The New Global Financial Order

The New Global Financial Order

Oscar Ugarteche[1], OBELA[2]

For two decades, China has been transforming its domestic financial architecture into a part of the new international financial architecture, opening the door to a new global order. China's issuance of sovereign bonds in 2024 in Dubai is a significant development. It challenges the narrative that China wants to de-dollarise the world. In its place, it introduces a new order in which the dollar plays a different role. The fact that the U.S. has held the top currency position allowed them to finance their huge deficits despite their poor macroeconomic data, as the world's international reserves are held in U.S. treasury bonds (T-bonds). It has now changed. 

Nasdaq Dubai announced on Nov 21,  2024, the Chinese Ministry of Finance listed two sovereign bonds, a 3-year bond for USD 1.25 billion and a 5-year bond for USD 750 million. This milestone consolidates the United Arab Emirates in general, and Dubai in particular, as a key centre for international debt issuance. In recent years, it has seen bond issues from 14 countries, including USD 22 billion from Chinese issuers. The big buyers are the central banks of the oil-exporting countries to China (Eichengreen).

This fact introduces several new elements in constructing the new international financial architecture. First, analysts have pointed out that three-year bonds were oversubscribed by 19.9 times while five-year bonds by 27.1 times. Is a world record indicating the appetite for People's Republic of China treasury bonds versus U.S. treasury bonds, which are oversubscribed by two to three times. The result is that China's interest rate is only 0.03% higher than that of the U.S., which makes them instruments that can replace the U.S. as international reserves in central banks because they are risk-free. The long-term consequence could be a global shift in demand from UST bonds to Chinese sovereign bonds, which will raise the cost of U.S. bonds while making them more profitable. It could shift the demand structure for the instruments more in favour of investment funds and less in favour of central banks. The consequence for BPdeC is that it will continue reducing its instrument position in U.S. Treasuries and replace them with gold and European bonds. 

            The issuance of third-country treasury bonds in Dubai in dollars is a recent innovation that opens the door to Asian and Latin American financing from the Middle East. It indicates that the global financial centre has shifted from London to the Middle East and that New York was not the recipient of the City's shifting activities, as some had predicted. A change in the financial axis accompanies the shift of the world economy from West to East.  

            The fact that China's Treasury bond issue was in dollars and not in Yuan reflects that China does not want the world to de-dollarise but wants to place its bonds in direct competition with UST bonds. In other words, it intends to put China's risk at the top and consolidate a new pyramid of international institutions. On the other hand, trade promotes operations in Yuan to lower transaction costs with invoices in local currency, which is convenient for sellers and buyers. It is less clear if it did not work for the Japanese Yen, why should it work for the Yuan? For the People's Bank of China's purposes, international reserves are held in dollars because they are cheaper to issue and are directly comparable to U.S. Treasury bonds. The yield on yuan bonds is lower (2.09%) than in dollars (3.03%), which makes these operations more attractive to international investors. Dollar issues provide foreign exchange to China's economy affected by the U.S. measures against it, although the level of international reserves in the BPdeC has grown from 3.4 trillion U.S. dollars in January 2024 to 3.57 trillion U.S. dollars in October 2024. There is a substitution of instruments because, since the beginning of the trade war unleashed by President Trump, it has been reducing its position in U.S. treasury bonds, which in August 2024 are almost half of what they were in 2016, with a clear downward trend (see graph), i.e. it now holds reserves in other currencies and other instruments.

Figure 1. U.S. Treasury Bond position in the People's Bank of China

  Source: https://www.ceicdata.com/en/china/holdings-of-us-treasury-securities/hol...

From the point of view of the new international financial architecture, with this operation, China turns its treasury bonds into a global instrument for holding international reserves for any central bank, over and above the reserves held in Yuan at the People's Bank of China by the countries sanctioned by the U.S., which can use the Yuan in international transactions. The sanctioned countries are mostly oil exporters, which, on the one hand, pushes up the price of oil and, on the other hand, pushes them to substitute the Yuan as a means of payment. China is the world's largest oil buyer in the 21st century.

It follows the People's Bank of China's role as lender of last resort with swap lines to 40 countries, including the European Central Bank, which in turn contains 27 countries; the establishment of insurance companies operating in Yuan for international trade shipments from China; the development of the world's largest commercial banks; and the development of five commodity exchanges: Shanghai Futures Exchange, Zhengzhou Commodity Exchange, Dalian Commodity Exchange, China Financial Futures Exchange and Shanghai International Energy Exchange. 

Sidebar S&P Global Market Intelligence annual rankings

 of the 100 largest banks by assets at the end of 2023.

Source: https://www.spglobal.com/marketintelligence/en/news-insights/research/th...

In March 2018, the Shanghai International Energy Exchange ("SEX") launched the listing and trading of the first RMB-denominated crude oil futures on a national futures exchange in China. On June 22, 2020, the Shanghai Futures Exchange (SHFE), through its subsidiary, the Shanghai International Energy Exchange (INE), launched low-sulphur fuel oil (LSFO) futures contracts. These futures aim to benchmark bonded bunker fuel prices in China, primarily catering to the marine fuel market. While Zhejiang Mercantile Exchange (ZME) is not directly involved in launching these futures, Zhoushan is a key hub for bonded bunker fuel supply in China. It is traded based on "international platform, net price, delivery under bond and RMB denomination" and is the world's only physically deliverable LSFO futures contract paid in Renminbi. The successful completion of the cross-border delivery agreement in January 2021, under the "domestic delivery + overseas delivery" model, marked a new direction for the two-way opening of China's futures market. Until then, the underlying physical market for the LSFO was in gasoil-filled vessels delivered in the ARA region (Amsterdam, Rotterdam, Antwerp, including Ghent) and was in dollars. 

Finally, there is the CIPS Cross-Border Interbank Payment System, which connects more than 100 countries and regions and is a key system for the global expansion of RMB, ensuring that "where there is RMB, there is CIPS service". It facilitates settling and clearing international RMB transactions under the People's Bank of China (PBC) supervision. It operates under a proprietary Business Rules and offers data processing, technology support and product innovation services. In 2018, the PBC approved a plan to increase capital and bring in foreign investors, adding 36 domestic Chinese and international financial institutions as shareholders. The website claims to have 1,304 indirect participants, approximately two-fifths in China and three-fifths overseas. Direct participants' payments and accounts are in Renminbi. Direct participants can send messages to each other via SWIFT or CIPS messaging system. Indirect participants send and receive instructions via SWIFT, as noted above. The limitation of CIPS is that many non-Chinese institutions still need to install translators for CIPS messaging. Thus, it works well in the East but with the West via SWIFT, the Western messaging system. This payment system avoids falling under U.S. economic sanctions because it can transfer Reminbi payments outside SWIFT's radar. After all, they are not transactions with the West. The equipment, coded in Chinese, solves the language limitation. In the West, transactions go through SWIFT, which has a Chinese-to-English translator. 

Eichengreen argues that transactions using CIPS are growing very rapidly and that it is plausible that more banks worldwide will join CIPS as a contingency plan. While it may not do them much good at the moment, their participation would provide a limited alternative should CHIPS and SWIFT restrict their access.

In sum, developing a new international financial architecture is less Western-centred. It strongly emphasises the Middle East and China, which simultaneously changes the global monetary order as the economic order shifts from Atlantic-centred to Pacific-centred. Introducing China's dollar-denominated treasury bonds, sold in Dubai and targeted at the central banks of oil-exporting countries, is a further step towards constructing a new Asian regional financial architecture and global financial order.