evergrande Group’s cash woes have this week pressured some newly issued developer bonds, which dominate the region’s junk debt. 

‘This fragile sentiment toward property HY would likely persist in the near term,’ according to a note from ICBC International analysts led by Angus To.” 

How gigantic is the Chinese levered “carry trade”? 

How much “hot money” has flooded into Chinese stocks and bonds over recent years? 

China has provided the marginal source of global Credit. 

I suspect leveraged speculation in Chinese bonds has been integral to global liquidity excess. 

This week was important. 

Collapsing bond prices for a group of companies with over $1 TN in combined liabilities. 

Chinese high-yield bonds trading as if almost the entire sector was going bust. 

Renminbi vulnerability revealed. 

Contagion jumping to Asia and EM more generally. 

Confirmation that China’s Bubble has been pierced, with dire ramifications for Bubbles across the globe. 

July 28 - Bloomberg (Ye Xie and Christopher Anstey): 

“You’re in good company if you can’t figure out why U.S. Treasury yields are tumbling. 

Jerome Powell isn’t sure either. 

Bonds have relentlessly rallied for months, even as inflation spikes to 13-year highs. 

Textbooks and Wall Street lore say yields should be jumping instead of diving in the face of that. 

The Federal Reserve chairman weighed in on the puzzle when asked about it Wednesday. 

‘We’ve seen long-term yields come down significantly,’ Powell said at a press conference… ‘I don’t think that there’s a real consensus on what explains the moves between the last meeting and this meeting.’”

I relate to Rob in the Workday commercial, who keeps yelling “Workday” during a Zoom call when his coworkers are trying to explain why they’re losing business to a competitor. 

Why have Treasury and global bond yields been collapsing in the face of surging inflation? 

The faltering Chinese Bubble. 

The Faltering Chinese Bubble! 

Fragile global Bubbles!!! 

“Hey Doug, you’re on mute.”

The Fed missed another opportunity this week to get the process started. 

Treasuries (10-yr yields down 5 bps this week to 1.22%) are essentially signaling it’s over before things even get started. 

Powell’s post-meeting press conference was considered dovish and (like Chinese policymaking) confusing. 

The Fed’s in a real pickle here. 

Powell is struggling to justify ongoing historic monetary inflation in the face of the most intense inflationary shock in decades. 

Our Fed Chair has the Republicans breathing down his neck, along with an increasingly divided (and vocal) FOMC. 

Public confidence is in the greatest jeopardy since the seventies. 

It’s an especially precarious position, especially considering the unfolding global backdrop.

lunes, agosto 02, 2021

A GALLOP INTO THE UNKNOWN / THE ECONOMIST

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A gallop into the unknown

Peru’s left-wing new president pushes for a new constitution

But it remains unclear how radical Pedro Castillo can be


It was an inauguration like no other in Peru’s recent history. 

Pedro Castillo, the new left-wing president, took office on July 28th following the narrowest of electoral victories in a bitterly divided country. 

But he delayed naming his cabinet until the following days, leaving Peru temporarily without a government. 

His inaugural speech was generally moderate in tone, promising “responsible change” in the economy and more money for health care and education. 

But he insisted that he will seek to install a constituent assembly to draw up a new constitution—the device used by left-wing populist strongmen such as Hugo Chávez in Venezuela and Evo Morales in Bolivia to concentrate power and hang on to it. 

For his inauguration he wore a collarless indigo jacket, seemingly copied from Mr Morales, as well as his trademark hat of cream-coloured palm fibre.

Mr Castillo’s inauguration took place on the 200th anniversary of Peru’s independence from Spanish colonial rule. 

In a populist gesture, he said he would not govern from the presidential palace, built on the site of the house of Francisco Pizarro, the Spanish conquistador of Peru. 

Instead, his office will be in Lima’s convention centre. 

A farmer, schoolteacher and union leader from Peru’s northern Andes, Mr Castillo is for some a symbol of those often ignored in the country’s political life.

In fact he is not the first mestizo (mixed-race) president, nor is he the first political outsider to secure the role. 

But of all Peru’s presidents, he was elected on the most left-wing platform, is the least experienced and has the weakest mandate, having won just 15% of the total vote in the election’s first round in April. 

He won a run-off election on June 6th by just 44,000 votes out of 17.5m, and only because many centrist Peruvians could not bring themselves to vote for his opponent, 

Keiko Fujimori, a conservative whose father Alberto ruled Peru as an autocrat in the 1990s.

It was not Mr Castillo’s fault that he was not declared the winner until July 19th. 

The delay was because Ms Fujimori cried fraud; her allegations were eventually dismissed by the electoral tribunal. 

But Mr Castillo has known for weeks that this was a near-certainty. 

He could have moved far more quickly to offer the country reassurance about his plans. 

He has said little in public since the election, and avoids media interviews. 

He appears mistrustful by nature. 

His closest aides are members of his large extended family and comrades from the teachers’ union.

The delay in naming a cabinet suggested Mr Castillo finds it hard to take decisions, and pointed to infighting between him and Vladimir Cerrón, the Marxist-Leninist political boss who runs Perú Libre, the hard-left party for which Mr Castillo stood. 

Everything suggests that Mr Castillo is drawing from a shallow talent pool.

He takes over in difficult circumstances. 

Peru has suffered greatly in the pandemic, with more officially recorded deaths as a share of population than any other country. 

Its feeble health system was overwhelmed. 

The economy shrank by 11% last year, while the official poverty rate rose from 20% to 30%. 

That fuelled rage against the political establishment, and was a factor in Mr Castillo’s victory.

Francisco Sagasti, the caretaker president since November, has laid the foundations for recovery, organising vaccinations. 

The economy may this year regain most of the lost ground. 

But the foundations remain fragile. 

“We have political polarisation instead of political leadership,” says Liliana Rojas-Suarez, an economist. 

The private sector is suspicious, especially of the idea of a constituent assembly.

The biggest question-mark is over the influence of Mr Cerrón, a Cuban-educated doctor. 

Only because he was prevented from running by a conviction for corruption when he was a regional governor did Perú Libre turn to Mr Castillo. 

More than half of Perú Libre’s 37 legislators in the 130-seat Congress answer to Mr Cerrón.

Mr Castillo has made some gestures of moderation. 

He has said he would retain the central-bank president, a respected professional. 

Pedro Francke, the probable new economy minister, is a moderate. Mr Cerrón has criticised him for sounding like “a Chicago boy—those who have failed for decades”. 

In fact Peru’s free-market economy delivered rapid growth, though political instability has eroded this since 2016. 

The poverty rate fell from over 50% in 2001 to 20% in 2019. 

The failures have been an unreformed state and public services.

To govern effectively Mr Castillo “needs to moderate in every way and Cerrón doesn’t let him”, says Gino Costa, an outgoing legislator for the centrist Morado party. 

Two polls this month found that only around 30% of Peruvians want a new constitution and radical changes in economic policy. 

Right-wing and centre parties have a majority in the new Congress. 

Mr Castillo said he would obey the existing constitution, which requires a majority in Congress and a referendum to amend it. 

It is not clear how he would reconcile this with his proposal for a constituent assembly.

Many on the right reject Mr Castillo’s presidency. 

Ms Fujimori said she would accept the election result but in the same breath that her supporters would work “to re-establish legitimacy”, a veiled threat to bring down the new government. 

The previous Congress had a taste for impeachment, trying it four times in three years. 

It forced the resignation of one president and impeached another. 

The opposition is not far from the 87 votes required.

Will Mr Castillo survive or self-destruct? 

His chief assets are plausible populist rhetoric and an image of honesty and authenticity in a country crying out for these qualities. 

“If he lasts a year he can probably last five” and complete his term, ventures a former minister. 

But that, and what those years would mean for Peru, will depend on the choices he makes in the coming weeks.

Boris Johnson’s Brexit win was a Pyrrhic victory

The realities of relative power mean the UK and EU are — and will remain — far from equals

Martin Wolf

     © James Ferguson


To the victor, the spoils. 

Boris Johnson won the referendum on UK membership of the EU just over five years ago, went on to win the leadership of the Conservative party in July 2019, reached a deal with the EU in October and won a decisive victory under the UK’s first-past-the post system in the general election of December. 

He has re-made his country. 

But has he remade it for the better or for the worse? 

Has he increased opportunities for British people, or diminished them? 

Has he made the UK more influential and prosperous, or less so? 

My answer to all these questions is: “the latter”. 

But I admit it is still early days in this story.

A point that emerged quickly (and to no informed person’s surprise) is that the Brexiters had misunderstood the EU. 

Anand Menon of the UK in a Changing Europe initiative at King’s College notes that Dominic Raab (now foreign secretary) said in April 2016 that “we can have proper control of our borders but we don’t need to be bound by all this stifling regulation . . . and it’s certainly not in the Europeans’ interests to erect trade barriers”. 

The EU disagreed. 

Many barriers do now exist: they will stay.





The reason for this predictable outcome was that members regard the preservation of the legal order of the EU, including the single market, as an overriding interest. 

This is clear from “EU-UK 2030”, a paper from the same unit. 

Consider Denmark, for example, for which the UK is both a good friend and its fourth largest trading partner. 

But Denmark does more than six times as much business with the rest of the EU as with the UK. 

Economic self-interest meant preserving the EU market, not accommodating the UK. 

The same is true for the other members. 

The EU always comes first for all of them.

As Menon also notes, sardonically: “It was curious that a group of ideological purists expected their interlocutors to be ideologically flexible and pragmatic.” 

It is clear that hitherto Brexit has strengthened the EU, not weakened it. 

Menon notes that “Even Marine Le Pen quickly came to realise that Brexit would do nothing to increase public support for Frexit.” 

So, EU members fought to defend their interests, just as British politicians ought to have expected.


Johnson’s “cakeism” was silly bravado, as is the view of David Frost, his chief negotiator, that the EU should “shake off any remaining ill will towards us for leaving, and instead build a friendly relationship between sovereign equals”. 

Of course, it would be easier to achieve this if Johnson had not lied over the implications of his deal on trade between Northern Ireland and the rest of the UK and even dared to attempt a repudiation of it. 

The EU rightly regards him as unserious and untrustworthy.

As for “sovereign equality”, the UK and EU may be equally sovereign, formally. 

But they are far from equals. 

The UK’s economy is a fifth of the EU’s and its dependence on trade with the EU is much greater than the other way round. 

These are the realities of relative power. 

A realist, such as the Victorian prime minister Palmerston, would have understood this. 

Why cannot Frost?


It is inevitable, especially in view of the apparent desire of the UK government for friction with the EU, that relations will stay poisonous for the indefinite future. 

It is inevitable, too, that the UK will lose more from this than the EU.

What about the economic results? 

Brexit is of course not the only shock to have hit the economy over the past five years. 

The other is Covid-19. But it is noteworthy that between the second quarter of 2016 and the first quarter of 2021, the UK economy shrank by 4.3 per cent. 

Italy’s performance was similar. 

But the eurozone’s economy grew by 1.3 per cent over this period. 

Brexit also inflicted a large initial shock to trade volumes. 

A recovery has occurred since then, but UK trade will end up smaller than it would otherwise have been. 

The effects of this will cumulate over time and show up in worse economic performance than otherwise.

This raises a question: what will “taking back control” turn out to mean?


There is no doubt that Brexit has lifted constraints on the government. 

British prime ministers with large majorities could always do most of what they wanted, so long as they retained parliamentary support. 

Now the government does not have to worry about EU rules either. 

So, the government (for which 44 per cent of the electorate voted) can act even more freely than before. 

This form of collective control may mean a great deal to many. 

Nevertheless, in the many areas where international co-operation is needed, Brexit has not increased control over the choices. 

The UK must still persuade other countries. 

But now it lacks a platform inside the EU from which to do so.

What about British people? 

Have they taken back control over their lives? 

At the very least, businesses trading with the EU and people wanting to work and study there have lost a great deal of control, not taken it back.


We cannot know what posterity will think. 

But to me today the promises of Brexit seem largely a will-o’-the-wisp. 

It will not increase control, but reduce it where it mattered most to individuals and even to the public at large. 

Skilful demagogues transmuted the public unhappiness into hostility towards the EU, which was mostly innocent of what people detested, except over migration. 

UK statistics are very poor on this: the number of EU citizens seeking “settled status” turned out to be 5.3m by March 2021, vastly more than expected. 

But, strikingly, inflows of migrants from the rest of the world have now jumped, as those from the EU declined.

In the longer run, Brexit is likely to damage the UK, perhaps split it, while strengthening EU solidarity. 

If so, it will surely be judged a Pyrrhic victory.

Joe Biden’s Nixon Strategy

Notwithstanding the predictable howls of protest from some Europeans, US President Joe Biden, French President Emmanuel Macron, and German Chancellor Angela Merkel are right to seek a thawing of ties with Russian President Vladimir Putin. If the main global threat is China, Putin has several compelling reasons to play ball.

Melvyn B. Krauss



STANFORD – The strategic imperative behind US President Joe Biden’s recent summitry in Europe was to forge a united Western response to China. 

In the three weeks since those meetings, it has become clear that he succeeded.

The United States, France, and Germany are now essentially on the same page. 

Each recognizes that broad international agreement is necessary to convince China to curtail its aggressive behavior. 

The Chinese attitude was laid bare in Chinese President Xi Jinping’s remarks this month commemorating the centennial of the Communist Party of China. 

Any attempt to interfere with his country’s ascent, he warned, will lead to “heads bashed bloody against a Great Wall of steel.”

In Asia, the Biden administration’s strategic imperative has led it to place greater emphasis on the “Quad” of Asia-Pacific democracies: Australia, India, Japan, and the US. Late last month, the US and Japan staged joint naval maneuvers to prepare for any Chinese aggression toward Taiwan. 

And in Europe, both NATO and the European Union have elevated China to the top of the policy agenda after previously trying to avoid “out-of-region” commitments.

Although Biden has made tangible progress in forging a broad consensus on China, he has only just begun to tackle the hardest element of this policy: convincing Russian President Vladimir Putin that his country has a national-security interest in distancing itself from China. 

Nonetheless, getting Putin on board is now clearly a high priority. 

Since their summits with Biden, French President Emmanuel Macron and German Chancellor Angela Merkel have both called for a reset of EU relations with Russia.

To be sure, the suggestion that the EU might patch up relations with Russia has been met with near-hysterical protests in the Netherlands, the Baltic states, and Poland. 

Responding to these histrionics, Merkel hastened to make clear “that such talks with the Russian president aren’t a kind of reward.”

If Merkel was dismissive, that is because the howls of protest were entirely predictable. 

Abrupt strategic policy shifts are rarely understood at their outset. 

When US President Richard Nixon inaugurated relations with communist China 50 years ago, he set off a firestorm among America’s allies, with Japan objecting even more strongly than the Estonians, Latvians, Lithuanians, and Poles are now.

Today, Nixon’s diplomatic initiative is remembered as one of the great strategic breakthroughs of the post-war era. 

The “opening of China” arose from the fact that both Nixon and Mao Zedong had come to view the Soviet Union as the greatest threat to each of their countries. 

By establishing diplomatic relations, they could force the Soviets (who had recently invaded Czechoslovakia and then waged a short but brutal border war with China) to reconsider their aggressive policies.

It worked. In the years that followed, the Soviets sharply reduced troop deployments along the border with China and entered into major nuclear-arms treaties with the US.

Fast-forward to today. Putin, a man of bloodless realpolitik if ever there was one, has several reasons to play ball with Biden – many of which are just as compelling as those that motivated Mao and Zhou Enlai to welcome Nixon’s overture. 

For starters, because Russia is more isolated now than the Soviet Union ever was, it has become dangerously dependent on China. 

But the main beneficiary of Putin’s anti-Western antagonism over the past decade has not been Russia but China. 

By bringing Russia in from the cold in which the West has placed his economy, Putin could reverse its descent into economic sclerosis and stagnation.

In fact, like many in Russia’s security establishment, Putin recognizes that his country has received scant benefits from its relationship with Xi’s China. 

Although China has been investing massively in firms and infrastructure around the world (much of it through Xi’s signature Belt and Road Initiative), only a miniscule amount of Chinese money has made it to Russia, where it has been desperately needed to offset the effects of Western sanctions.

Moreover, while China’s leaders never mention it, they are just as embittered over Russia’s theft of Chinese territory in the nineteenth century as they are over the West’s imperial predations. 

With Western imperialism having been largely rolled back, it is Russia’s continued occupation of historic Chinese territory that stands out the most to ordinary Chinese observers.

For example, the city of Vladivostok, with its vast naval base, has been a part of Russia only since 1860, when the tsars built a military harbor there. 

Before that, the city was known by the Manchu name of Haishenwai. 

When Russia held celebrations for the city’s 160th anniversary last year, hyper-nationalist Chinese internet users exploded in indignation.

There is also a demographic argument for Putin to consider: the six million Russians spread along the Siberian border face 90 million Chinese on the other side. 

And many of these Chinese regularly cross the border into Russia to trade (and a good number to stay).

Just as Nixon’s brokering of relations with Mao was never intended to transform China into a bastion of human rights and democracy, nor is the Biden/Macron/Merkel strategy meant to turn Putin’s Russia into a free society overnight. 

Western leaders are not harboring any illusions. 

Despite everything he has to gain from better relations with the West, Putin will not shift away from China if doing so poses any threat to his power or personal safety. 

The Putin regime is far too brittle and reliant on outright authoritarianism to take any serious risks.

If the West wants Russia to distance itself from China, it will have to accept Putin as he is – warts and all. 

Though he won’t improve his record on human rights, he could at least be convinced to recognize internationally agreed norms in cyberspace, and to stop openly threatening his neighbors. 

That sort of bargain is more than possible, and it just might be enough to alert a stubborn Xi to the strategic dangers of his own regional and international bullying.


Melvyn B. Krauss is Professor Emeritus of Economics at New York University.

America Needs to Break Up Its Biggest States

By Noah Millman


From its beginning, the United States was built to expand. 

Article IV, Section 3 of the Constitution grants Congress the power to create states. 

Starting with the Vermont Republic in 1791, as America grew, the country’s roster of states expanded as well.

But since the addition of Alaska and Hawaii in 1959, America hasn’t increased the number of states, and unless some future president winds up buying Greenland, the United States is unlikely to expand territorially. 

Nonetheless it continues to expand — demographically. 

Since 1960, the country has added over 150 million people through a combination of immigration and natural population increase. 

Yet we haven’t upped our state count.

This is a problem. 

America needs new states not only to provide representation for those living in territories but also more urgently to provide adequate representation to those who have congressional representation but whose votes perversely carry less weight because of their state’s size.

And America needs new states to improve the internal governance of the states and the country. 

We need new states — and the place to start is to carve them out of the largest states that already exist.

Since 1980, about 40 percent of America’s population growth has accrued to only three megastates: California, Texas and Florida. 

California has more than eight times the population of the median U.S. state; on its own, Los Angeles County would be the 10th-largest state in the union. 

The four largest states by population now make up roughly one-third of the population of the entire United States — more than the smallest 34 put together.

This poses a critical problem for democratic legitimacy primarily because of the Senate. 

Those four largest states have only eight senators, while the 34 smallest states have a supermajority of 68. 

Because of the unusually large scope of power granted to America’s upper house — the Senate not only is capable of blocking legislation but also plays a key role in approving many presidential appointments, members of the judiciary and treaties with other countries — such an acute disproportion of representation effectively disenfranchises much of America’s population. 

Moreover, this disproportion cannot be rectified constitutionally, because Article V forbids any amendment to the Constitution that would deprive any state of equal representation in the Senate without that state’s consent.

One reason to break up the largest states, then, is to give their citizens something closer to appropriate representation.

At the same time, the sheer bulk of states like California and Texas gives them far greater influence than a typical state has. 

On issues like environmental regulation and education policy, these behemoths can shape or frustrate national policy by their unilateral actions in ways that smaller states cannot easily dissent from. 

Their key industries and interest groups, meanwhile, wield disproportionate influence in the national and state capitals.

So another reason to break them up is to reduce the power they exert over the country.

Whatever you think of the merits of granting statehood to the District of Columbia, Puerto Rico, the U.S. Virgin Islands or Guam, doing so would not rectify these problems. 

Democrats would be pleased to get additional safe Senate seats, but adding tiny states would only make the Senate's disproportion worse. 

Nor would their addition do anything to cut down the concentration of power in state capitals like Albany and Sacramento or provide adequate representation to those who feel increasingly alienated from state capitals.

The solution has clear precedent in American history: break up the largest states, ideally into components with populations as close to the state median as possible. 

Kentucky was created out of territory that originally belonged to Virginia, as was Tennessee from North Carolina territory and Maine from the territory of Massachusetts. 

No constitutional amendment would be required; per the terms of Article IV, creating states from a state that already exists would merely require the state legislature to vote to split up and for Congress to assent. 

And unlike consolidating smaller states, which would reduce their citizens’ representation, splitting up the large states would increase it, giving their voters a reason to be supportive.

Congress could help structure the process by setting a minimum size for new states (say, one-half the population of the median state, about 2.25 million) and requiring them to have territorial integrity and avoid partisan gerrymandering, all of which would help assure that the break up improved national governance. 

But carving the four megastates into three or more states each might have a host of benefits for their internal governance as well.

For example, New York City currently lacks many powers that are crucial to management, like full control of its transportation system. 

If, as part of a larger national reorganization, New York City were to become a city-state — as Berlin, Hamburg and Bremen are in Germany — it could assume most of those powers, while its senators in Washington could focus on a national agenda relevant to urban America. 

Inasmuch as New York City needs partners to coordinate with, the most important ones are in New Jersey and Connecticut, not in Buffalo and Rochester — so splitting up New York State could give new momentum to proposals for regional governance across state lines. 

Meanwhile, upstate New York would have a better chance at pursuing its own development in ways that suit its commonality with other Rust Belt regions without being captive to the needs and preferences of a city with which it has had little in common economically since the near obsolescence of the Erie Canal.

Similarly, splitting California into at least three states — as has been proposed before, most recently in a failed ballot initiative — would allow its very different regions to pursue policies appropriate to their character and interests. 

California could even plausibly be broken into as many as five states, if the Bay Area and Los Angeles were hived off to become city-states, which they are certainly populous enough to be.

Splitting up the largest states would not necessarily favor Democrats or Republicans — which is another reason it might be a good idea and why Congress might want to condition approval of one state breakup on others, much as Maine and Missouri were admitted in 1820 and 1821 to preserve the national balance between free and slave states. 

New York City would undoubtedly be a safe Democratic state — but upstate New York might well be as competitive between the parties as Pennsylvania is today. 

A state carved out of northern Florida would likely be reliably Republican, but the central region would probably be purple, while southern Florida would have a Democratic lean. 

Carving up Texas, meanwhile, would open up opportunities for Democrats but could also lower the temperature on the possibility of the state’s flipping blue by giving residents of Lubbock and Midland an escape route to a safely red republic.

There will be sentimental objections to these suggestions as well as practical ones — how could we even consider breaking up the Empire State? 

But sentiment about the past should not obscure the possibilities of creation. 

How often does a political community get a chance to choose a new name for itself, a new flag to fly? 

We shouldn’t pass up the opportunity to refound political communities on a new and more inclusive basis.

The states that exist today, even when they were given names with Indigenous sources, were founded and organized overwhelmingly by white settlers. 

So it could be powerfully symbolic if, for example, members of the Seneca, Oneida, Mohawk and other nations of the old Iroquois Confederacy played a central public role in defining a state covering their old territory.

It sometimes seems the United States is flying apart into mutually hostile factions. 

The genius of our federal system is that it provides a framework for a multiplicity of communities, with different interests and values, to live together as part of a single country. 

If that system feels as though it’s breaking down, maybe it’s partly because its components are out of balance.

The work of dividing states might not only give us the space we need from one another but also help us learn how to cooperate again. 

Breaking up can be hard to do, but sometimes, it’s the best way to ultimately come together.


Noah Millman is a political columnist at The Week and the film and theater critic at Modern Age.