The long-awaited Xi Jinping-Donald Trump meeting has finally happened — but what, exactly, came out of it?
On the first part of this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Supply Chain and Critical Minerals Research Cory Combs to unpack the immediate takeaways from the leaders’ summit in Beijing.
The two discuss:
Why the meeting was heavy on symbolism but light on concrete outcomes
The significance of China’s high-level diplomatic treatment of Trump
What to watch for on export controls and a possible extension of the Busan agreement
The prospects for a future “board of investment” mechanism governing U.S.-China capital flows
How Iran and the Strait of Hormuz factored into the talks
Andrew and Cory also assess why both sides appear eager to stabilize relations — even if major structural tensions remain unresolved.
Then in the second half of the pod, Andrew is joined by Trivium’s Head of Markets Research Dinny McMahon to break down the PBoC’s latest quarterly monetary policy report and what it reveals about Beijing’s economic priorities.
The two discuss:
Why the PBoC is signaling greater concern about currency stability
How the Iran war is reshaping China’s monetary policy calculus
Why interest rate cuts may now be less likely in 2026
Potential reforms to how mortgages are priced in China
Beijing’s intellectual defense of its export-led growth model
Transcript
Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs. Cory, how’re you doing, man?
Cory Combs: Doing well, thank you.
Andrew: Yeah, good to have you on as always. I have Cory on right now just for a quick discussion on the outcomes of the Xi Jinping-Donald Trump meeting that just wrapped up today. We’re recording at 6 p.m. Eastern time on Friday, May 15th. So, the meeting just wrapped up this morning, U.S. time. Still not a ton of outcomes from it, but I just wanted to get a quick conversation with Cory on the books about our immediate reactions.
Next week, I’m going to have a more in-depth discussion on not only the outcomes of the meeting, but sort of broader U.S.-China and some other interesting elements of the China politics and policy side with John Czin from the Brookings Institution. So really excited about that. So, we’ll do more in-depth next week, but wanted a quick touch with Cory now. And then in the second half of the pod, or what was really more the second 80% to 90% of the pod, I am talking with Dinny McMahon about, again, macroeconomic developments, but specifically the monetary policy report, the Q1 monetary policy report that the PBoC, China Central Bank, put out.
So, most of the pod will be on that. But as this is the big news of the day, I had to get into it a little bit. So, before we get into it, of course, Cory, got to start with the customary vibe check. How’s your vibe, man?
Cory: Mobile. I am currently in a car, not driving, don’t worry. Parked. But I just got back from travel and I had a day with my wife, and I just dropped my wife off at the airport, which is why I’m recording from not my usual location.
Andrew: Nice. Well, good. I hope you get back and have a relaxing Friday with a place to yourself. I’m in the opposite... Well, actually, I’m not the opposite. I’m in the same position. I’m at home Friday, 6 o’clock. My wife is also traveling. She went off to Chicago this weekend, but I am not going to have a quiet, relaxed evening to myself. I am solo dadding. The girls and I, my daughters and I are going to have some fun. We’re going to a baseball game tomorrow, which I’m excited about, the Nats game. So, we got my younger daughter’s soccer game tomorrow as well. So, trying to notch the first wing of the season. So, that’s my vibe. It’s a sports vibe weekend. So, that’s where I’m at.
Cory: Nice. Love it.
Andrew: Well, with those comments and our vibes out of the way, we also have to do the quick housekeeping, of course, just to start. A quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So if you need help on that or on domestic China policy developments, give us a shout. We’re at hq@triviumchina.com. We’d love to have a conversation about how we can support your business through your fund.
Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription options in terms of regular updates on policy developments out of China. We’ve got tech policy, policy that will impact markets, general China watching policy. We got free options. We got paid options. Check out the site.
You’ll definitely find the China policy Intel option that you need there. And finally, as always, please do tell your friends and colleagues about Trivium and about the podcast. It helps us grow the business, grow the listenership so we can keep bringing you these weekly podcasts and other great content. So, we really appreciate those word-of-mouth recommendations. Super helpful for us.
All right, Cory. Trip just wrapped up. Big meeting. Donald Trump, Xi Jinping in Beijing. The Chinese rolled out the red carpet. Really kind of personal touch from Xi in terms of protocol. Han Zheng met Trump at the airport. That was, in terms of protocol, pretty senior person to meet him there. More senior than the individuals they’ve sent in the past to meet U.S. presidents arriving at the airport. They also hosted Trump in Zhongnanhai, the sort of secretive leadership compound where the Chinese government operates, Chinese Communist Party operates.
So, in terms of protocol, they kind of gave them the bells and whistles. Trump seemed to be pretty impressed. But for all the bon ami, not a ton of outcomes from the meeting. In terms of when we’re recording, there’s really been zero announcements in terms of anything that was agreed to, any deals that were made. So we’re, right now, pretty lacking on the concrete outcome side. But given all that, just having set the stage, just tell us kind of your initial reactions on what you thought the key developments were and any impacts, if any.
Cory: Yeah, absolutely. I think, you know, when I asked to describe how the meeting went or how the summit went, I think the answer is good enough. I mean, it wasn’t much to write home about. I love whoever titled today’s update on it, which is the summit could have been an email. That really does capture a lot. And that said, it is really important that a lot of different topics were reportedly covered. Apparently, they did talk about trade. They did talk about investment. They did talk about export controls at some level, reportedly. And we say that because nothing has really been confirmed.
The downside of this is, yeah, it would have been nice to come away with concrete takeaways. Business community could relax. Diplomatic community could kind of take a seat back, a deep breath. That didn’t happen. But the reason I say it’s still good enough is, for me, the real benchmark is, did it set the scene for further meetings to come? The most important single facet or aspect of this, to me, was, do the leaders set the tone for the two countries to meet and speak constructively and to come to terms on deals to come? We’re not surprised that, you know, we didn’t see more concrete outcomes.
But more importantly, I’m not really that concerned that we haven’t seen much concrete yet, because I think it will come in the next meetings. So for me, what I was really concerned about is, are we going to have the next meetings? There was a lot of romance happening, a lot of appreciation, the dinner menu looked great. I saw that YMCA was on the song list, a couple of our analysts liked that. It was good vibes all around. But more importantly, both sides, you know, I think very credibly signaled they want to move forward in a constructive direction. They want to stabilize. That’s all that really mattered to me. They’re going to meet again. That’s the big takeaway for me.
Andrew: Yeah, that’s great. I mean, I think that makes sense. I also agree with you that it’s likely that not only more will come out of subsequent meetings, but we may even get some sort of concrete deliverable, even maybe an extension of the Busan agreement maybe in the next day or so. I don’t know what would be sort of holding them back from announcing that, but we noted that Xi Jinping, in his comments to Donald Trump before they kicked the cameras out, said something about, you know, yesterday our teams made good progress or even like came to a good agreement or something like that, that will benefit both sides and benefit the world.
So, it sounded like there was, based on those comments, maybe even some concrete developments out of the previous meeting, which was Scott Bessent, U.S. Treasury Secretary, and He Lifeng, the vice president or vice premier in charge of the economy/key negotiator on the Chinese side, they both met, those teams met in South Korea just before the Xi Trump meeting. So maybe something was hashed out there and they’re just kind of finalizing some details. We don’t know. Hopefully, we’ll get some clarity here soon. I mean, like you said, something was agreed.
It’s reported that 200 Boeing aircraft will be purchased by the Chinese. The Chinese side did not confirm that officially. So, there’s some reporting that things are there. It’s a little strange that we don’t have concrete announcements from either side, but I’m with you. I think more will come in the immediate day or two, and then we’ll get potentially further outcomes from these other upcoming meetings. The most important to me is whether or not they extend the Busan kind of agreement.
I think from the Chinese side, that’s the main thing they want, basically an agreement that we’re not going to go back to backsliding. We’re not going to continue taking actions on an ongoing basis against each other, specifically on the export control side. And so, I’m quite sure that that’s one of the main things that the Chinese want to make sure gets agreed to. So we’ll be on the lookout for that. I wish we had a little bit more information, but as you said, at the very least, there was no backsliding, right?
We’ve got more meetings on the book. So, I think overall, we’re feeling okay about this meeting. The expectations were low, as we think they should have been, and we didn’t really expect anything. Both sides managed expectations well going into this, that there wouldn’t be a ton of really big concrete deliverables. But also, it seemed like there was good interactions between the CEOs, the U.S. CEOs who were on this trip and the Chinese leaders as well, specifically Li Keqiang. So also, some momentum on the commercial side, again, absent any specific deals. But if we’re grading on vibes, the vibes were good. And at the very least, that keeps us from going backwards, which I know sounds like a low bar, but is actually at this stage quite important.
Okay, Cory, that’s kind of my immediate high-level take. Not a lot groundbreaking. What else are you on the lookout for just quickly?
Cory: Yeah, I mean, first off, exactly, just to summarize, it was a low bar. And I think that’s a perfectly fine summary of the whole situation. Beyond the export controls, obviously, that’s the number one piece, get an extension of the postponements from Busan. And just for anyone wondering, it’s like, you know, why does China want the postponement? China wants stability. And in its view, having the export control situation basically, at least officially speaking, even if it gets undone later, having that on the books is stabilizing. You know, we’ve heard suggestions that they would push for that even through the end of the Trump administration, right?
So, this isn’t just a US needs this situation. China is also very much pushing for that as far as we’re aware. So, we think there’s a very good chance that it happens, high likelihood that it happens. The other piece that I think there’s maybe a little bit more of a question mark around is the board of investments. And for those who somehow have avoided having to think about this constantly for the last months, it’s been proposed, the board of investment is supposed to be an instrument or a mechanism through which the two sides can set rules and basically agree upon what is an appropriate manner, space, form, amount of investment, Chinese investment into the U.S.
Now for the U.S., obviously, there’s a lot of investment the U.S. needs, frankly. And there’s a lot that politically would be a win for Trump. If he gets a bunch of Chinese money into the U.S. economy that, you know, if framed properly and not kind of rubbing up against NATSEC interests, national security interests, could be a huge win. At the same time, you have plenty of forces pushing against that. There are plenty of forces who think the U.S. needs to be less entangled, not more entangled with China. So there is a tension on the U.S. side, even though Trump himself seems to be kind of eager to get Chinese investment in some capacity.
On the flip side, it seems quite clear that China really does want supportive investment, even if it’s going to be conditioning a lot of the investment. It would provide a more stable pathway and say, “Hey, we agree China can invest in XYZ.” That’s terrific for Chinese companies who just need the certainty to be able to make investments, right? And so that’s still unclear exactly where that is, where that stands. You know, publicly speaking, it’s still in the offering, as far as we know. There have reportedly been further conversations around this, but it’s not confirmed what exactly is happening with it right now.
So, to me, that is really beyond the export control piece. That’s the longer term, more than immediate soybean purchases or something like that. That to me is a structural driver of relations to come. If the board of investment comes through, its actions will be kind of the next mechanism to watch in terms of what’s shaping the interactions.
Andrew: Yeah, definitely something to keep an eye on. I think the only other thing maybe to note is the two sides did talk about Iran. It doesn’t seem like they made a lot of progress. Like we said, there were no real concrete outcomes at all from this meeting, including on Iran and potential Chinese support for sort of finding an off-ramp or an end to the war in Iran. That said, Trump did note that he thought that he and Xi Jinping were on the same page when it came to Iran, saying they both do not want to see a nuclear Iran and that they both want the Strait of Hormuz open.
And I think that’s probably right. I think China probably does want both those things. I thought, interestingly, Xi Jinping made remarks like, we want the Strait of Hormuz open and we don’t want a situation where there’s tolls on the waterways. We want a free and open waterway. We basically want back to the status quo ante. And he did indicate they’re willing to help figure out how to do that, but no concrete commitments from either side. The U.S. did, at least Marco Rubio, U.S. Secretary of State, when talking to reporters said, you know, “We don’t want China’s help here. We don’t think we need China’s help.” So, whether that’s Shriver just posturing. It seems like the U.S. side wasn’t trying to negotiate towards that, and nothing really came of it.
That said, China is definitely helping behind the scenes to cajole the Iranians to the table and to try to get an off-ramp together. So, just another interesting piece of this where we thought maybe Iran would be a little bit more… some actual concrete moves by the Chinese might be part of a broader negotiation of outcomes, but that also seems to not be the case. So, I think it sounds like the Chinese will continue to play sort of a background role, and the U.S. will try to talk with the help of the mediation of the Pakistanis to the Iranians, and that China is going to maintain an arms-length distance. I think, as I understand it, the Chinese are doing this on purpose because they sort of see potentially their involvement as just making it more complicated for the U.S. to say yes if they do come to a deal.
But they do play a role in at least getting the Iranians to come to the table because both sides have walked away from the table at various points. And I think the Iranians think that the U.S. political calendar maybe plays in their favor. So, at the current moment, they may try to be buying some time. But Xi Jinping has been clear, at least from his perspective, he would like this thing to be over. And I think he’s not alone there, actually. We won’t get into the specifics.
Cory: Yeah, that’s an understatement.
Andrew: Yeah, yeah, an understatement for sure. Yeah, yeah, yeah. Well, we won’t get into more dynamics of the specific Iran war negotiations between the U.S. and Iran. That’s not really our bailiwick, but just kind of a little color there on how that played into this meeting. I think otherwise we can wrap it up there. Like we said, like a lot of times these meetings happen and there’s a lot of sort of hot takes on, “Oh, this was a nothing burger, or actually the outcome is more impactful than people are giving them credit for.” But at this stage, there are literally no outcomes from this meeting.
So, there’s no spin when we say it was nothing burger. There just is nothing. That said, the goodwill shown at the meeting was positive. In my view, the sort of personal diplomacy between Xi Jinping and Donald Trump seems positive, and in the fact that there seem to be more meetings on the books with eventually some likely deliverables on the way. All bodes pretty well. As you said, good way to sum it up. Low bar, but bar met. So that’s where we are. Cory, any last words?
Cory: Yep. It needed to happen. It’s not the most exciting thing, but it happened. And I think that sets us up for more exciting things to come, hopefully in the positive direction and not the euphemistic direction.
Andrew: Well said. All right. Well, just want to do a quick reaction and we’ll leave it there. Thank you, Cory, for joining me today. Really appreciate it, man.
Cory: Cheers. Always a pleasure. Thanks so much.
Andrew: Thanks, everybody, for listening to this part of the pod. Stick around for my conversation with Dinny McMahon on monetary policy. And also make sure you tune in next week where we will dig into more of these issues with John Czin from Brookings. All right. Up next, me and Dinny.
I’m joined now by Trivium’s Head of China Markets Research, Dinny McMahon. Dinny, how’re you doing, man?
Dinny McMahon: I’m good, mate. Good to see you.
Andrew: Yeah, good to have you back on as always. And we’re going to get into some more China macro stuff. Specifically, we are going to talk about the PBoC’s quarterly monetary policy report. So that may seem dry, but it’s actually super important in terms of how the central bank, China’s Central Bank, is thinking about managing the economy. And we won’t be talking hard data on the economic outlook or anything like that, but more economic policy as through the eyes of the PBoC. I think one of the reasons that this is so important is I often say when I’m talking to clients and potential clients, so what we do at Trivium, at least on the market side of the business, is that what we do is like Fed watching on steroids. So, we’re watching for small changes in language that will, in the conversation among policymakers around that might impact the trajectory for when you’re watching the Fed, interest rates, for example.
And that’s true for the PBoC as well. Of course, they set interest rates, but kind of have a host of other tools. There’s no more activity akin to Fed watching than PBoC watching and pulling apart the PBoC quarterly monetary report. So that’s what Dinny and I are going to go through today. This report came out on May 11th. So, four days ago, we’re recording on May 15th, Friday at 4.45 p.m. So, Dinny was kind enough to come on near the end of the week before we start our weekend.
We’re going to talk about PBoC signaling on the currency, on the yuan, on monetary policies more generally, and on interest rate reform. And we’ll also talk a little bit about trade and property at the end. So, with that in mind, Dinny, let’s just get into it. Start us off on what you saw on currency, because for those who don’t know, maintaining a stable currency is the PBoC’s number one job, right? It’s like written into the PBoC law, the central banking law — kind of like the Fed’s dual mandate is inflation and employment, the PBoC’s fundamental mandate is on the currency. So talk to us about what you saw there.
Dinny: Okay. Well, just to double down on your warning. I mean, this is about to get incredibly weedy.
Andrew: That’s why the people come.
Dinny: Is that what they tell you?
Andrew: Well, that’s what they say. Maybe they’re just, yeah, maybe they’re blowing smoke, but that’s what people tell me when they talk to me about the podcast.
Dinny: Okay. So, what we’re going to talk about, it has a lot to do with expressions that were in this report that weren’t in the last report, and kind of there’s a lot of reading between the lines as well, or kind of reading the tea leaves. So, with regard to currency, the thing that really jumped out about this quarterly report, so it’s a first-quarter report. Comes out about a month and a half. Each of these quarterly reports comes out about a month and a half after the end of each quarter. So, first quarter report came out more or less the middle of May. The big thing that jumped out at us on the currency issue was the reappearance of this expression that the PBoC would create a stable exchange rate environment for the real economy.
Now, that sounds pretty innocuous, but that’s boilerplate wording that had been the PBoC’s reports for a full year from the fourth quarter 2024, all the way to the third quarter of 2025. And then it’s notable because the PBoC dropped it for the last monetary policy report, the one that they published in February. That was really interesting because they got rid of that expression and then there was a real surge of appreciation of the currency. More or less coinciding when that report was published, the renminbi appreciated about 4% against a basket of currencies that Beijing sort of pegs the currency to or manages the currency against, about a 4% appreciation over the space of two months.
And that was far faster than anything we’d seen really in over a year, probably even longer. I think over the previous seven months, the currency had appreciated 3.6% against the basket. So, shooting up 4% over two months, that was a big deal, and it was a real change. And, as I said, that expression, that talk of creating a stable currency environment for the real economy, that wasn’t in the report anymore. Anyway, lo and behold, it’s now back in the report. And so, what we think that is signaling is it’s not telling us anything about the direction of the economy. It’s not telling us if the currency is going to appreciate or depreciate.
But what it says is the priorities of the PBoC has now shifted. It’s going to be less tolerant volatility. It’s going to be less tolerant of a fast appreciation or depreciation. And the focus is now on stability. And I think this comes back very much to what’s happening with the Iran war. Chinese exporters or firms, more generally speaking, are dealing with a lot of uncertainty at the moment with regard to commodity prices, with regard to the availability of the inputs that they need, even in terms of shifts in global demand and whether countries overseas actually will need Chinese exports in the volume that they previously had.
So, given the uncertainty of what’s going on globally, the PBoC is now saying, “Well, one thing that we can do is limit the uncertainty in the currency space.” So, I think that’s kind of what the report was sort of signaling for the next few months, that the Iran war is causing headaches for firms globally. And so, the PBoC is going to do the one thing it really can do to lessen uncertainty for Chinese firms.
Andrew: You mentioned that that doesn’t really give us any clear read on whether there’s a preference for currency appreciation or depreciation, particularly versus the basket. But, you know, what’s your expectation kind of now that the, I guess, initial shock of the Iran war has filtered through? There are obviously may be lingering impacts. And I guess I wouldn’t describe them as shocks anymore. That part seems to have happened. But what do you kind of think is on the horizon in terms of currency direction?
Dinny: Well, my working assumption is that to the extent that Beijing wants to use the currency in a way to sort of advantageously in the interest of the economy, I don’t think they’ve necessarily worked out what they want to do yet. And what I mean by that is that clearly China, as with everybody else in the world at the moment, China’s dealing with imported inflation. I mean, that’s something that the PBoC said explicitly in this monetary policy report. So, on one level, if they allowed the renminbi to appreciate, that would lessen the impact of that imported inflation because it would mean that in renminbi terms, the cost of importing stuff overseas wouldn’t be as bad as it otherwise would be.
But the other side of the equation is that rising energy prices globally are sort of smothering global demand, right? So, a lot of the countries that China is increasingly dependent on as export markets, like places in Africa, South Asia, Southeast Asia, those economies are often very sensitive to changes in energy prices. And so, the potential for that very quickly to sort of feed through into less domestic demand, less willingness for households to spend, that could result in a weakening of Chinese exports.
It certainly didn’t really come through in the trade data yet, but it’s still sort of relatively early days. What’s probably happening is Beijing is taking a wait-and-see approach because on one level, yeah, a stronger currency would help lessen the impact on kind of how firms and households are sort of experiencing inflation domestically. That’s what a stronger renminbi would do. But a weaker renminbi would potentially help protect China’s export markets. So, I don’t think they’ve necessarily made a decision one way or the other at the moment.
They’re going to probably sit back, look, you know, which way things are going, and then kind of decide whether it is worth deploying, trying to deploy the currency one way or the other, depending on where the greater need is. But I don’t think we’re there yet. I mean, typically, I think that Beijing is less interested in guiding the renminbi in a direction these days and more kind of just keeping it within a range. So, I think even that would represent, you know, trying to deploy it strategically, like along the lines I was talking about, that would sort of represent a bit of a shift.
I think that’s kind of the calculus that’s sort of dangling there over the horizon at the moment. But as I said, I don’t think there’s any sign that they’re moving in one direction or the other as yet.
Andrew: Yeah, I want to move to monetary policy, but I have two other items on this currency thing. One is just a comment and then a kind of follow-up broader question, which is to say really throughout 2016, 2017, the PBoC, there was a lot of currency volatility at that time. The PBoC really started talking a lot about how it views its role as a counterweight, to be a counterweight to the market, right? To basically keep the currency from becoming a one-way bet, either towards weakness or towards strength, right? So, if the currency has a heavy pressure to depreciate that can lead to capital outflows. If it has heavy pressure to depreciate, it can lead to very strong hot money inflows, carry trade, all that stuff, which creates different headaches for the PBoC.
It’s got to sterilize those dollar purchases when it’s trying to slow the pace of appreciation, all that stuff. And so, they were just kind of saying like, “We do not want large bets to build up either way. And so we’re going to kind of keep the market off guard to an extent by adjusting the fixing in sometimes unexpected ways.” You characterized it as kind of keeping the currency in a range, but I think that’s a big part of what they’re doing. They never really want a clear view, one way or the other, in terms of a large move up or down, at least vis-a-vis the dollar, right? In terms of the U.S., the dollar China, the USD/CNY exchange rate. So, that’s just something to keep in mind. I think that’s a fundamental principle. And one of the things that it’s a main framework for how I look at the PBoC’s actions and has been for now about 10 years. I think it’s been pretty good at explaining a lot of the PBoC’s actions. That’s just the comment.
The question is, what do you think the main target is now for the exchange rate? Is the PBoC managing the currency primarily against the dollar or primarily against the basket of currencies, trade-weighted basket of currencies? My assumption is always kind of like the dollar is still king, the dollar exchange rate. But am I wrong on that? You think they’ve shifted more towards the basket?
Dinny: I think when it comes to managing it on a day-to-day basis, the dollar is still king because, you know, you look at when the renminbi gets too weak or it gets too strong, all of a sudden it’s very clearly we hit a limit and the PBoC just keeps setting the fixing at the same level more or less at the same level over and over again to prevent it from sort of moving beyond the level that the PBoC is happy with. And it does that with the dollar. And so, I think, yeah, you don’t kind of see that playing out so much with the basket. You see that sort of intervention with regard to the dollar.
But I also think that the basket’s incredibly important because in terms of efforts to drive renminbi internationalization, what they really want is, I mean, when they talk about the value of the renminbi being potentially a good reserve currency or a good global currency, it’s because one the PBoC pursues responsible monetary policy and secondly because the renminbi is relatively stable right. and it’s not just stable against the U.S. dollar, it’s stable against all its other major trading partners. And so, think that’s where the basket is important because they kind of have one eye on like you know in a world where the dollar was less important. Everybody else in that basket, the Singapore and Malaysia and, I think, Canada and Korea, they all kind of have to look at it and go, “You know, our currencies, regardless of what the dollar is doing, are still relatively stable to the RMB. So, I think the authorities probably have one eye on that as well.
Andrew: Good thoughts. Good comments there. Let’s move to monetary policy now. The rest of the world is looking at potentially higher rates, right? Increasing rates to combat inflation. Correct me if I’m wrong, but the Australians just recently raised rates?
Dinny: Yeah, I think they put up interest rates. I’ve got Aussie dollars. I should be paying attention to this.
Andrew: Pop quiz.
Dinny: The Australian government takes half of any interest I get because I’m non-resident. So, I guess that’s why I’m less engaged than I should be.
Andrew: From macro issues to very micro tax and personal issues. Yeah, there’s a bunch of different reasons to watch the markets.
Dinny: Exactly. If anyone wants to mail in with tax advice, please go ahead.
Andrew: So, well, on the monetary side, when it comes to China, so like I said, the rest of the world potentially looking at higher rates. Australians have already moved. But China’s been looking at going in the opposite direction. And we should say, you know, there’s a bunch of stuff. Uncertain people are still potentially expecting the U.S. to cut. It really depends on how all the stuff from Iran filters through. We’re not making a call on developed world monetary policy, but what we do know is that China has been expected to cut, or was expected to cut in 2026, but now those cuts are likely on the back burner for a bit. Tell us kind of where the PBoC’s head is on the interest rate piece.
Dinny: Okay. Tell you what, mate, talking about interest rates on a Friday afternoon is proving harder than I ever would have thought.
Andrew: Oh, yeah. You want to get into that tax discussion.
Dinny: Exactly. Okay, so deep breath. So yeah, you’re right. I mean, the talk for however long is, I mean, China is in a rate-cutting cycle, and it has been forever. I mean, to the extent that renminbi has really sort of gathered appeal as an international currency over the last few years, it’s because interest rates have been as low as they are. They’re so much lower than anywhere else in the world. I mean, we just recently wrote a thing about like demand for foreign issuers. So, sovereigns of panda bonds, which is like onshore, you know, bonds issued on shore in renminbi is the strongest it’s ever been.
I think, you know, last month, Slovenia issued a bond, Kazakhstan’s Sovereign Wealth Fund just did, Pakistan’s thinking about it. Indonesia’s planning to do it next month. And the reason is because interest rates are low. And more importantly, the expectation is they’ll get lower. Right? And so that’s kind of been baked in for ages, except, and we’ve talked about this ad nauseum, is that we had one interest rate cut last year. PBoC flagged that there would be another one this year if they could manage to get banks’ net interest margins up.
And, as I said, we’ve talked about this heaps. The reason the PBoC isn’t cutting is because they don’t want to erode bank profits beyond what they already are. Net interest margins for the banks are well below the critical safety level. And so, the PBoC doesn’t want to cut further unless they can be relatively confident that they’re not further eroding bank profits. And one of the deputies of the PBoC said this explicitly back in January, I think it was, you know, we’re doing everything we can to cut bank funding costs. There’s a lot of forces that we think are working in our favor this year.
Once that happens, then it opens up space for an interest rate cut. Now, it seems that even that cut is less likely. And the change in wording for the monetary policy report was the PBoC is still committed to maintaining a moderately loose monetary policy, which they sort of, I think it was the new wording that they rolled out in the last policy report, which is in February. But the thing that they changed is that their approach to delivering that moderately loose monetary policy will now be flexible as opposed to comprehensive.
And it’s in that one word, flexible, I mean, that sort of, it speaks, you know, it contains multitudes. And what it really seems to be doing, I mean, what seems to have happened is that the Iran war has completely flipped the script so that the goal was to cut rates. And now that inflation is rising and that the rest of the world is potentially going to be raising rates, then maybe an interest rate cut in China doesn’t make as much sense anymore. And again, I mean, going into the weeds of the words that they use in the monetary policy report, the PBoC said it would closely monitor changes in the monetary policies of major overseas central banks.
And again, this is boilerplate. This has been in every monetary policy report for the last two years, except the last one. And so, in the last one back in February, there seemed to be a lot more scope for monetary policy changes. They were a lot less worried about the international environment. They thought that they could focus a little bit more domestically. Iran war happened, and now we’re kind of back to where things used to be. So, I think there’s this reluctance to cut because of the uncertainty. And so, everybody, I mean like all the investment banks, everyone’s saying, “Okay, we’re revising our interest rate cut expectations for the year. We now don’t think there’s going to be a cut.” And so, I think that’s probably pretty reasonable I don’t think a cut is necessarily completely off the table. I think that we’re now in a point where they’d like to have the option of being able to cut.
So, I think all those efforts of trying to reduce bank funding costs, they’ll sort of continue in earnest. But cutting rates is now an option. It’s not an eventuality. And it’s the sort of thing that’s going to depend very much on how the PBoC sees sort of the shifting global environment.
Andrew: Well, how impactful is that sort of rates have moved to from an option or an almost or, sorry, from an eventuality, from basically a certainty to sort of more of an optionality type thing? Will the impact be on the economy and monetary environment and all that stuff?
Dinny: I mean, frankly, it doesn’t matter at all at this. At this point, trying to work out whether China is going to cut interest rates is a parlor game, right? So, even if, back a few months ago, even if the bank’s interest margins had increased and the PBoC was confident enough to cut interest rates, all we were likely to get this year was a cut of ten basis points. And that is not going to move the margin in any way, shape or form. I mean, at the most, it’ll perhaps help improve some firm’s profitability, but it’s not going to do anything. It was never going to do anything to stimulate economic activity. It was just going to make life marginally easier for some firms that had borrowed, wasn’t really going to do anything in the first place anyway.
And realistically, as I said, we had one interest rate cut last year. Rates need to be falling given the state of the domestic Chinese economy, and yet the PBoC hasn’t been delivering. But market rates have. So, if you look at the overnight rates, you look at the seven-day repo, you look at one-year interbank lending rates, they were all at record lows. So, I think, was it this time last year or late last year? I forget when, but we got to the end of a bond bull market and the PBoC did a bunch of stuff to kind of pull yields out of the abyss and they kind of went up a little bit. And then they’ve just, over the last five months, have been going back down again.
And we’re now at, over the last couple of weeks, maybe even just the last week, we’re down at record lows. Now, at the long end, things aren’t quite the same. 10-year bonds, the yield on 10-year Chinese government bonds aren’t as low as they used to be. So, there’s been a bit of a steepening of the curve. But at the short end, interest rates are at record lows. And then you look at the way banks lend as well. When the PBoC cuts rates, the implication is that it feeds through interbank lending rates via the loan prime rates. There were two loan prime rates.
They are, in theory, the rates that the biggest banks in China give their best customers. And yet those loan prime rates have become increasingly irrelevant to the way that banks set interest rates. I think when the five-year loan prime rate was introduced, I think it was in 2019, I think only about 15% of all bank loans were priced below, long-term loans were priced below the loan prime rate. And now it’s something like 50%, which is mind-blowing. I mean, this is supposed to be the rate at which banks lend, make loans to their best clients. And yet pretty much half of the loans they make these days are below that level. So it kind of makes a mockery of what this is.
Andrew: Maybe they’ve got a lot of really good clients.
Dinny: Exactly. You know, you’re right, Andrew. That’s exactly what’s going on here. We’ve completely misjudged the value of China’s property developers and local government financing vehicles. So, it does make a little bit of a mockery of what the loan frame rate is supposed to be in the first place. But it kind of speaks to what’s going on with, with interest rates, even without a cut in a year. Because that’s that was the last time that PBoC cut interest rates. The actual loan, the rates on loans that banks are making, the rates on interbank costs, interbank lending is coming down. So, you know, even if the PBoC isn’t cutting, the market is adjusting to the economic realities that credit costs need to be lower than officially where they should be.
Andrew: Yeah, well, and we won’t get into it now, but that also plays into the whole idea of the balance sheet recession, right? Where, you know, it doesn’t matter how low the cost of credit, people don’t want to borrow just because they either have high debt loads in their balance sheet or they just don’t see economic prospects for borrowing to invest. And typically, in a balance sheet recession, monetary policy is pretty ineffectual. So, cutting doesn’t really make that big of an impact, as you kind of said earlier, but still important kind of dynamics to keep an eye on here.
And kind of stepping back a little bit, you also mentioned, or we talked about it at the top, PBoC also talking about interest rate reform efforts in this monetary policy report. What was going on, on that side?
Dinny: Yeah. So I said at the beginning that this involves a lot of reading between the lines or reading the tea leaves. And I mean, this is really an exercise in that, but I’m still reasonably confident that this is what’s going on. So, in these monetary policy reports, most of it is the PBoC going over key data from the previous three months, and then there’s a section at the back which is a little bit forward-looking, and that’s where this stuff about the currency and you know flexible monetary policy, so much of that’s kind of in this like the final section. But then every one of these reports, the PBoC has these columns or boxes. They’re printed in blue. They’re a little bit different from the rest of the report. And no two columns are the same. Right?
So, it’s something that’s kind of top of mind for the PBoC each quarter. And every quarter, there’s going to be a different set of columns. And one that was particularly interesting, this quarterly report, it was on other countries’ loan pricing benchmarks. And it often does this. It’ll write something up in these columns, which seems to be purely educational. It’s like, “Oh, here’s something interesting about how other countries do something with respect to their currency or managing monetary policy.” But even though it kind of is framed as a purely educational sort of thing, more often than not, what they’re trying to do is lay the groundwork for some sort of reform.
So, this particular column was about how most countries, they’ve got two different benchmarks for pricing loans. One is a short-term interest rate, something like LIBOR or SOFR or whatever that sort of prices, you know, it’s a floating rate for short-term loans. And then they have another benchmark for long-term loans, usually long-term fixed rate loans, which is typically mortgages. And China does have benchmarks. It’s trying to develop what they call the DR007, which is the seven-day interbank repo rate as kind of like a benchmark for pricing short-term floating rate loans.
But when it comes to long-term loans, particularly mortgages, China does it very, very differently from the rest of the world. So, in most of the world, well, particularly places like the United States, and I think Japan as well, I think also the column shouted out the UK, I’m not entirely sure — long-term fixed rate mortgages, or at least the portion of a mortgage that’s fixed rate is typically pegged to a 10-year government yields. That’s certainly the case in the United States. And that is a constantly changing price. It is a market price. And although it’s influenced by the policy rate, so you’ve got the Fed funds rate, which is an overnight rate, and whenever the Federal Reserve changes that, it trickles through the entire system and all interest rates sort of adjust accordingly.
But even though that’s the case in these sort of longer-term rates that are influenced by the short-term fed funds rate, it still kind of has a life and a mind of its own. And sometimes the spread between short-term and long-term rates are wide and sometimes it will narrow. And so there is a real reason why you price long-term mortgages against a long-term interest rate rather than a short-term thing. Now, as I was saying, in places like the United States, mortgage pricing, interest rates are benchmarked on a 10-year Treasury yield.
But in China, the benchmark for mortgages is the five-year loan prime rate, which I was talking about a minute ago. Firstly, a five-year rate isn’t that long-term. If we’re being generous, it’s kind of a medium-term. But the other thing is it is not a dynamic market rate. It is a fixed rate which never changes unless the PBoC changes its policy rate. And so, when it changes its policy rate, which is a seven-day reverse repo rate, the five-year loan prime rate moves a comparable amount. And so, it’s not a market rate. It’s based of a short-term rate. It very rarely changes.
And it does not reflect credit conditions at all. And so what my guess is, is sort of reading between the lines is that the PBoC might be laying the groundwork for changing the way that mortgages are priced in China. That sort of they get rid of the sort of the absurdity of pegging them to the five-year loan prime rate, and they start using the 10-year Chinese government bond rate. Now, a few years ago, that might not have made a lot of sense because maybe Beijing didn’t feel confident enough that Chinese treasuries, Chinese government bonds properly were probably sufficiently representative of market rates.
But, was it last year or the end of the…? I think that may be in the end of 2024, the PBoC started intervening in the government bond market, buying and selling bonds on a month to month basis to properly ensure that the yield curve, to sort of smooth out the yield curve and do whatever it thought was necessary to ensure that at any given tenure along that curve properly reflected what the market rates were. So, I think the government or the PBoC is now probably more confident that the 10-year yield on government bonds probably is now a high functioning rate that you could start pricing mortgages off. And I think the other thing here as well that’s worth considering is making the shift to 10-year Chinese government bonds. Is that you’d potentially now reduce the interest rate on mortgages.
And the reason I say that is that over the last five years, I think, the spread between the yield on 10-year Chinese government bonds and the five-year loan prime rate has been getting bigger and bigger, right? So as 10-year government bonds have kind of declined and got lower and lower, the loan prime rates barely moved at all. And so, I think by sort of shifting to the 10-year government bond rate, there’s a potential for mortgage rates to be lower. And particularly if those yields, if those market rates continue to fall as well, that kind of opens up the potential to kind of stimulate demand for mortgages as market rates fall without needing to cut interest rates.
So, I think there’s a lot going on there. But I think the significance of this fairly educational column about sort of talking about, “Oh, isn’t it interesting how other countries price mortgages different from China?” I think reading between the lines there, the PBoC is sort of laying the groundwork for shifting how mortgages are priced.
Andrew: Great explanation of what’s going on there. We’ll obviously have to see as to whether they make those reforms on kind of a concerted basis going ahead. But as you know, this is often where moves like these first start to show up before they get enacted. So, it’ll be a long-term thing, but we’ll keep an eye on it. You just talked about a key piece of the potential interest rate reforms being on the mortgage side. Talk to us about property because there was an interesting development in terms of how property was characterized or not in this monetary policy report?
Dinny: Yeah, the really interesting thing about property is that it just didn’t come up for discussion at all, which is mind-blowing because it’s always in the quarterly monetary policy reports. The PBoC always has something to say about the development of the new real estate model or relending quotas or something, but this time just crickets. And I think, more than anything, it just reflects the reality that the PBoC has kind of become quite irrelevant to sort of reviving the fortunes of the property sector. You know, they’ve rolled out relending facilities in the past to kind of stimulate purchases of certain types of houses, and they’ve never really worked. In previous times, they’ve used the pledged supplementary lending facility, which is…
Andrew: We need to start doing cold opens, and that would be the cold open this time.
Dinny: I thought you were going to say we need to start drinking when we do this.
Andrew: Well, that too, but that would be the cold open — You trying to say the word supplementary. Anyway. Sorry, keep going.
Dinny: Yeah, but anyway, this particular facility is when the PBoC lends to the policy banks, and the policy banks traditionally played a really big role in trying to support the property sector, whether it be affordable housing construction, urban village redevelopment, dual use, public infrastructure, all of this sort of stuff. But, in the fourth quarter of 2025, the total amount of outstanding funds lent under that facility shrank by over a trillion RMB. So, the reality is that the tools that the PBoC use for supporting property sector, they’re just kind of irrelevant at the moment. It’s not that the central government isn’t doing anything meaningful to deal with property sector stresses.
I mean, over the past year, the degree to which local governments have deployed special purpose bonds to buy back land from developers and local government financing vehicles has been really quite aggressive. I mean, I think over the first four months of this year, it’s already up to, I think, 130 billion RMBs worth of SPBs have used to buy back land. So, it’s not that the central government has completely washed its hands of it. It’s just PBoC has kind of been irrelevant, and the tools that it’s used in the past just haven’t really worked at all. So, I think that’s where it’s at.
I think it’s just a recognition that there’s no real point in the PBoC concerning itself with or talking about property sector anymore because it’s a complete sideshow as far as the central bank’s concerned.
Andrew: Yeah, well, it’s certainly an interesting development. I mean, you know, just another in the long line of evidence, pieces of evidence that property’s less, far, far, far less central to the economic growth model because, I mean, the PBoC managing credit policy to effectively manage the property cycle has been the main action for a long, long time. I mean, it’s a pretty big deal that the PBoC is seemingly sort of saying a hands-off the wheel on this one, but we’ll see. I mean, you never know what the future monetary policy reports and future monetary policy thinking will yield on that front. So, it could just be a temporary thing, but interesting things for that. Let’s wrap up by, you know, there’s another really interesting section in this report on trade, right?
The monetary authorities don’t usually talk all that much about trade. Yes, they manage the currency, which impacts trade and vice versa. But they specifically spoke about the trade surplus. And that’s kind of been in line with some of the other commentary we’ve seen from officials on China’s trade surplus. So, walk us through what you made of their comments there.
Dinny: Yeah, I found this really interesting because what the PBoC argued is that this is effectively the line, it’s like, don’t worry about China’s trade surpluses. They’re actually good for the world. Because what they were arguing is like, look, we don’t simply accumulate trade surpluses. Those surpluses then, by their very nature, recycled out into the global economy again as foreign direct investment or outward direct investment, as cross-border lending and portfolio investment. So, investments in other countries, government debt, stock markets.
And this is specifically what the PBoC said. “This sort of outward investment promotes employment growth and industrial development in other countries, and it provides funds and liquidity support to foreign financial markets.” Now, of course, that’s sort of the corollary of any country’s trade surplus. If you’ve got a net inflow of funds via the trade surplus, it’s got to flow out again through the capital account and more importantly through the financial account. Now, traditionally, the massive trade surpluses that China used to accumulate would go straight into the foreign exchange reserves, and they were then mostly invested in U.S. treasuries or other countries’ government bonds.
And so there was kind of a very limited sort of global impact on that. But what the PBoC has now changed… but that’s not the case anymore. So, China’s foreign exchange reserves have barely increased for years now. And what that means is that the foreign currency or the earnings from China’s exports, they go into the banks, the commercial banks, and then the banks themselves make a decision as to how those funds are used. Do they exchange them for another currency or for renminbi? Do they invest in foreign securities themselves? Do they use them to make foreign currency loans? Do they give them to Chinese companies that are investing overseas?
And what the PBoC is arguing is that, look, the way China manages this sort of inflow of funds from the trade surplus is so radically changed over the last few years that now the way China deploys those funds back into the global environment, a net benefit for the rest of the world.
Andrew: Convenient.
Dinny: It is. I mean, the argument’s a little bit, I mean, they’re not wrong, but it’s a little bit self-serving. But I mean, any country that’s sort of been in this position, I mean, you look at the Middle East countries, I mean, this is what petrodollars are, right? Earning massive trade surpluses from the sale of oil. The quid pro quo is that they then invest in U.S. government debt. Or if you look at the British economy during, what, the 19th century, you know, running a big trade surplus, what did they do with the funds? Well, they invested in things like railroads in the United States, railroads in Argentina, sort of opened up the Pampas and the cattle raising districts.
When you kind of have those resources, you then use them to invest in infrastructure or factories or do something overseas that generates return. And now the PBoC is going, well, that’s what China’s doing. And you see it with Chinese firms setting up factories overseas. You see it in Belt and Road Initiative. I’m not exactly sure as to exactly what sort of the breakdown is or where these funds are going. But as far as the PBoC is concerned, this is like this is creating jobs and it’s providing financial stability for countries overseas.
But as I said, I mean, at the end of the day, it’s pretty self-serving because the criticism of China’s trade surplus is that China set up a growth model that is structurally tilted towards overproduction. And that leaves global demand, foreign demand to absorb that excess output. Or, I mean, the Michael Pettis argument that this is effectively a better-than-neighbor sort of strategy. And so, I don’t think anyone’s arguing that, yeah, once you run a trade surplus, the money’s got to go back, and invariably it ends up in productive investments in the rest of the world.
The argument is that China shouldn’t be in that position because the way that it’s managed to build up these trade surpluses in the first place.
But I think, regardless of the merits of the argument, what this sort of represents is that the PBoC or China, Beijing writ large, is sort of building an intellectual scaffolding to defend its continued reliance on export-led growth. What it signals is that it’s not about to pivot anytime soon. It’s not like, oh, this aggressive export growth is an anomaly and things will go back to normal soon. No, what they’re sort of developing is the arguments to say, “Not only are we going to keep doing this, but doing this is actually a good thing for a whole lot of countries in the world. And so, we’re going to stick with it.”
So, I think that’s kind of what the subtext is here. It’s like they’re trying out arguments to justify why they’re going to stick with this approach.
Andrew: Yeah. I don’t even know if it’s subtext. It feels like it’s basically a text.
Dinny: Yeah, I think you’re right.
Andrew: I mean, we’ve talked a lot about this. We’ve seen this in many different ways, including having talked on the pod about at the China Development Forum. And I think I mentioned it even a couple of weeks ago where senior officials are saying, “It’s an export model, get used to it, like it or not.” And that maybe they’re trying to soften the edges a little bit by saying, “Oh, and by the way, it’s good for you.” So, it is interesting that they’re just being so overt and not in any way trying to say, “We’ll take other countries’ concerns into account.” It’s like, “No, not only are we going to stick with a plan, but your concerns are invalid because this is actually good for you.”
So that’s going to go exactly nowhere in terms of like, you know, alleviating trade tensions with trade partners, but still interesting to see it happening. And just, yeah, interesting that the system is kind of moving in this direction on that issue. I mean, it only just, certainly, to me, reinforces the conviction that they’re going to try to actually push the export model as far as they can, like to the breaking point, unless anyone or any group of countries really push back. And so far, no one’s really pushed back. I mean, the U.S. has put on tariffs, but that’s mostly just diverted low-end exports from the U.S. to Europe. It hasn’t fundamentally changed the way China approaches global trading.
So, interesting, really interesting that showed up in the report. Thank you for walking us through that. Thanks for walking us through all of it. A bunch of interesting stuff in there. Dinny, as always, thanks for the thoughts. We’ll continue to sort of monitor all of these issues and see how it plays out, how these developments affect the economy, property market trade, and everything else, monetary policy, etc., going forward. So, thanks a bunch for your time today, man.
Dinny: No worries, mate. It’s a pleasure.
Andrew: All right, buddy. Have a good weekend.
Dinny: Same to you, dude.
Andrew: And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
