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Covid-19 is speeding up China’s rise as a financial rival to America

Geopolitics and technology had already laid the groundwork

SINCE THE second world war, America has been the pulsating centre of the global financial system. Now, though, repeated missteps, and China’s growing pull, have begun to tear at the seams. Many assume the status quo is too entrenched to be challenged, but that is no longer the case. A separate financial realm is forming in the emerging world, with different pillars and a new master. The hegemon-in-waiting financially, as geopolitically, is China.

A crude measure of this change is provided by the relative size of the countries’ banks. The world’s financial plumbing remains under America’s thumb. But Chinese institutions are gaining ground. Three things are driving change, as explained by our special report on international banking.

First, the “push” factor of geopolitics. America’s centrality allows it to cripple rivals by denying them access to the world’s liquidity supply. Yet until recently it refrained from doing so extensively. President Donald Trump’s administration has elevated the system for use as a weapon, and used it even against allies. This creates resentment.

The second force behind the new trends is the “pull” factor of spontaneous attempts to meet the needs in emerging economies. Chinese tech firms have sights on the world’s 2.3bn people with little access to financial services. Helped by plentiful capital and permissive rules, they have created cheap-to-run systems they are starting to export. Some also aim to enable commerce in regions where credit cards are rare but mobile phones common.

It helps that many emerging countries, not just China, are keen on a rebalancing. Most borrow abroad, and price their exports, in dollars. America was once the biggest buyer. Whenever the dollar rose, demand would follow, making up for costlier debt. But a stronger dollar now means China, their chief trading partner, can afford less stuff. So demand falls just when repaying loans gets dearer.

The third factor helping insurgents is covid-19, which could lead to a tipping-point. Already hobbled by rising tariffs, global trade is likely to fragment further. As disruption far away causes local shortages, governments want to shorten supply chains. That will give regional powers like China more room to write their own rules.

Most important, the crisis harms other countries’ trust in America’s fitness to lead. It ignored early warnings and botched its initial response. China may be guilty of worse—its own missteps helped export covid-19 in the first place. Yet it managed to curb cases fast and is now broadcasting a narrative of domestic competence. It is also dispatching medics and masks around the world, whereas America struggles even to provide for itself. America’s ability to guarantee global prosperity is the glue that holds the financial order together. With its legitimacy badly hit, renewed assaults on the system seem inevitable. On the front line are the dollar-system’s foot soldiers: the banks.

Editor’s note: This Daily Chart is based on an article entitled “Parallel universe”, part of a special report on international banking published in this week’s issue of The Economist

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