The "Age of Chinese capital"

With the launch of the Shanghai-Hong Kong Stock Connect, China moves even farther from the shadow of the US dollar.

Washington must prepare for the day when it no longer has China as a massive — and captive — buyer of its Treasury bonds, says a recent Financial Times article.

China has made multiple attempts in the recent past to move out of the shadow of the US dollar, notably through the Asia Infrastructure Investment Bank and the New Development Bank. Its latest initiative is the launch of the Shanghai-Hong Kong Stock Connect (SHKSC) — a move that reveals its "master plan to remodel the global financial landscape to serve its own needs," asserts the Times.

Through the SHKSC, foreign investors will be able to buy up to 300 billion renminbi ($US49 billion) in mainland shares, and mainland investors will be allowed to buy up to 250 billion renminbi in Hong Kong stocks. It is China’s boldest move to date in terms of in giving international investors unfettered access to China, but it mainly gives domestic investors a route to international assets.

The SHKSC is meant to correct the largest hurdle to the renminbi's acceptance as a global currency: the minimal investment opportunities available to those who hold Chinese currency. By the middle of 2013, capital market assets that international investors holding renminbis could freely access totalled a mere $US250 billion, compared with the $US55 trillion in global assets accessible to those holding US dollars. In this respect, the renminbi, which is the currency of the world's second largest economy, is barely equivalent to the Philippine peso. 

But the SHKSC foreshadows bigger changes to the way China allocates its capital overseas. A key goal is to diversify away from its reliance on US Treasury bonds, of which China held $US 1.27 trillion at the end of 2013. That massive holding is extremely unpopular inside China.

The SHKSC scheme, because it will trade only in renminbis and not in US dollars, opens a way out of this predicament, allowing China to seek healthier returns for its accumulated export earnings beyond the US dollar's long shadow. Welcome to what Deutsche Bank calls the "Age of Chinese capital."