Asian countries are the first to fall in the financial battle between the world's number one and number two.

At present, the world is in a rare moment of major transition, the United States as the leader of the world economy, China in second place, the economic and financial showdown between them is inevitable.

While a financial showdown between the world's first and second largest economies is inevitable, the brunt of the fallout could be felt elsewhere in Asia.

The financial competition between the United States and China has reached a fever pitch: the Federal Reserve's insistence on keeping interest rates high has caused the dollar index to hit a new high in recent years.

Still, the U.S. banking sector is under severe pressure, with at least four banks declaring bankruptcy.

The US interest rate hike has also brought a certain impact on the Chinese economy, and the adjustment of supply chains, the deterioration of the export environment, the decline in domestic demand and the decline in the stock market caused by the outflow of foreign capital have inevitably affected China's financial order.

However, China's choice not to raise interest rates and moderate depreciation of the yuan, for the export power, this will benefit exports, the impact is relatively limited, at least to preserve the basic trading.

In stark contrast, Southeast Asian countries such as Japan, Vietnam, Indonesia, and Malaysia do not have a strong economic and financial foundation.

The large-scale outflow of US dollars has led to the accelerated depreciation of the currencies of these countries, causing the central banks of all countries to pay great attention to whether to take corresponding measures. This certainly confirms a basic rule: a financial war between the two largest economies of China and the United States will bring disaster to the Asian audience.

Asian currency crisis

Recently, the dollar has strengthened again, creating new currency challenges for emerging market countries.

Since 2024, the dollar has gained more than 4%, and the dollar index once broke through the 106 mark, which, coupled with risk aversion caused by some geopolitical tensions, has supported the dollar's strength.

However, the dollar's strength has put pressure on other currencies, especially those in Asia.

The exchange rates of emerging markets have fluctuated greatly, and the market fears that this will have a huge impact on the economic and financial stability of Asia, and may even trigger a financial crisis.

From 2022 to 2023, Asian countries experienced a long period of currency suffering. In April 2024, Federal Reserve Chairman Powell publicly said that the US dollar needed more time to accumulate the capital needed to cut interest rates, which led to many capital crocodiles began to sell Asian currencies out of the Asian market, thus creating a new round of depreciation of Asian currencies.

The Japanese yen has fallen near its lowest level in 34 years, the South Korean won and the Indonesian rupiah have also taken a hit, the South Korean won briefly hit its lowest level against the dollar since 2022, and the Indian rupee has given up all its gains for the year.

Japan had raised rates under pressure from the United States, but the Bank of Japan opted to keep rates unchanged in April, while cutting its GDP growth forecast for fiscal 2024.

In order to stabilize the currency, Indonesia has even taken dual measures to raise interest rates and buy local currency, but it is still difficult to stop the depreciation of the rupiah.

In the face of the Sino-US financial war, China has maintained overall stability and introduced a new monetary anchor bond policy.

Despite the recent volatility in the yuan, it has remained generally stable against a basket of currencies.

In the face of strong dollar pressure, China was not forced to raise interest rates, but continued to cut interest rates to cope with the rising pressure of the dollar index.

At the same time, China has taken the initiative to burst the real estate bubble since 2018, the debt control of local governments has reduced local debt risks, and the stock market bubble has been curbed.

Although many investors suffered heavy losses in the three-thousand-point defense for more than a decade, China's overall economic bubble was contained and the dollar failed to trigger a financial crisis.

Recently, China's central bank in the secondary market to carry out bond trading has attracted market attention.

The central bank stressed that this is only a liquidity management method and a reserve of monetary policy tools, not the beginning of monetary anchoring of government bonds.

However, some experts have questioned whether the central bank's participation in the secondary market of government bonds means the beginning of monetary anchoring of government bonds, and raised concerns that currency depreciation is inevitable.

The advantage of issuing currency in foreign trade surplus is to ensure the stability of the exchange rate, which is actually the RMB indirectly anchoring the US dollar.

But today, the US printing money is the most destabilizing factor, and the dollar's strength is unlikely to last.

Coupled with the huge uncertainties in the Chinese economy and the international economy, the risk of issuing currency with a US dollar surplus is relatively large.

Now, is it good or bad for central banks to issue currency-anchored government bonds? Will it be the same as opening the floodgates, as some people claim? Should China return to the gold standard?

The RMB issuance of anchored Treasury bonds has the most significant impact on the US dollar.

The internationalization of the renminbi will challenge the dominance of the US dollar in the global monetary system.

While not a particularly big hit to the dollar in the short term, this challenge will gradually become a threat.

According to the data of the International Monetary Fund (IMF), by the end of 2022, the scale of RMB reserves held by global central banks has reached 298.4 billion US dollars, accounting for 2.69%, an increase of 1.62 percentage points over 2016, ranking fifth among major reserve currencies.

More than 80 foreign central banks or monetary authorities have included the renminbi in their foreign exchange reserves. As China becomes more influential in the global economy, the renminbi will become more internationalized, which is undoubtedly an ongoing threat to the United States.

At the same time, China's unique economic logic of using renminbi to buy and sell government bonds will also have an impact on the economies and monetary systems of other countries.