As we discussed in part 1 in our series on the new US–China cold war, we examined the possible conflict and its impact on the tech industry. In the second part, we’ll discuss China’s goal of de-dollarization.
Back in May when President Trump via Twitter announced that a trade deal with China was off the table, the yuan dropped 1.5% because of market sentiment that Chinese growth would suffer without a trade deal with the US. So, Chinese policymakers pumped more stimulus into their economy, essentially increasing their already staggering debt. This would typically weaken a currency, but Beijing immediately warned speculators that they would not allow the yuan to suffer. A firm line in the sand had been drawn.
President Xi Jinping then warned his citizens that China had tough times ahead. He did so at the site of the launch of the Long March—the military retreat undertaken by the Red Army of the Communist Party of China to evade the pursuit of the Chinese Nationalist Party’s army. It wasn’t a dystopian promise, but it gave no hope of further stimuli.
Why did the Chinese president go to such lengths to refuse the easy path of greater monetary stimuli or even a currency devaluation? First of all, devaluing the yuan would anger President Trump and make it even harder to reach a trade deal. Second, it could launch capital outflows from China. More importantly, however, it would harm Beijing’s long-term goal of de-dollarizing Asian trade, including China’s own commodity imports.
China has spent the last decade liberalizing its exchange rate and fixed income markets, ceding control of the two most important prices in any economy. Following the 2008 crisis, it became clear to Beijing that its dependence on the US dollar for trade financing left it at the mercy of US banks to provide such financing. And today, with the ongoing trade war, China’s goal of freeing itself from its dependence on the dollar is growing even more pressing. To de-dollarize its trade, China needs its currency to remain strong to remove it from the shadows of emerging markets such as Brazil and Turkey and to become a serious challenger against the US dollar.
Assuming that the US–China standoff is not merely a trade war but the start of a new financial cold war, then the shift in the relationship between the two superpowers (and China’s goal of de-dollarization) will cast a dark shadow over global financial markets.
As reviewed in our two-part series, the new China-US cold war could end up being:
- bearish for US technology stocks
- bearish for the US dollar
- bearish for Chinese growth
- bullish for yuan bonds
- bullish for gold
In a world that may be going through a dramatic shift, long-term investors should focus on gold and silver and shift part of their portfolios away from assets like the US dollar and US technology stocks.