Below is our translation of an article from RIA Novosti with commentary by Vince Dhimos.
Before noting who the author was, I knew this article had to be by Ivan Danilov, the most insightful writer on the RIA staff.
As you read the article you might have the uneasy feeling that the Chinese economy is doomed by the draconian measures threatened by the Trump administration. However, if you are following closely the moves of the administration and the counter-moves of the Chinese, you will note that China always has an answer. One of the first was to slap heavy tariffs on soybean imports from the US. Then the Chinese broke their promise to Trump and stopped buying US LNG.
But a look at the massive Chinese projects that are unfolding before our Western eyes, shows that dedollarization was the goal all along. The Belt and Road initiative laid the groundwork by facilitating trade between China and the rest of the world. Yuan clearing centres set up by China all over Europe and Asia facilitated the exchange. The AIIB (Asian Infrastructure Investment Bank) made it attractive for trading partners to use the yuan in their trade. The Shanghai gold exchange enabled traders around the world to acquire physical gold in yuan (in contrast to Western paper gold exchanges, whose customers never see the metal. Is it even there?). The Shanghai crude futures market is setting a new oil benchmark and again, is trading in yuan. The futures are convertible into gold, an option only Shanghai’s traders, including global ones, have available. All of these offerings could have been initiated in the West, but Western pols and central bankers prefer the printing press to real economics. This is why they are losing ground. You’d think the US would wake up and realize that China now holds some potentially winning cards and that if they were smart, they’d join them instead of fighting them.
Trump and friends can huff and puff and invent new sanctions and declare all the trade wars they want. But East is East and West is West and, so far the impression is that Kipling was right: never the twain shall meet.
“... China’s obvious reciprocal move will be a massive listing on European exchanges, as well as issuing bonds in euros, francs or yuan, which, in turn, will only accelerate the process of de-dollarizing the global financial system and creating a global financial infrastructure that is not dependent on Washington’s whims.”
“It’s even better: our Chinese partners saw the seriousness of the intentions of American opponents and realized that the latter could make good this threat at any time, which means it’s time to work more actively on the dedollarization of world finances, which will certainly be a positive development from the standpoint of Russian economic interests.”
Finally, I would remind the reader that the anti-China shenanigans are not about Trump. The US Establishment is solidly behind him, including Democratic pols like Sen. Chuck Schumer, who said of the trade wars: “Trump hit the nail on the head.”
But none of the pols cheering on the trade wars are economists. Real economists have been warning that trade wars have no winners.
America is preparing a terrible punishment for China
Sept 30, 2019
The Donald Trump administration is preparing a nightmarish financial execution for Beijing, one rumour of which led to a drop in stock prices of leading Chinese companies and a decrease in their total capitalization by billions of dollars. But after the panic calmed down a bit, experts all over the world are wondering if the United States will suffer more than China if Washington really takes an extraordinary measure and cuts off access of Chinese companies and borrowers to their stock markets.
The Reuters news agency explains the essence of the White House’s plans: “three sources familiar with the situation said Friday that President Donald Trump’s administration is considering delisting Chinese companies from US stock exchanges, which would lead to a radical escalation of trade tension between the US and China. According to two sources, the move would be part of a broader effort to curb US investment in Chinese companies.”
The result of the information feed was not long in coming: the shares of Chinese companies that are traded in the United States began to fall. For example, the shares of e-commerce giant Alibaba (the owner of the well-known AliExpress service) fell by more than five percent, erasing over $20 billion of market capitalization in one day.
Similar drops were recorded in the shares of other well-known companies: JD.com securities fell almost six percent, Baidu - 3.67%. But the point here is not so much in the tens of billions of dollars of lost market capitalization, but in the fact that if the aggressive plans, are realized, as reported by the sources of the American agencies Reuters and Bloomberg, the United States is actually going to do the same with the Chinese economy as they tried to do with the Russian one after 2014. Moreover, without the introduction of any analogue of the "Crimean sanctions," but just like that. Although, perhaps, some restrictions "for suppressing democratic protests in Hong Kong" will be used as a political cover.
It must be emphasized that the media are writing about involves a double blow to Chinese business and the economy as a whole. We are talking about the intention to deprive the company of the opportunity to borrow money (through the issuance of bonds) from American investors and raise equity (through IPO or listing) on state stock exchanges. This really resembles the anti-Russian measures of past years. The difference is that there was an attempt to strangle Russian corporations via difficulties in accessing foreign bank loans and offering bonds, but they are attacking the Chinese using bonds and shares on exchanges in the USA, because this is one of their main methods of attracting foreign currency funds.
In addition to forced delisting, plans are reported for limiting regulatory investment in American companies, funds (especially pension funds), and other investors in Chinese firms. This is necessary so that, for example, an investment fund, deprived of the opportunity to buy shares of fast-growing and attractive companies on the New York Stock Exchange, will not open a stock account in Hong Kong or Frankfurt and will not buy forbidden shares there.
This drastic measure is probably connected with a serious scandal (which went unnoticed in the mainstream media) that erupted after it turned out that the American state pension fund responsible for paying military and veteran pensions, it turns out, is investing money in Chinese companies. Moreover, at least three of these companies are under official US sanctions.
Many investments of this kind are related to the specifics of modern financial markets. The most popular class of investment funds is so-called passive funds, which do not select instruments for investment themselves, but invest solely in accordance with the composition of special indices - such “baskets” of stocks or bonds that meet certain criteria.
There are several reputable companies in the world – compilers of indexes (index providers), which are guided by funds that manage a trillion dollars in total. As soon as one of them (MSCI, S&P Dow Jones Indices, FTSE and so on) includes some securities in its indices, investment funds immediately buy them, because they are obliged to do this on the basis of their own statutory documents.
As a result, as soon as Chinese stocks or bonds of specific companies become quite attractive and liquid, they are included in indices, and overseas (and international) investment funds are obliged to buy them, which cannot but make the Donald Trump administration angry. It is to block this mechanism that official Washington (according to media reports) is developing regulatory restrictions on US portfolio investment in Chinese securities. They are likely to apply to investment funds and to companies that compile investment indices.
The most common estimate of the total capitalization of 156 Chinese companies trading on US exchanges is $ 1.2 trillion. And according to the former head of the macroeconomic analysis department at Societe General Bank Lawrence MacDonald, the total “lost demand” in the even the the relevant securities are excluded from the Bloomberg Barclays Credit Index and MSCI will be $ 1.6 trillion over four years.
It may seem that the Trump team has found another vulnerable point in the Chinese economy, which will be extremely painful if struck, without any special risks for the United States. However, this is not entirely true, for the damage will be far from one-sided.
American (and European) investors choose Chinese financial instruments not out of love for Beijing or because they have to. In the context of negative interest rates in the European Union and ultra-low rates in the USA (Trump is also demanding the introduction of negative dollar rates), you can find high-yield investments, especially for pension funds, in the most risky corners of Western financial markets (hence the popularity of so-called junk bonds among investors from companies with low credit ratings and dubious prospects for yields), or in markets such as China or Russia. It was not for nothing that shares of Chinese companies were in the portfolio of the pension fund of the US military, and Russian bonds were found in the portfolio of the pension fund of civil servants in California
This means that forced patriotism by the Trump administration is unlikely to meet investor understanding. They will seek (and find) options to circumvent the relevant restrictions. Among the simplest ways are simply to buy stocks or investment units of specially created European or Asian (but not Chinese) buffer companies or buffer funds that actually harbour Chinese securities within them, like in a Russian matryoshka doll.
Moreover, China’s obvious reciprocal move will be a massive listing on European exchanges, as well as issuing bonds in euros, francs or yuan, which, in turn, will only accelerate the process of de-dollarizing the global financial system and creating a global financial infrastructure that is not dependent on Washington’s whims.
Probably precisely because of the US Treasury’s awareness of the gravity of the above consequences, it decided to officially declare that such radical measures are not planned “so far.”
What’s even better, our Chinese partners saw the seriousness of the American opponents’ intentions and realized that the latter could make good this threat at any time, which means it’s time to work more actively on the dedollarization of world finances, which will certainly be a positive development from the standpoint of Russian economic interests.