If the US dollar cuts interest rates, will there be a trillion dollars flowing back to China?

Can we completely get rid of the liquidity crisis?

In the past few days, around the time when the US National Security Advisor Sullivan visited China, the internet was flooded with such news; is this a coincidence?

The key question is, will there really be a trillion dollars flowing back to China?

Can we just lie down and count the money?

How did the news of a trillion dollars flowing back to China come about?

This claim originates from Stephen Jen, the CEO of the British hedge fund Eurizon SLJ Capital and the proponent of the "US dollar smile theory."

A few days ago, as the expectation of the US dollar interest rate cut rose, Stephen Jen made a bold statement: with the US dollar interest rate cut, Chinese companies might sell a trillion dollars worth of dollar-denominated assets, which could cause the yuan to appreciate by 10%.

According to Stephen Jen's estimation, in recent years, Chinese companies may have accumulated more than two trillion dollars in overseas investments.

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When the Federal Reserve cuts interest rates, the narrowing interest rate differential between China and the US might stimulate a trillion dollars of "conservative" funds to flow back to China.

By now, everyone should understand that the so-called two trillion dollars of overseas investments is an estimate by Stephen Jen, and he used the term "might."

The flow back of a trillion dollars in funds is also "might stimulate," and these are not definite figures.

To put it bluntly, this is just a baseless claim without any tax implications.

So, how reliable is this data?

We believe another figure is more reliable.

A few days ago, a research director at Goldman Sachs said that Chinese companies currently have about 30 billion US dollars in overseas amounts not yet converted into yuan.

Due to the higher US dollar interest rates, companies temporarily keep the earned US dollars overseas without converting them, which is understandable.

If the US dollar interest rate is cut, through which channels will capital flow to China?

There seem to be three main channels.

1.

The familiar argument that US dollar capital will flow globally in search of valuable investment targets, which is commonly referred to as the dollar tide reaping the world.

2.

In recent years, as the US dollar has increased interest rates, capital from various countries flowing to the US will mostly return to their origins, with European capital returning to Europe, Japanese capital returning to Japan, and Chinese capital returning to China.

This is the part Stephen Jen mentioned.

3.

The funds that Chinese companies have not yet converted overseas will speed up the conversion process.

This might start in advance recently and not wait until the US dollar interest rate cut, which is the part mentioned by Goldman Sachs.

Some may ask, why would the capital flowing to the US from various countries return again?

Wouldn't the US dollar interest rate hike be in vain?

Indeed, wouldn't the capital from various countries stay and take advantage of the US?

For example, by investing in the US stock market or even in industries?

First, the capital flowing to the US from various countries will return because the US dollar interest rate has decreased, and there is concern about the depreciation of the US dollar.

Of course, some capital will also stay in the US, possibly getting caught up in the US stock market, or having gotten used to making money in the US in the past two years and not wanting to go back, or perhaps it was capital that left and cannot return.

Therefore, Stephen Jen said that Chinese companies have two trillion dollars of overseas investments, and there might be a trillion dollars flowing back.

However, let's think rationally, will there really be so many US dollars flowing to China?

Will we have endless money from now on?

Will the stock market and real estate all soar?

How could there be such a good thing?

Looking at the current situation between China and the US, there really isn't such an easy thing.

If it were 10 years ago, there might have been such a thing, but now the US has cut off the channels for capital to flow to China, and many investment areas are prohibited.

The first channel mentioned earlier, where US dollar capital invests globally, is estimated to have not much coming to China.

The second channel, where Stephen Jen talks about two trillion dollars coming back one trillion, is also a wild guess; whether the actual situation has that much is currently unknown.

There are two major issues here.

On one hand, these funds are very complex, and it's unclear what kind of money it is and whether it can easily return.

On the other hand, many of our companies are also investing globally, and some of these US dollars will also be invested abroad and will not return.

The third channel, the 30 billion US dollars mentioned by Goldman Sachs for conversion, is relatively more reliable.

Apart from a small amount invested or consumed, most are estimated to be able to return.

Finally, we want to ask an important question: Stephen Jen may also know that the trillion dollars is just something he came up with, so why does he still say it so alarmingly?

And why doesn't he talk about other countries specifically about China?

We need to understand who Stephen Jen is and whether his words are credible.

Stephen Jen proposed the US dollar smile theory, which is a theory that highly praises the hegemony of the US dollar.

It says that no matter whether the US economy is good or bad, the US dollar will appreciate.

What is the reason for this?

Simply put, when the US economy is strong, investors will chase high-yield assets, leading to the appreciation of the US dollar; when the US economy is weak, investors will seek safe-haven assets, and the US dollar will also appreciate.

Therefore, Stephen Jen has a mysterious worship of the US dollar and highly advocates for his American financial father.

His statement about a trillion dollars flowing back to China is fundamentally to attract attention and traffic by making sensational remarks, and it may even be that he throws out this false topic to help his American father intimidate China.

So, many of us should not always chase such thrilling topics; first, we should understand clearly before jumping to conclusions.