As in the past, it is doing so again while the renminbi is under appreciation pressure (https://www.reuters.com/business/finance/china-banks-raise-dollar-deposit-rates-amid-yuan-strength-sources-say-2026-06-05/?utm_source=chatgpt.com).

In our paper, summarized here, we document two relevant facts: (1) China’s foreign equity portfolio is already very large—official data put it above $600 billion in 2023, while our estimates suggest private holdings may have been closer to $800 billion and total holdings above $1 trillion once unrecorded and government-managed positions are considered; and (2) China has historically tended to open the portfolio-equity gate when the renminbi is facing appreciation pressure.

Chinese capital controls are better seen as a valve than a wall, and an integral part of the monetary reaction function. China does not necessarily want fewer equity outflows and also sees benefits in providing households overexposed to domestic real estate with better diversification opportunities. But it wants outflows it can monitor, tax, regulate, and turn up or down.

Our paper also shows that changes in Beijing’s capital-outflow policy can move the prices of U.S. stocks Chinese investors favor (including technology and growth stocks), even when those companies have little direct economic exposure to China.

In a paper published in the JIE in 2024 with Rashad Ahmed, we found that the elasticity of the treasury market to Japan's 2022 FX intervention was very large. (See section 6.1 at this link: https://www.sciencedirect.com/science/article/abs/pii/S0022199624001016.)

Japan intervened with about USD20 billion in September 2022. The estimated price imapcts are summarized here:

We were initially skeptical about the estimated price impact being so large. Subsequently, we realized that it likely depends on market conditions (https://cepr.org/voxeu/columns/reverse-conundrum-and-foreign-official-demand-us-treasuries).

Once again, as several times before over the last couple of years, the U.S. Treasury market is fragile, and the U.S. Treasury Secretary clearly felt it could not risk taking the pressure of a large Japanese sale.

The main one is that #energy, #technology, and #geopolitics can no longer be treated as separate domains. The conflict also showed how shocks now travel through indirect supply-chain channels, and how energy abundance is not the same as energy security, and how military power depends on industrial and technological chokepoints.

In an Andersen Institute for Finance and Economics blog with Daisoon Kim and Fabio Natalucci, we argue that the era of weaponized interdependence has begun — and that firms, investors, and policymakers need to plan accordingly.

https://anderseninstitute.org/the-era-of-weaponized-interdependence-has-begun/

We thought long and hard about how the two interact and what it means: the U.S. and China now each hold a weapon that can hurt the other — advanced chip technology and rare earths — and that mutual dependence can contain further decoupling rather than drive it. It is the Cold War logic of Mutually Assured Destruction (MAD), with “destruction” here meaning economic disruption. This new equilibrium is here to stay for several years, but it is fragile.

Market Espresso by Fabio Natalucci

Chips & Tokens at the Fault Lines: Two Stacks in One Fragmenting World

The United States and China have each built the capacity to inflict serious economic damage on each other, and neither has used it in full. Washington controls the semiconductor technology on which China's ambitions depend. Beijing, through its near monopoly on rare earth processing, controls inputs that the West's defense and advanced manufacturing can…

Read more

3 months ago · 2 likes · Fabio Natalucci and Alessandro Rebucci

In the paper, we draw out what this means for firms, markets, and the middle powers. Full paper here.

The economics of an IMF-style balance-of-payments rescue are straightforward. The proposed loan would provide dollar liquidity without further draining the central bank’s reserves. A swap line can temporarily stabilize FX markets, reduce rollover risk, and lower near-term crisis odds. However, Argentina faces stubborn inflation, an overvalued exchange rate, and fiscal and external imbalances. The risk is moral hazard: without credible conditionality, temporary liquidity may simply delay necessary fiscal and structural adjustments—the discipline an IMF program is designed to impose to assure repayment.

The implications for governance and the international financial architecture are less clear. What’s novel here is the U.S. assuming direct credit and political risk to support a relatively small economy in need of adjustment, effectively bypassing the IMF rather than channeling support through it.

Yes, the U.S. has intervened directly in exceptional cases (e.g., Mexico 1994, Uruguay 2002) to augment IMF packages and signal credibility. But this time the signal looks different: friends of the U.S. may obtain financing with limited economic conditionality.

That could help Argentina in the near term and spare the IMF from lending into very high risk—but it also undermines the role of the IMF at the center of the international financial architecture. It is telling members that it's political friendship, not commitment to adopt good policies, that gives access to liquidity.

More broadly, tying bilateral liquidity provision to political alignment further erodes the supposed neutrality of the global safety net and fragments crisis management along geopolitical lines—the very pattern the U.S. has criticized in China’s bilateral official lending.

There is empirical support for these concerns. Research has shown that proximity to U.S. positions at the UN correlates with more favorable IMF and World Bank lending—on access, conditionality, or timing. If bilateral facilities expand along geopolitical alignments, governance frictions will intensify, and an already imperfect international financial architecture will become more segmented and eventually weaponized.

Everyone loses in this scenario—especially U.S. taxpayers, who are now more directly exposed to sovereign default risk in countries with a long history of weak policies.