Axios' Bethany Allen-Ebrahimian and I write: Thanks to a mandate for outside investment and its strong rebound from the coronavirus pandemic, China’s financial markets are drawing record high chunks of global capital — particularly from U.S.-based investors — and are poised to keep growing.
Why it matters: As more money flows to China’s financial markets, its political leaders will have a clear mechanism to increase the country’s political power, giving China another potent weapon to challenge the United States’ position as the world’s superpower.
What we're hearing: China's goal is "renminbi internationalization," says Nicholas Borst, director of China research at Seafarer Capital Partners.
What it means: As more foreigners invest in mainland Chinese companies, government bonds and other securities that trade in renminbi — China's currency — they are forced to buy and hold the currency.
- The more global investors hold these Chinese assets, the more international and important China's currency becomes.
- "You can’t have a globally important currency unless you give investors a safe place to park it," Borst tells Axios.
The big picture: China has long weaponized access to its domestic consumer markets for geopolitical gain, forcing airlines, hotels, Hollywood studios, and many other companies to avoid crossing the Chinese Communist Party's red line.
- As China's capital markets become more lucrative, many expect they will leverage access to those markets in the same way.
One case study: In Hong Kong, China's national security law requires banks to freeze the assets of pro-democracy activists accused of "terrorism" or "sedition" for political organizing activities.
By the numbers: As of 2020, the market cap of Chinese companies listed on mainland, Hong Kong and overseas indexes like the New York, London and Singapore stock exchanges, totaled nearly $17 trillion, with the vast majority ($11.7 trillion) on mainland exchanges.
- That total rivals the combined market cap of the London Stock Exchange and the Euronext exchanges.
Yes, but: China has a long way to go before the RMB becomes an internationalized currency. That's in part because China's leaders are reluctant to make the currency fully convertible, since doing so would relinquish some control over capital outflows and domestic fiscal policy.
What to watch: China is developing a digital RMB, and the global payments giant SWIFT has partnered with China's central bank to help develop it.
- A digital RMB could speed the internationalization of China's currency and expand Beijing's geopolitical sway around the world.