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the face of growing domestic social tensions arising from wealth and income inequality, the political elites in both countries have resorted to populist nationalism. This is discussed further in Chapter 6. The result has been escalating Sino-US tensions, with the Financial Cold War recently heating up in the form of a widening geopolitical clash being played out in the financial and economic spheres.

Conventionally, there are considered to be seven economic tools suited to geopolitical application: trade policy; investment policy; economic and financial sanctions; financial and monetary policy; economic aid; cyber; and energy and commodities.²³ The latter two have certainly been applied in Sino-US geopolitical context but, since these verge on the domain of conventional warfare, they fall outside the scope of this volume, which is focused on the financial and economic dimensions of the relationship that are stoking tensions. Nevertheless, as highlighted in this book, each of the other tools in the economic arsenal has been mobilised in an escalating Sino-US conflict.

The trade war launched by Donald Trump in early 2018 has been the focus of much attention. However, this was neither the opening salvo in the geo-economic clash between the US and China, nor is trade even the most pertinent battlefront. While trade flows were at the forefront of policymakers’ thinking at Bretton Woods,²⁴ the huge growth in global financial markets since then means that today the trade in goods and services has been vastly superseded by financial flows, which now account for roughly 90 percent of cross-border capital movements.²⁵ It is therefore to the capital markets that we must look to fully understand the scope of the geo-economic conflict between the two countries.

      As the geo-economic campaign between China and the US unfolds, we face a substantial risk that this will spill over into broader conflicts that could result in disaster for both nations and the rest of the world.

The Financial Path Out of Conflict

      The evolution of markets has been a major civilising force for humanity. Financial markets provide a vital means for capital to be allocated to where it can be most productively used and have enabled the sharing of risks, such that mankind has been able to undertake giant ventures beyond the capacity of any individual or small group. This has contributed to a reduction in conflict and to huge advances for humankind.

      Nevertheless, markets operate within institutional frameworks and are subject to the incentives that they create. When policies are calibrated to encourage competition and foster enterprise, markets can be powerful drivers of innovation and progress. Financial markets are complex ecosystems, however. Poorly designed incentive structures and lax regulatory enforcement can give rise to serious imbalances. When imbalances occur, their impact can stretch far beyond the financial sphere, with significant social, political and diplomatic repercussions.

      Since finding resolutions must begin with understanding, this book reviews in detail the history of how the global financial system today has come about, as well as the ideological and practical underpinnings of different financial and economic policies.

Part One of the book focuses on the US. It first gives an account of how the dollar came to dominate the global financial system, and explains the policies, regulations, infrastructure and market conventions that perpetuate the dollar's global role. It then questions whether the costs of that role to both the US and the rest of the world may now outweigh the benefits.

      Part Two focuses on China. Given the very long historical perspective through which Chinese policymakers frame policy, it is necessary to have a broad perspective of Chinese history to appreciate the context of today's financial and economic policies. This part therefore first takes readers on a whistle-stop journey through six centuries of Chinese history, from the height of China's relative global economic power during the Ming Dynasty (明朝, 1368–1644) through to the ravages of the Cultural Revolution (文化大革命, 1966–1976) and the country's economic climb back in the decades since. It then goes on to give an account of the development of China's modern financial markets and examines the financial and economic challenges facing the country today.

      Part Three examines the true nature of the current Sino-US conflict and possible ways to reduce tensions between the two countries. It first critically assesses the New Cold War narrative and looks at the financial and economic sources and dimensions of conflict. It then looks at the role of financial markets today and how, in many instances, contemporary policies, regulations and incentives have subverted the proper functioning of markets. The final chapter concludes with a discussion of potential reforms to US and Chinese policies and to the global monetary system that could help rebalance the world economy and de-escalate Sino-US tensions.

      The sheer scale of the imbalances that have built up means that they cannot be quickly unwound and many of the challenges are not well understood. Reforms will require key decision makers in China, the US and other major nations to put their heads together, seek truth from the facts, and cooperate with each other in designing appropriate policies. It will be a daunting task. However, for the sake of our future peace, stability and prosperity, it is a task that we can no longer put off.

Notes

      1 1. (Fukuyama, 1992).

      2 2. IMF data, which can be accessed at: https://data.imf.org. Figure given is for 31 December 2020.

      3 3. A ‘Gilt’ is the common term used for a British government bond.

      4 4. (Rajan, 2019, p. 248).

      5 5. See, for example, (Klein & Pettis, 2020) and (Magnus, 2018).

      6 6. See (Kolodko, 2020).

      7 7. (Saunders, 2020).

      8 8. China conducted a series of live-fire exercises in the Taiwan Strait in the run-up to Taiwan's presidential election on 23 March 1996 to express displeasure at the apparent independence leanings of Taiwanese President Lee Teng-hui (李登辉).

      9 9. (Yergin, The New Map: Energy, Climate, and the Clash of Nations, 2020, p. 138).

      10 10. (Wong, 2015, p. 14).

      11 11. (Naughton, 2020, p. 129).

      12 12. (Wong, 2015, p. 14).

      13 13. In 2018, before worsening Sino-US relations and the 737 Max recall affected its sales, China accounted for 13.6 percent of Boeing's worldwide revenues. Notwithstanding ongoing trade tensions, China contributed 18.8 percent, 11.0 percent and 9.3 percent, respectively, of the worldwide sales of Nike, Starbucks and Disney in 2020.

      14 14. See (Magnus, 2018) and (Mahbubani, 2020).

      15 15. HKEX and Dealogic data for the 10 years up to

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