The U.S. remains the world’s leading economy and military power, but the rise of China could usher in the fall of the dollar’s dominance.
Chinese-U.S. Relations Impact on Markets
The rise of China challenges the U.S.’s global position, and markets will need to adjust if President Xi is successful.
Last week, Treasury Secretary Janet Yellen visited Beijing to improve understanding and economic cooperation between the United States and China, the world’s leading economic powers. Relations have deteriorated since February 2022, when Chinese President Xi shook hands with Russian President Putin on a “no limits" alliance.
Russia invaded Ukraine less than one month after the handshake, and China has increased its rhetoric over reunification with Taiwan. On March 22, 2023, at the Kremlin's door, the Chinese leader told the Russian President, “Right now, there are changes—the likes of which we haven’t seen for 100 years—and we are the ones driving these changes together.”
The changes involve the decline of the U.S. and the world’s sole military and dominant economic power. Markets reflect the economic and geopolitical landscapes. The rise of China challenges the U.S.’s global position, and markets will need to adjust if President Xi is successful. China’s population and economic growth are compelling factors changing the worldwide financial landscape.
Chinese plans poke the U.S. administration
- The Chinese-Russian alliance bifurcates the world’s nuclear powers.
- China has not backed off its plans for reunification with Taiwan, warning other countries not to interfere.
- China considers Taiwan part of the Chinese sovereign land, as Russia considers Ukraine part of the Russian sovereign territory.
- While Russia believes NATO threatens its sovereignty, China thinks U.S. alliances with South Korea, Taiwan, and Japan challenge its position in Asia.
- Chinese influence has spread worldwide for decades with strategic investments across most continents.
- The anti-U.S. rhetoric from Beijing has increased over the past years.
President Biden and Secretary Yellen remind China that its success depends on the U.S. consumer
- S. President Biden had labeled President Xi a dictator, reminding him that Beijing relies on Western investment.
- Secretary Yellen criticized China’s uneven treatment of U.S. companies saying, “The U.S. seeks healthy economic competition with China.” She also said, “
- China and the U.S. are the world’s leading economies, creating levels of codependence in the global financial landscape.
Chinese strategic policies could restrict the flow of essentials
- On July 3, China announced export restrictions on germanium and gallium for “
- Germanium and gallium are critical ingredients for worldwide semiconductor manufacturers. China is the leading germanium and gallium producer and exporter.
- Taiwan Semiconductor is the world’s second leading semiconductor manufacturer by market cap, with an over 11% market share. A Chinese invasion could cause chip shortages.
- China has a 70% market share of rare earth metals production and processing. Rare earth metals are critical technological inputs.
- Export restrictions for germanium and gallium could be the first step that leads to restrictions for “
Strength in numbers- De-dollarization is a challenge
- China, Russia, and other BRICS countries have been the leading gold buyers over the past years, increasing strategic reserves.
- China has moved to purchase Saudi Arabian oil and other critical energy and industrial commodities using non-dollar assets.
- The BRICS countries have been planning to roll out a BRICS currency that could be gold-backed to challenge the U.S. dollar’s dominance as the world’s reserve currency and commodity’s pricing benchmark.
- A BRICS currency would lead to a decline in the dollar’s role in the worldwide financial system and weaken the U.S.’s economic leadership.
The impact on stocks, bonds, and commodities
- Geopolitical woes could shake investors’ confidence, leading to sudden selloffs.
- China has historically been a leading buyer of U.S. government debt securities. Tensions could limit purchases or encourage sales, leading to higher U.S. interest rates that weigh on economic growth.
- Given its population and growth, China is a leading commodity producer and the demand side of the fundamental equation. Tensions, tariffs, export restrictions, and bans could lead to distortions in commodities prices, which are global assets.
- Markets reflect the economic and geopolitical landscapes, which are not mutually exclusive. Political discord between Beijing and Washington, DC, will ripple through markets across all asset classes, causing increased price variance and distortions.
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