Is The Yuan A Threat To The Dollar?

Yesterday, I closed a Hong Kong trade in my global-investing service and banked a 67% return in just six months.

The gain came in shares of HKEx (HKXCF), the parent company of the Hong Kong Stock Exchange. I’d recommended the stock back in October, in anticipation of an arrangement few investors or Wall Street pros were paying attention to.

How did I see what others didn’t? Well, the answer to that explains how you need to be investing today based on what else I see in the offing.

For months prior to it happening, I knew Hong Kong and China were moving toward a cross-border link with their stock markets. The link would allow Hong Kong traders to buy China’s Shanghai-listed A-shares, a share class that has been available only to Chinese residents, while allowing Chinese institutional investors and certain retail clients to trade directly in Hong Kong shares.

Once in place, the arrangement was clearly going to benefit the Hong Kong Stock Exchange, since it would mean greater trading volumes, which would translate into greater profits for the exchange and its parent company. It also clearly meant that HKEx would begin building various products aimed at investors on both sides of the borader.

And that is exactly what has happened. The Hong Kong Stock Exchange saw record volume earlier this month. And already Hong Kong and Chinese authorities are talking about relaxing the rules to allow even greater numbers of Chinese retail investors to participate in the link, because it has proven so successful.

But there’s a bigger, underlying theme: The arrangement is a form of cross-border capital flow, meaning that China, once largely closed off to the world financially, has effectively opened its financial market to the world. Anyone with an account in Hong Kong can trade the Shanghai A-shares directly.

And that brings me to what’s in the offing.

The Fall of King Dollar

Against America’s wishes, the International Monetary Fund announced this month that, before the end of the year, the Chinese currency, the yuan, will likely be added to the basket of reserve currencies that comprise the IMF’s Special Drawing Rights, known as SDRs. IMF officials at the very top said the yuan should be part of the SDRs because of China’s heft in the global economy and its position as the world’s largest trading nation.

Putting China in the basket of reserve currencies would instantly legitimize the yuan as a global currency on equal footing with our greenback, and it would mean that the world’s countries would need to pare their other reserve-currency holdings to make room for the yuan.

The dollar would be one of the currencies sold, reducing the greenback’s prestige a bit, elevating China’s and serving as a clear sign the dollar’s long-standing status as reserve-currency to the world is in its waning days.

To be clear, this isn’t specifically a China story. The IMF’s thinking simply — but unquestionably — foreshadows a future that is growing closer by the moment. It is a future in which King Dollar has been dethroned.

It won’t be dethroned by China alone. It will be dethroned by the global trading community that is growing exceedingly weary of a dollar-centric world and the advantages that accrue to America while imposing costs and other unsavory ramifications on other nations.

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Wendell Brown 6 years ago Member's comment

Your point about HKex is interesting. But I find the analysis of the yuan role is pretty shallow. I read articles here on the topic by Harry Dent and Tyler Durden among others much earlier this week that gave me better information and I suggest that other readers do the same.