157. Trump Turmoil: Never Underestimate China

0:00Now, I'm delighted to tell you that Monzo Business are now a proud partner of The Rest is Money. We're teaming up for the next six months. You'll be hearing why they're a great option for your business banking and how they're supporting small businesses up and down the UK. Now, since I am a Monzo business customer already, I can tell you all about it. They've got three different plans to choose from depending on the size of your business. So, for example, with two of us in mind, me and a business partner in our latest venture, we've opted for the pro version, which comes with a load of tools to help us simplify all of that financial admin.

0:37There's also light for sole traders and team for those slightly larger businesses that are scaling up. So why not join me and over 500 ,000 businesses already banking with Monzo Business and sign up for an account today. Only sole traders or limited company directors in the UK can apply. Invoicing is available with Monzo Business Pro for£9 a month and team for£25 a month. T's and C's apply.

1:13Hello, Trump's turmoil still not over. Maybe we'll never be over. So it's another daily special of The Rest Is Money with me, Roma Peston. And me, Steph McGovern. Oh God, what a week. It's just, I mean, even just one of the days we've had would be monumental. But it's been every single day. And material for so many episodes. Yeah, I know, I know. I wonder if we'll ever have a day off again. But listen, let me just, before we get into, again, analysis of things, Let's just bring you up to speed a bit. So, of course, we talked about this pause on these massive tariffs. There is still bond and stock market.

1:58I think you could still call it chaos, to be honest. The volatility that we've seen this week has been quite incredible. You know, last night, the S &P 500 closed down about 3.5%. So the US stock market's there still facing the kind of wrath, I suppose, of Trump. because it's not just concerns about low growth and higher inflation in the US. It's also about the wider global impact. Everyone's trying to get their head around what this actually means for the world now. A lot of that is to do with this trade war between China and the US, which has ramped up again. China now facing 145 % tariff. I mean, the numbers are just ridiculous now, aren't they?

2:39And neither side is showing any sign of backing down on this. Trump did this cabinet meeting as well last night. He talked about how they're in very good shape. There'll be a transition cost and transition problems. But in the end, it's going to be a beautiful thing, he said. But I think, and this is what I want to ask you about, Robert, I think the one thing we've learned from all of this, you cannot mess with the bond market. And investors have been selling off their US government bonds. And in simple terms, that makes it more expensive for the government, the US government, to borrow money.

3:13And that is a major problem for several reasons. So, Robert, you think this is what's made him cave, don't you, because of the ramifications of it costing them a lot more money to borrow money? Yeah, I do think I wrote a long account of this on X yesterday in an ITV blog. And, you know, my opening line was, we just learned that the world's most powerful person, Donald Trump, has a boss, the bond market. Now, look, in some senses, it shouldn't be a surprise to us, the power and the influence of the bond market. I don't know if you remember, back in the early 1990s when Bill Clinton wanted to do an economic expansion and was scared off because he was told the bond market would react negatively.

4:05James Carville, the Democrat advisor, said, you know, in earlier times, he thought if he was going to be reincarnated, he would want to come back as perhaps the Pope if he was interested in power. But now he was clear that he wanted to be reincarnated as the bond market, because obviously nobody messes with the bond market. You know, one was, actually it was Jim O 'Neill who reminded me, who was going to be our guest next week, of that. The thing is not, however, for me, just that yet again, we've had a manifestation that, you know, whether you are the British Prime Minister Liz Truss or now the American president, that you don't mess with the bond market.

4:53For me, the more significant sort of trend here is what Trump has done to shatter investors' view that the dollar and U .S. government debt are assets you buy when you're anxious about the outlook, that he has destroyed the idea that they are a safe haven. And if I were an American voter and if I were a member of the Republican Party, I would be absolutely furious about this, because if you look at the history over decades of why America has become richer and richer and richer, one of the big reasons for that is that they could borrow unlimited sums of money as a government at relatively low interest rates.

5:51because of this idea that if the world is going to hell in a handcart, you buy the dollar and you buy bonds. And what's happened on this occasion is we've had the mother of all market shocks, enormous anxiety, and I think Trump thought that even though he was engineering this anxiety, people would still support him by buying treasuries, U.S. government bonds, would still support him by buying the dollar. And what's happened? The dollar has fallen, and the price of US government debt has fallen. And as you pointed out, when the price of US government debt falls, that means that the interest rate that the US government has to pay when it is borrowing new money, that rises.

6:43And the reason that is, I described it again yesterday as a fiscal prison for Donald Trump. And the reason it is a fiscal prison is because of the sheer amount of new borrowing that this government has to make in the coming year and the sheer amount of existing debt that matures and has to be refinanced. So I'm going to share two numbers with you. which show you the challenge for the US government, particularly now that, you know, if you look at all maturities, the interest rate the US government pays has risen very sharply for all maturities. So here are the numbers. And as I say, particularly for things like 10 and 30 year bonds, it's now very expensive for Trump to borrow.

7:37So the deficit, as you know, which is the amount he has to borrow in a single year, That's well over 6 % of GDP of America's national income. But also, when you look at the existing debt, and depending on how you measure it, that's either 100 % or 122 % of America's national income. But a third of that debt has to be refinanced in the next year. That is$8 trillion of US government debt that matures and has to be replaced. And at the moment would be replaced at really quite high interest rates. That means that the interest costs for the American government will go up and up and up. And if the bond market were to fall even further, you then get into this absolutely vicious cycle where bond investors would say, oh, my God, the cost of refinancing American debt is increasingly unaffordable.

8:40And that means that they sell government bonds even more. And you get into an absolutely vicious downward cycle where people start to think the absolutely unthinkable that America could default. Right now. Yeah, I assume it won't get as bad as that. I assume that, you know, Scott Bessent, the Treasury Secretary, who used to work as a hedge fund manager and the president will make sure that America doesn't go so near the edge that that becomes a very significant risk. But it is a risk and it's a risk that Trump, with his absolutely reckless tariff policies, brought upon himself and brought upon America.

9:30It's all very well. He'll probably say, look, I inherited this debt from the Democrats. I inherited this deficit from Biden. And of course, those big numbers for debt were there under Biden. But he inherited them. It's his responsibility now. And if he drives the American vehicle over the cliff, that's on him. So this is essentially like a consumer, one of us, remortgaging, isn't it? So you've come to the point on your fixed rate deal. In that time, interest rates have completely rocketed. And now you're having to refinance with a much more expensive mortgage. And that is basically the headache that Trump's got on a trillion dollar scale, rather than, you know, you and I facing a couple of hundred pounds extra a month, which is a lot of money for lots of people.

10:16But for Donald Trump, this is trillions. Yeah. So, I mean, you know, this is just another element of how vulnerable Trump has made America. So let's look at the least, I suppose, perturbing element of all of this. But still, you would argue this is, to put it mildly, unfortunate for America. The US administration, Trump, wanted to impose big tariffs on Japan, as it did so many other countries. And Japan is one of those countries now negotiating with Washington to limit the tariff to the current or the new 10 % floor. And I think it's possible, because Tokyo seems to want to deal with America, that there will be some deal between Washington and Tokyo.

11:12But the bargaining position of Japan is way stronger than many people may appreciate, because over the last decades, when it's generated these surpluses, and this is no, these trading surpluses with the rest of the world, and particularly with America, and this isn't an accident, this is what happens when you generate trading services with a country like America, they have accumulated vast stocks of American sovereign debt. They have massive holdings of US government bonds, treasuries, more than a trillion dollars worth. And effectively, what they've been doing over those decades is lending cheaply to America to give America the finance to buy stuff from Japan.

12:00And, you know, that was the way the financial system has been working for decades. However much Trump may now rail against that, American consumers benefited from this because they got a lot of high quality, cheaper stuff, cars, electronics, as a direct result, not only of Japanese manufacturing prowess, but also of the fact that Japan was lending cheap money to them. Now, you could argue, which I think is reasonable, these imbalances, these financial imbalances are unsustainable over the long term. What Trump's doing is trying to correct them way too fast, which is why we've got this massive shock.

12:41But, you know, let's just think in the case of Japan. You know, I've just said$8 trillion of US government debt comes up for refinancing in the next year. it's not beyond the realms of possibility that if the trade talks between Japan and America get really sticky that Tokyo could just say well hang on a second why should we continue to lend to you as cheaply as this and in particular you know if this debt that you owe us comes up for repayment well okay we'll have the money back and we won't lend it back to you and at the moment that they decide not to lend it back to America you know frankly Washington has a really big problem Because where the hell is it going to get that borrowing from?

13:24And what kind of interest rate is it going to pay? So that is the risk, even with an ally. And I haven't even got on to China yet. What blows my mind in this is how much money the Americans owe Japan and China. So, you know, we're talking Japan owning more than a trillion dollars worth of US treasuries. And China are not far behind that with nearly 800 billion. So what happens if America don't pay this money back? Because it looks like they hold the cards, the Chinese and the Japanese here, not the Americans. But what if the Americans say, nah, we're not paying you? What happens then? I mean, defaulting is in terms of financial markets everywhere, including the UK.

14:14defaulting is the equivalent of a nuclear strike from which fallout would, you know, a massive nuclear strike with fallout poisoning and killing people all across the world. It's the financial equivalent of that. I mean, in those circumstances, the price of US government debt would collapse, the dollar would collapse, banks, hedge funds would go bust. You know, we are talking about a scale of financial crisis that would be the global financial crisis of 2007, eight times, I don't know, times 10, times 100. So, you know, even somebody as impetuous as Trump is not going to want to countenance that, which now brings me actually on to China.

15:03Now, China, certainly according to the official figures, I think it has something like 700 or 800 billion of Washington's debts of US government bonds. Although there is thought that it may hold some bonds offshore through nominee names, maybe via Europe. So maybe its exposure to US government debt is higher. But let's be clear, 800 billion is still a colossal amount of lending to the US. And Beijing is not naive, right? President Xi is not naive. They know that they have this leverage over America through these holdings, these massive holdings of the US government debt. And we've got this, honestly, mind-boggling situation.

15:58I mean, one of the reasons I said, I think yesterday, that I was staggered by the Wall Street bounce is it conveniently ignored the fact that we are living through by far the worst trade war for at least 100 years. We've got, you know, two economies that represent way more than half of global economic output. China and America totally at loggerheads. 145 % tariffs on Chinese exports, 300 billion pounds of them to America, which, although I think I did say yesterday, means essentially there can't be any trade between China and America. One thing that I had forgotten is there are some manufacturers in America who are so desperately dependent on bits of plants that they have to get from China that for a short period at least, they will be paying more than double the price for those bits of plants just to keep going.

16:59And so, you know, the shock again to American companies from this astonishing, but just global growth slowing. We've had some good news from the UK this morning in terms of growth being higher. But I mean, God knows whether that's just a one month blip now that global growth will be growing. Prices in America will be going up as a result of this. absolutely no sign yet of peace talks on tariffs between Beijing and Washington. And if they got nasty, China does have this extraordinary weapon, this threat that says, OK, right, OK, we're going to stop lending to you. And at that point, you know, we've had this terrifying fall in government bond prices in America.

17:40That would get so much worse in those circumstances. The thing that gets me and this is it feels like China is way more prepared than America for this trade war. So, you know, if you look at, for example, when Trump first came in, in his first term, China already started to reduce their reliance on the stuff they export to America. So, you know, in the first administration, 26 % of exports from China went to the US. Now it's more like 13 % of exports. So they've already been reducing things there. On top of that, I mentioned, you know, the last show about how they rerouted products to try and avoid the tariffs through other countries.

18:22And that seemed to work for a while. And, you know, now it feels like with all the US bonds they hold too, they've got all the cards here and they're way more prepared for this. And what have America got? A bit of business with China in terms of, you know, what they sell to them but that's it so you know you make a very important point i mean i've been covering the rise and rise of china uh for more than 25 years you'll remember that when i was at the bbc i made i think four or five hour-long documentaries about the rise and rise of china and what that meant for the world and whether or not there was going to be a bubble that would see the chinese economy eventually crash.

19:06You know, in the last 30 years, I've been to Beijing, you know, many, many, many times. And one of the things that has always impressed me has been that they plan for the long term, always. And unlike, you know, many Western governments, which struggled, I think, more than a day ahead. So yes, of course, they saw Trump coming back. They experienced Trump first in the first administration. So of course, they've been shoring up their defenses against this eventuality. It is striking to me that recently, China's, for example, stock market has stabilized more than in other places, despite those initial shocks from the tariff onslaught.

19:46China is stimulating its own economy. But there was one other really interesting point, which I was really struck by. It was made in a piece, actually in the FT, by K.U. Jin. And what it said, and this seems to me to be absolutely spot on, is that what Trump wants to do here is make China's economy poorer and he wants to lessen their competitive threat. One of the things that's been really striking to me is the speed at which China has been going up the value chain. So it started, you know, 40 years ago, you know, in the most low-cost manufacturing, you know, manufacturing the most basic commodities from, you know, radios.

20:46We talked about its dominance in fold-up umbrellas, which it still has. But actually now, it now has one of the world's large language model artificial intelligence leaders in DeepSeek. It has these absolutely massive number now of digital giants on a scale with the Googles and Metas. They have high tech manufacturing, even in their more basic manufacturing. They have more robots manufacturing within the workplace. They have more density, more use of robots within the workplace than any other manufacturing nation on the planet. And what they are going to do now is rather than back down and do what would probably suit America, which is get into more commodity manufacturing, they will now massively make an effort to challenge America's dominance right at the top of the value chain.

21:49So they will pour more money into artificial intelligence. They will pour more money into high technology, pharmaceuticals, and they will respond not only in whatever way they have to in the sort of short term in respect of tariffs and possibly, as you say, using this threat of not financing America's debt and deficit. but they will also just invest a ton of money in making sure that when it comes to the products and services that are changing our world, the AI industrial revolution, they will be there and they will not leave the field clear to America and it will become more urgent for Beijing that China does that.

22:34Yeah. Well, listen, there's still loads more to talk about, but we should go to a quick break. I want to talk about this alleged insider trading that I know some of the Democrats are kicking off about that they think might have happened when the stock markets were with all the volatility we've seen this week. But we'll tell you more about that after the break. Never a dull moment with Trump. See you in a second.

23:02Welcome back. Yes, it's another Trump's turmoil. Rest his money special with me, Robert Peston. I can hear the enthusiasm in your voice of saying the name Trump. It's time to win a bit. But I mean, there's another element to all of this. You know, we've talked about the trade war. We've talked about the power of China and everything else and what might happen next. But another side story to all of this is this assertion that perhaps Trump's team did some type of insider trading and benefited off the stock market volatility. So you'll remember on Wednesday, Trump announced that he was pausing these tariffs.

23:45So this 90 day pause on these high tariffs and kind of all countries apart from China would just pay 10 percent. And that made the stock market suddenly rocket up. Now, a few hours before he did that, before he made that announcement, he put out a message on Truth Social, you know, his preferred platform, where he basically said, this is a great time to buy. now what critics are saying is that was him telling all his mates go and buy shares while they're cheap because i am going to make this announcement and you know the stock markets are going to rock it up now you've been talking haven't you robert to a few people about this and and i've got a bit more of an insight into whether that is feasible that that is what happened and And obviously this is alleged where, you know, there's no kind of evidence to back this up at the minute.

24:44It's just kind of speculation about whether this is possible or not. But Robert, go on, tell us what you've heard on this. Well, look, there are certainly lots of rumours around the place that the tariff reversal leaked ahead of time, but people traded on the back of it. And normally in these circumstances, if this were happening in the UK, you would certainly expect the authorities to be investigating, the Financial Conduct Authority, you would expect to be investigating. What I've been told, talking to traders, investors, managing vast sums of money, I mean, one of the things that I was told, which is genuinely shocking, is that there were, before the announcement of the tariff pause, and we should remind people that led to the most jaw-dropping surge in US share prices, the S &P 500 rising 9.5 % in a matter of hours.

25:57astonishing astonishing rises in share prices um so one of the things i've been told is that there were purchases of what are called one day options and these are options about what will happen to share prices in the course of just a single trading day so a bet essentially you know if you just think about that right you know you're only gonna buy a one-day option because basically the thing about options is they become worthless if share prices do not rise by the end of the trading day right so this is a this is like betting on a horse race right if your horse doesn't win you lose everything, right?

26:44So there were purchases, I'm reliably told, of these one-day options, and whoever purchased those options made a fortune. Now, the problem is, we don't know who purchased those options, and the only institution that could find out would be America's regulator, the Security and Exchange Commission, members of the Democrat Party, in Congress, in the Senate, in the House of Representatives, want an SEC investigation to get to the bottom of who made these colossal profits. The question is, will there be an SEC investigation? You know, I am confident that if this had happened in the UK, You know, you would be seeing investigations because having lived and breathed these sorts of market shenanigans in the UK, investigated them as a journalist.

27:47I've investigated insider trading by quite prominent people, you know, going back decades. I would be confident that there would be a probe. We just don't know, though, in Trump's America. No, it's not going to happen, is it? I'm not going to impugn the integrity of the guy that he's put in charge of the SEC. But he's put him in charge. Yeah, yeah. He's nominated the new boss of the SEC. The SEC itself has been a demoralized institution. It's been losing people. And, you know, I've talked, they may be being overly cynical. They may be being naive or they may just be being realistic. But again, when I talk to market participants, do they think there will be an SEC investigation?

28:33The reply I get back normally is no chance. Yeah, yeah. And I think, I mean, if you're thinking, has this happened before in America, if we've seen anyone prosecuted, there is a interesting case because it was passed, wasn't it? In 2012, I think the Congress passed the Stock Act, which made it illegal for Congress members and any one part of the executive branch to take part in insider trading. And there was the US representative, Chris Collins, who was actually prosecuted in 2018. And what had happened with him was he'd got information about a drugs trial for a pharmaceutical company. So through his work, he'd found out that this drugs trial hadn't gone particularly well for this pharmaceutical company.

29:20He then rang his son and told his son to sell the shares that he had in this company. They were able to find out from the phone call timings and the timing of the email that came into Chris Collins. And he was prosecuted for this. But he got pardoned by Trump in 2020. so you know if you look at the Trump's kind of history here he doesn't mind clearly doesn't mind a bit of insider trading does he especially if it's his mates who are benefiting from it I mean the big question and you know we've obviously all been focusing on what Trump does that affects our security and, you know, affects our prosperity.

30:11So cozying up to Putin, withdrawing support from Ukraine, these extraordinary income and wealth damaging tariffs, you know, have been very much the focus of our attention. But the sort of what you might call the probity of the administration has been a bit of a side issue. But I have mentioned before how shocking it was when he launches this crypto coin, this meme coin on becoming president, which he directly profits from. And, you know, as a matter of just straightforward financial market mechanisms, you know, he profits from this crypto coin. If anybody wants to financially reward the president, all they have to do is buy the meme coin drives up the price.

31:04Right. And it's almost like you might argue this is institutionalized bribery. Right. But again, that sort of passes that sort of that sort of passes broadly without comment. his truth social right he puts all his statements out on a social media platform that he owns that you know yeah if you want to know what he's saying to the world you have to go to a media platform that he profits from this is shocking stuff right but he gets away with it yeah and he gets away with it as well because he does so much of it as you're saying that you know if there was just one of these things, people might go harder on him and try and get him to not do that.

31:52But because he's doing like a scattergun approach of dodgy things, you know, it kind of dilutes it, doesn't it? And it makes it less of an issue because there's so many different things. You try and focus on the one that has the bigger impact and it gets away with it, essentially. It just keeps getting away with it. Look, I do think the Democrats have not got their act together. They're all over the place in terms of challenging Trump. But you also have to pick your fights. And, you know, if it's, you know, the security of the world, avoiding World War III or, you know, stopping America from going bust, you know, I guess it's perfectly reasonable to say those would be your priorities over this issue of quite how dodgy he is as president in his personal dealings.