The United States’ trade war may be dealing a blow to China’s economy, but it could well be a blessing in disguise. This is because the dispute between the world’s two largest economies is accelerating the process in which China replaces the US as the dominant force in the global financial system. If China is able to deliver tough but necessary reforms to make this happen, its capital markets will transform into a major asset class no international investor can afford to ignore. The US, which acted as the leader of free trade for the past several decades, is increasingly reluctant to accept the cost of global financial leadership, such as a chronic current account deficit and an economy overly reliant on consumption and debt. The dollar, the world’s main reserve currency, has not helped American exports industries either. The greenback tends to appreciate when global economic conditions deteriorate, reducing the competitive advantage of US multinationals when they need it most. Now that the US is seeking to reduce the deficit and shed its global responsibilities, the trade war presents China the incentives to embrace far-reaching reforms that would enable it to take on a pivotal role in the reconfigured financial regime. Specifically, it will have to liberalise its capital account and integrate fully into the world financial system. If such a future sounds far-fetched, look at Asia. Here, a China-centric order is already taking shape. In a relatively short space of time, Asia has effectively evolved into a renminbi bloc. As China’s neighbouring trade partners increasingly settle contracts in the renminbi, the Chinese unit has become a more important anchor for the region’s currencies. China, Russia declare war on US dollar dominance According to our calculations, as much as 15 per cent of movements in Asian currencies can be attributed to shifts in the renminbi, compared with zero in 2006. The dollar is still dominant, although its influence has shrunk to 83 per cent from a 2008 peak of 90 per cent. The renminbi bloc today represents some 23 per cent of world gross domestic product, compared with just 5 per cent in 2006. By our calculations, this alone suggests that the renminbi should command a global reserve share of 13 per cent, seven times higher than the current figure . China should waste no time in pursuing reforms and opening up its capital markets. The reason is demography. The proportion of the working-age population – those aged between 15 and 64 – will decline to 52 per cent by 2030 from a peak of 64 per cent a decade ago. Over the same period, China’s savings rate will have dropped to less than 40 per cent of GDP from 46 per cent. This is because as the population grows older , its overall spending increases , mainly on health care and retirement. It’s only a matter of time before China finds itself running a current account deficit – consuming more than it produces. When that happens, the country will have to finance that deficit by borrowing more from abroad. In other words, it will turn from an exporter of capital to an importer. This will have significant investment implications. Renminbi-denominated bonds and stocks will become global investments to rival those of the US, Europe and Japan. Anticipating this, world bond and equity index providers have begun incorporating Chinese financial assets into their mainstream benchmarks . The move is expected to attract inflows of more than US$300 billion. Greater involvement of overseas investors in Chinese markets should also enhance return on their investments. This is because the injection of foreign capital can work as a catalyst for cutting costs and revitalising some of the chronically inefficient industries. Beijing may also divert a substantial sum of capital away from idle investments such as US Treasuries to fund local research and development programmes designed to help develop innovative, home-grown businesses which produce value-added products and services. This should help Chinese companies generate revenues that no longer rely on technology transfer from the Silicon Valley. China’s holdings of US Treasuries tumble to lowest since May 2017 Already, the number of patents filed and scientific papers published in China has eclipsed that in the US. The World Bank calculates that China’s R&D spending has risen to 2.1 per cent of GDP in 2017 – above that of Norway, Australia and the UK – from a typical developing economy level of 0.6 per cent just 20 years ago. If China is to grab a greater slice of international investment, the biggest loser could be US Treasury market. At the same time, demand for second-tier reserve currencies such as the yen and sterling would probably wane, to the detriment of UK and Japanese bonds and stocks. The trade war has the potential to transform the financial landscape. For China, it may represent huge opportunities in adversity. Patrick Zweifel is chief economist at Pictet Asset Management