There is no China-US financial war - yet

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Although the U.S. and China are on the verge of signing a phase one trade deal, the trade war is far from over. Most of the hundreds of billions of dollars in tariffs the two countries have levied on each other over the past 19 months remain in place. The bilateral relationship is as fraught as at any time since the establishment of diplomatic relations in 1979. Yet, the "financial war" forecast by pundits hasn't materialized.

That's not to say tensions aren't affecting the financial sector. They certainly are, even pre-dating the start of the trade war. In January 2018, Washington blocked Ant Financial from buying MoneyGram, citing national security concerns. Chinese firms listing on U.S. exchanges face tighter scrutiny than before. The U.S. is mulling taking action against Chinese banks for allowing transactions tied to North Korea's nuclear program. The National Defense Authorization Act (NDAA) for the 2020 fiscal year passed in December calls for secondary sanctions on financial institutions that do business with Pyongyang in violation of existing sanctions on the Hermit Kingdom.

For its part, the U.S. seems to be proceeding cautiously with punitive action against China in the financial sector. That's probably because Congress rather than President Trump is driving those efforts. The only exception has been the Trump administration naming China a currency manipulator in August 2019, a largely symbolic - but well suited for a tweet - move. In the meantime, bipartisan legislation drafted last year aimed at forcing full disclosure by Chinese firms listed on U.S. exchanges has gone nowhere. The legislation addressed a legitimate question: Why has China been able to block U.S. regulators from accessing the financial audits of its companies? Beijing claims that the information constitutes "state secrets."

After the legislation was drafted, concerns mounted about the possible deleterious effect of forcing Chinese companies to delist from the New York Stock Exchange and Nasdaq. In September, speaking on "Squawk Alley," Senate Majority Leader Mitch McConnell expressed opposition to forced delisting. Preventing Chinese firms from accessing the U.S.'s capital markets "could end up hurting us — whatever tactics we use with regard to China need to not be ones that punish us," he said.

Washington's leverage may be limited in this case, as Chinese firms have the option to list in Hong Kong instead of New York. The Hong Kong Stock Exchange will accommodate them if the NYSE and Nasdaq won't. Hong Kong offers Chinese firms the ability to raise capital from global investors close to home with none of the political risk of America's capital markets.

Meanwhile, despite China's aversion to "dollar hegemony," the renminbi is in no position to challenge the greenback's dominance. Renminbi internationalization has slowed to a crawl amidst Beijing's reluctance to relinquish control over the Chinese financial system. The yuan today accounts for just 2% of the world's trade settlements. To increase that figure significantly, China would have to remove capital controls and let the yuan float. Otherwise, it's simply too troublesome to use the Chinese currency outside of China.

To be sure, the dollar's share of global currency reserves could fall. But other freely convertible currencies would likely fill the void - the euro, South Korean won, possibly the Brazilian real - rather than the yuan, economists say.