Yesterday Today Tomorrow

Inseong J Kim: Hello, this is Inseong Kim from Yesterday Today Tomorrow. We are continuing our program about the monetary system. Last week, we talked about Magnequench, the company that was sold to China in 1995. Before I get into it, I am going to talk briefly about AI and how to win the AI war. As we know, AI is fed by data. As long as the data is healthy, AI is functional in a healthy way. When the data is corrupt, AI becomes corrupt and the output is not accurate.

In the AI war within our nation, if we have healthy data that is secure and used by ourselves, it works. Outside of our nation, if we want to talk about war, if the data is corrupt on the outside, you win the AI war. If the situation is reversed and we have false or corrupt data while the outside has healthy data about all of us, then we lose the war. That is how the AI war is going to unfold. It is no different than the info war during World War I or World War II, just more advanced. However, it can be more dangerous because the data is so massive right now.

We also have to pay attention to what is happening in Hong Kong. Everyone will hear more about it in the near future along with Taiwan. I will probably air a segment about Hong Kong and Taiwan when the time is close, but please keep your eyes on Hong Kong and the monetary system. In 1995, no one knew what was happening openly because it went very smoothly and legally. The sale of that small Indiana magnet company ended up handing China control over materials the U.S. military could not do without. By the time anyone noticed, the factory was gone and the decision was irreversible. Last week, we told that story in full.

This time, the pattern may be repeating, not in a factory but in ordinary retirement accounts and pension funds that quietly hold a growing share of American capital inside an economy that the United States may one day need leverage against. The difference is that this time it is happening in daylight while there is still time to ask the questions that were never asked in 1995.

Guest (Male): The title is "3B," referring to three of the most respected names in American finance: BlackRock, Blackstone, and Bridgewater. Each has made a considered bet that deep engagement with China's market is sound business. Their reasoning deserves to be stated fairly and in full because the debate only matters if both sides are heard honestly. China is the world's second-largest economy, home to well over a billion customers and one of the deepest capital markets on Earth. Excluding it entirely from a globally diversified portfolio means giving up real diversification and historically real returns. In mainstream textbooks, this is a case for global investing, not a fringe position.

BlackRock, led by CEO Larry Fink, became the first wholly foreign-owned mutual fund company permitted to operate in China in 2021, launching an onshore fund that raised more than $1 billion from over 111,000 Chinese investors in its first offering. Fink told shareholders that China represented a significant opportunity for both BlackRock's global clients and for meeting the retirement needs of the rapidly aging Chinese population. This was framed consistently, both internally and publicly, as an ordinary business expansion into the world's second-largest economy, not as a political statement of any kind.

The second company is Blackstone, co-founded by Stephen Schwarzman, which has taken a different, longer-view approach by building institutional bridges rather than simply moving capital. Schwarzman funded the Schwarzman Scholars program at Tsinghua University, one of China's top academic institutions, aimed at training a new generation of global leaders with direct, firsthand exposure to China rather than an understanding filtered through headlines. An underlying argument made repeatedly in public is that sustained engagement and education meaningfully reduce the risk of conflict between great powers, while isolation and mutual ignorance increase it.

Bridgewater Associates, led by Ray Dalio, has gone the furthest of the three in publicly defending engagement as a matter of principle rather than pure profit. Bridgewater has operated in China since 2018 and was among the first major Western hedge funds to launch onshore investment products there. Dalio has argued publicly and repeatedly that Western investors should not impose their own domestic political framework in judging how another sovereign country chooses to govern itself. Withdrawing capital purely over political disagreement is, in his words, a mistake rather than a virtue. Drawing on his extensive writing about the historical rise and fall of great powers, he has warned that treating China's rise reflexively as an enemy to be contained, rather than a shift to be understood, risks becoming a self-fulfilling prophecy.

Inseong J Kim: It is a very sticky situation. If we do not invest, we might lose the chance. If we do invest, we might not get a return and the money will be frozen there because their economic system is different than ours. Money has two functions: it can give freedom or it can give control. It depends on which ideology is behind that money. That is what we have to look at. Is China ever going to give up communist-controlled ideas? Before we ask that question, we just invest money wishing that they are going to give up their control. Apart from the communist ideology, they have a 5,000-year history as a nation. This is something we cannot ignore.

At the end of the day, what we are experiencing in the American economy is a trade deficit of over $200 billion every year. China is buying less and less of our debt, so money is not flowing back in. This whole petro-dollar circulation has been disrupted. That is the true statement of what we are experiencing. Before China rose, the petro-dollar circulation worked beautifully because money came back to the U.S. Now it does not. We have to learn about how this whole monetary system works on macro and micro levels.

Without that understanding, each corporation thinks only about their own profit and loss statement and takes a narrow view to survive. The whole American economy will be affected. That is what happened between 2000 and 2008. Instead of finding a solution, they were only thinking about profit margins getting narrower and narrower, so they moved the work to China. But that is not the true story. A small group of people already knew that the software and websites of the dot-com era would boom. They already knew what is happening today. In order for them to use that system, they needed fast, cheaper items to produce massively. So the decision was made before the companies moved in that direction.

Now we are reaping the fruit of that transition, but we did not see it. A certain group of people might have made a lot of money and profit, but as a government and as the people who live here, we did not get the benefit. That is the real problem with the Belt and Road Initiative (BRI). A lot of countries signed up with the BRI and then realized the local people were not getting the benefit. They lent the money, Chinese workers came, and the money went back to the Chinese people. At the end of the day, those countries are under debt, so the ports and infrastructure are left for China to use because the countries have to pay back. That is the Belt and Road Initiative. In America, we might not know that we are engaged in a BRI without really understanding what it is.

As we experience in our time that debt is growing, we are not finding solutions. At the same time, some groups of people think we have to invest money as soon as possible in China before we lose our turn. That is the direction certain people believe in. A lot of money is going to head to China and eventually Hong Kong will be the hub later on. Not every prominent investor agrees. This phenomenon has to be understood properly.

Guest (Male): Not every prominent investor agrees. What is happening with this economic entanglement with China has to be studied thoroughly before making a decision. Time is crunching and the stock market is going up and down. We have to stabilize. Again, we are reacting rather than responding to the economy with thorough study and examination. How can we be able to sustain our economy without reaction? This reputation of reaction will eventually hurt America.

Here is a part of this story that almost no one sees directly because it happens quietly inside a piece of the financial infrastructure most people never examine closely: the index itself. If you hold a broad global index fund, an emerging markets fund, or even certain target-date retirement funds, there is a strong likelihood you already own Chinese companies, including some tied to the Chinese state, without ever having been asked.

Inseong J Kim: Some states are making laws about that to disclose information, but not everyone has that power, especially hard-working groups who have 401ks or mutual funds. When you sign up, you give the power to the company to invest for you, so you do not have much of a voice. There are certain states that have a restriction about investing in China. Everyone who has money in the stock market in any form of retirement or investment needs to understand where our money goes.

I am not giving any financial advice. I am just giving information. Some people are looking for short-term gain and do not care if the money goes to China or any other location as long as they make money. This show is not for them. This is for the overall picture of the nation, not just myself or my company. We need to think about the big picture of where we are and where this financial market is heading.

I can give clues to think about, but I cannot give all the answers. I am learning as I go, too. Whoever is listening to this program, rather than leaving it up to a financial advisor, just ask questions about where your money is. At the end of the day, it is everyone's money. People think BlackRock and these other 3B companies are the most powerful companies in the world. They are not. It is everyone's money. It is public money; it is not their money. Everyone has a right to ask about where their money goes and how it is invested.

The United States remains the world's leading financial power, home to the deepest and most trusted capital markets on Earth. This is a genuine form of national strength, the same kind of strength that once made America the world's leading rare earth producer. Once we were the rare earth producer with a processing company. Now we have to acknowledge that 90% is in China. As I shared last week, Magnequench was sold to Chinese leaders, and they became the producers of 90% of the world's rare earth minerals. Now they are using that against us as leverage. We should not make the same mistake with our financial market.

Strength that flows outward without anyone tracking where it lands is not a strength; it is an exposure. If a meaningful share of American retirement capital continues to flow into companies that function in practice as instruments of a strategic rival state, the country that leads the world in influence could eventually find itself in a position analogous to where it stands today with rare earth magnets, needing to negotiate or pay a premium to recover the value of its own capital because so much of it has become entangled with the very economy the U.S. may need leverage against.

That is what we are facing today. It is not just Magnequench, but other companies that moved. At the end of the day, it comes down to education. We educated foreigners more than we educated our own citizens in America. The fruit we are seeing was sown 40 or 50 years ago. The reverse happens at school and at home, in how we raise our children and educate them so they can thrive, have motivation, have vision, and not only think about themselves but think about their nation.

There are several states that have mandated divestment of public pension funds, specifically Florida, Indiana, Kansas, and Missouri. Each has passed a law requiring their state-managed pension funds to divest from Chinese state-linked holdings. If you are not in those states, everyone has to search for themselves and have their own voice with their own money. Money has two values: it gives freedom or control. Thank you for listening to Yesterday Today Tomorrow. We will be back next week.