This is the second part of the New Cold War. The first part: "Delineating the New Cold War: China’s Boa Constrictor Strategy" appeared last week.
The New Cold War works like a train. FIRST, is the Nuclear Arms race as China and Russia seek parity with the US as well as the accelerated replacement of US as the hegemon at the heart of about 80 global alliances. . SECOND is the break up of the global trading system. THIRD is the new trading and reserve currency system, These three are successive and inevitable components of the train with the locomotive being the New Cold War,
This report deals with the third wagon: the new trading and reserves system . (we'll return to the over all architecture of New World Order targeted by the KRYNKS next week).
This is what will happen in the next 24 months:
- China will seek to replace the US$ as the currency used for its trade and as reserve currency.
- The tool to achieve this will be the internationalisation of its super efficient domestic payements systems.
- The historic pre-conditions to become a reserve currency (US$ example) will be duplicated substantially for the offshore RMB. This includes recourse to PBOC liquidity and gauruntess , legal protection; and isolation of the offshore RMB from domestic policies in China. Domestic (capital) controls will be maintained for the onshore RMB. But the offshore RMB will be fully tradeable but not against domestic RMB.
- Participant trading nations will not go along with keeping their reserves created in RMB or any other fiat currency. At least 30%-50% will flow into Gold. This will heft the gold price to US$ 6,000.
Portfolio: Winners and losers of the New Cold War:
- Strong RMB Vs US$ & EUR.
- Gold will go to US$ 6,000. Buy gold and gold miners.
- Chinese fintech stock that are part of the international payment methods are beneficiaries: Alipay and WeChat Pay.
- Asian EMs will be major beneficiaries of the new China centric free trade system (Korea, Malaysia, Indonesia). Philippines and Taiwan don't fit the new system geopolitically and will be losers. Australia could be a winner too but faces an "AUKUS or trade" dilemma. India will participate in the growth but geopolitically New Delhi will stay on the fringes. India is however a safe asset bet against several of the world's excesses like AI.
- On the other side of these long positions are the short losers: US$ and EUR as currencies; the sovereign bonds of US, Europe and Japan (coping with New Cold War spending) and EU equities (as risk premia rise).