The Delisting Threat Might Backfire: Yuan’s On The Road To Become A Global Currency

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.

​Photo credit: davidgsteadman

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.

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Gary Anderson 8 months ago Contributor's comment

Fascinating concept for the future.