Illustration: Sarah Grillo/Axios

The rise of U.S. unilateralism has given new urgency to the perceived need for a world financial order that isn't dominated by America. When China becomes the world's largest economy, will the financial world still be dominated by the dollar, the Treasury and the Fed? Not if China has any say in the matter.

Why it matters: Even when the U.S. can credibly claim to have the best interests of the rest of the world at heart, its allies chafe at the global hegemon's hubris and overreach, especially when it uses the architecture of international financial plumbing to advance its own geopolitical agenda.

  • Just this week, the EU, Russia and China agreed to create a separate payments system that would allow businesses in those countries to trade with Iran.

Already, the Chinese yuan is the third largest of the five currencies that make up the SDR, the closest thing the world has to a global monetary yardstick. Come April 2019, Chinese government bonds (CGBs) will similarly be the third-largest component of the Bloomberg Barclays Global Aggregate bond index.

CGBs are increasingly proving to be not only attractive investments but also important financial benchmarks, traded on rates desks alongside Bunds, JGBs, and treasuries.

  • CGBs have performed very well this year: While the Citigroup World Government Bond Index has fallen 1.4%, Chinese bonds have rallied, with the yield on the benchmark 10-year CGB falling by about 20 bp.
  • They also have a lot of room to rally further, with the 10-year still trading at a yield of 3.7%. That's extremely high, for a reserve currency: The equivalent numbers in the U.S., Germany and Japan are 3%, 0.5% and 0.1%, respectively.

The bottom line: "The ultimate goal," writes Andrew Capon in an excellent guide to the Chinese government bond market in the latest issue of Euromoney, is for CGBs "to supplant U.S. treasuries as the global benchmark."

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