The delisting threat might backfire: Yuan’s on the road to become a globlal currency

  • The White House has shown that it is ready to use delisting of Chinese companies as a new weapon in the trade war.
  • However, that might be a catalyst for the acceleration of the paradigm change in the financial markets.
  • Several countries are already pursuing alternatives to the international payments system based on the USD.

Photo credit: davidgsteadman

The President’s threat to delist Chinese stocks might be a tipping point in the trade war. In the short term, it may act as desired and inflict pain to the Chinese government. However, in the longer term, it may change the status quo of the world’s reserve currency.

A strong reserve currency walks hand-in-hand with strong capital markets. That is why, although the Chinese have the second-biggest economy, they do not have the number two currency in the world. That is also why the best Chinese companies have gone to the US when they want to float equity.

However, the delisting threat may change that. In the short term, it will inflict pain by stoping new IPOs, and by depressing the shares of companies trading in the US. If the delisting comes through, it will also destroy part of the international investors’ confidence in Chinese equities.

The other side of the coin is the fact that it will increase the sense of urgency of the Chinese policymakers to open and develop the Chinese capital markets. The development of a fully open Chinese bond market and an alternative equity market will also mean a fully convertible Yuan. The existence of a solid alternative to the USD is the critical ingredient to end the US traditional immunity to a debt crisis and to have the vigilantes back to the bond market.

If there is an alternative to the USD, there is a comparable peer and a solid trade pair. The signs that this transformation is happening abound. China and Russia have been ditching the USD from their transactions. Additionally, the Chinese have been developing its bond market. The same goes for the equity markets.

(Source: Bloomberg)

The threat to delist Chinese companies might act as a catalyst for the Middle Kingdom to accelerate the opening of its financial markets. On the other hand, the current US hostility towards the EU, Russia, China, Japan, and México, might bring this heterogeneous group of countries together in search of an alternative to the USD.

I am following this very closely because it might be the unfolding of a game-changing trend. If it materializes, it will be a new paradigm for financial markets. Meaning that, the next thirty years in the investment world will be nothing like the last thirty.

How to ride the trend towards a global Chinese bond market?

If the trends described previously are to materialize, then, we’ll need instruments that translate our vision into an investment. There aren’t many tools available for individual investors to get exposure to Chinese government bonds. However, there is one interesting ETF, VanEck Vectors ChinaAMC China Bond (CBON), that invests in the fixed income markets of China. The fund invests primarily in Renmimbi-denominated bonds issued by AAA institutions.

(Source: VanEck )

The net expense ratio is capped at 0.5% at least until 1 September 2020. It is not clear what will happen after that date. I am hoping that the fund managers stick with the cap. The current fee makes the ETF very attractive, other alternative ways to own the assets contained in the fund, will likely be more expensive.

(Source: Seeking Alpha)

The performance has been lackluster, which, was to be expected since we are betting on an inflection point for this asset class. Nevertheless, although it is no match for the US bond funds, it hasn’t been a disaster in absolute terms.

(Source: Seeking Alpha)

All said, the biggest drawback about this fund is the lack of volume, and that’s a big problem. I will keep watching this fund, and maybe dip my toe in the water, but always with very limited exposure. At least, until the fund gets more traction.

(Source: Seeking Alpha)

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