Financial Cold War

A groundbreaking exploration of US-China relations as seen through the lens of international finance

Rising tensions between China and the United States have kept the financial markets on edge as a showdown between the world’s two largest economies seems inevitable. But what most people fail to recognise is the major impact that the financial markets themselves have had on the creation and acceleration of the conflict.

In Financial Cold War: A View of Sino-US Relations from the Financial Markets, market structure and geopolitical finance expert James Fok explores the nuances of China-US relations from the perspective of the financial markets. The book helps readers understand how imbalances in the structure of global financial markets have singularly contributed to frictions between the two countries.

In this book, readers will find:

• A comprehensive examination of the development of financial markets in both China and the US, as well as the current US dollar-based global financial system
• Insightful observations of the roles of technology, innovation, regulation, taxation, and politics in the markets, and on their resulting effect on US-Sino relations
• Thorough explorations of the role of Hong Kong as an intermediary for capital flows between China and the rest of the world
• Suggestions for how, balancing the many varying interests, policymakers might be able to devise effective strategies for de-escalating current Sino-US tensions

Financial Cold War is a can’t-miss resource for anyone personally or professionally interested in the intersection of economics and international relations, financial markets, and the infrastructure underlying the international financial system.

Preface xi

Acknowledgements xix

Abbreviations xxiii

Chapter 1 Introduction 1

Legacy of the GFC 5

Modern History of Sino-US Relations 6

The Financial Roots of Sino-US Conflict 11

The Financial Path Out of Conflict 15

Part One The Colour Of Money Turns Green 17

Chapter 2 How the US Dollar Took Over the World 19

An Ad Hoc Position 21

The Barbarous Relic 24

Two Competing Plans 30

A British Innovation 34

The Coupon Express 36

Plumbing the World’s Financial Markets 42

Niksonu Shokku 47

Volatility 51

‘Risk Free’ Assets 57

Boom and Bust 62

Chapter 3 Whose Problem? 65

The Unipolar Moment 69

The Almighty Mr. Market 74

Emerging Markets Crises 84

The Weakest Link 98

The Music Stops 102

Anyone for Tea? 108

A Tipping Point? 113

Part Two Capitalism With Chinese Characteristics 123

Chapter 4 From First World to Third and Back Again 125

Maritime Power 131

The Milk of Paradise 135

Wars and Revolutions 147

A Leap into the Abyss 156

Herding Cats 161

Crackdown 172

Journeys to the South 177

A New Path 181

The Bird’s Nest 187

Chapter 5 Two Steps Forward, One Step Back 192

Going Public 197

The Protection Racket 206

The Price of Money 212

Still Building, But Will They Come? 221

Alien Attack 228

Who Will Look After Grandma? 237

Connecting China and the World 242

Can’t Buy Me Love 262

Part Three The Financial Cold War 271

Chapter 6 A New Cold War? 273

A Close Call 277

Fly Me to the Moon 279

Tax Me If You Can 284

A War of Words? 291

Geo-economic

Warfare 294

Chapter 7 The Role of Markets in the 21st Century 307

Selective Efficiency 310

What Happens When Competition Dies 313

Wrong Incentives 318

Bubbles and Cycles 321

Funny Money 328

We’re All in the Same Boat 342

Chapter 8 Avoiding the Thucydides Trap 343

Admitting the Problems 345

A New Bretton Woods? 350

MAD for Markets 362

It All Starts with Leadership 365

Afterword 369

Cast of Characters 381

Bibliography 399

Notes 423

Index 453

James A. Fok is a veteran financial and strategic advisor to corporations and governments. He served as a senior executive at Hong Kong Exchanges and Clearing (HKEX) during a decade of rapid internationalisation in China’s capital markets. Prior to that, he worked as an investment banker specialising in the financial services sector.

Since the 2008 global financial crisis, tensions between the United States and China have risen rapidly. The rhetoric escalated further when the Trump Administration imposed significant new tariffs on Chinese goods and, despite a transition to a new administration in the White House, a near-term thawing of relations does not appear to be in the cards.

In Financial Cold War: A View of Sino-US Relations from the Financial Markets, market structure and geopolitical finance expert James Fok examines Sino-US relations through the lens of the financial markets, helping readers understand how imbalances and nuances in the structure of the global financial system have contributed to the current geopolitical tensions between America and China.

The book traces the history of the development of financial markets in both countries and of the current US dollar-based global financial system. It goes on to explain why the structure of world financial markets is fanning the flames of global tensions. Alongside a presentation of geopolitical developments between China and the West from the 18th century to the present day, the author examines the role of technology, innovation, regulation, taxation, and politics in markets. At the same time, he explores how the markets have impacted politics and policy.

Drawing on over two decades of hands-on experience in financial markets, including a decade on the frontline negotiating the integration of Mainland Chinese and international capital markets, Fok offers an in-depth analysis of the global financial system and questions the enduring assumptions that underpin it. He highlights the growing risks of dependence on the US dollar and worldwide fiscal competition, the challenges posed by China’s gradual financial market opening, and the role played by Hong Kong as an intermediary for capital flows between China and the rest of the world. He also suggests ways for Chinese and American policymakers to address key financial sources of conflict in order to de-escalate geopolitical tensions.

Financial Cold War is a must-read resource for anyone interested in the interplay between financial markets and international relations, and the international infrastructure of the financial system.

PRAISE FOR FINANCIAL COLD WAR

“James Fok’s book highlights the explosive risks in the relationship between the US and China today. It also offers insights into fundamental driving forces of international frictions and is a call to take urgently necessary steps to address the sources of conflict.”

—Klaus Schwab, Founder and Executive Chairman of the World Economic Forum

“My only gripe about James Fok’s take on the bumpy road ahead for US-China relations is that his book doesn’t include a seatbelt. His message that things are about to get turbulent, one offered in uniquely personal terms, should be necessary reading for investors and businesspeople everywhere.”

—William Pesek, award-winning Tokyo-based journalist; Forbes and Nikkei Asia columnist; author of Japanization: What the World Can Learn from Japan’s Lost Decades

“Financial Cold War is a profoundly important book necessary for understanding China-US relations as well as the challenges facing the modern day global economy. James Fok has used his unique vantage point of working at the intersection of international finance and the Chinese economy to provide invaluable insights and analysis of this new geopolitical and geoeconomic frontline. It is remarkable in its breadth—tracking, from ancient days, how modern China and America have found themselves in this precarious position. Fok also offers practical steps for Chinese and US policy makers, business leaders and market participants to avoid, and de-escalate, tensions within this financial Cold War.”

—James Shipton, former Chair, Australian Securities & Investments Commission; former Executive Director, Harvard Law School’s Program on International Financial Systems; former Executive Director, Securities & Futures Commission of Hong Kong

“The multi-trillion-dollar financial market relationship between America and China has profound implications for the whole world. As the United States and China head down the path of digital and technology decoupling, their tension in finance­—especially China’s new sovereign digital currency potentially challenging the US dollar’s supremacy—adds a new layer of complexity to the global economy. Thankfully, James Fok has delivered exactly the kind of comprehensive, timely and thought-provoking account you need to get up to date.”

—Winston Ma, CFA, Managing Partner of CloudTree Ventures; author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace

“James Fok is a China expert and he found himself on the frontline of the Sino-US rivalry that threatens the world's financial ecosystem. This book benefits from his personal experiences, and from his passion for original research and for telling a story of global significance.”

—Dato’ Seri Cheah Cheng Hye, Co-Founder and Head of Value Partners Group, Hong Kong