The Parallel System

In between the resuscitation of the Iran War, controversial World Cup soccer refereeing and heat waves, China launched its parallel gold and yuan infrastructure.

The Hong Kong gold central clearing system went live. HSBC completed six gold trades in one day for refiners and jewellers. Standard Chartered completed seven gold trades for banks and companies. The Bank of China was appointed a clearing bank. The Shanghai-Hong Kong "Delivery Connect" mechanism went live. A real-time settlement and centralized value model reduced credit risk, insurance and logistics costs. The clearing system also offers real-time settlement versus London's two-day settlement creating a competitive advantage for Asian time zone participants.

Second, the PBOC, Hong Kong Monetary Authority and the Securities Futures Commission, made a joint announcement amending the RMB Business Facility boosting the quota from 200 billion yuan to 500 billion yuan ($73.6 billion). The participant base includes over 40 banks. The efforts are designed to boost the fixed-income, currency and offshore yuan markets.

Finally, China expanded its derivatives infrastructure. ChinaAMC executed its first public fund interest rate swap under "Swap Connect". The London Clearing House (LCH) began accepting offshore yuan-denominated China government bonds as collateral. CCB International launched a unified cross-border trading platform.

ICBC's chairman noted the infrastructure bridges the gap between Western trading hubs and Eastern consumption. It connects more than 70 central banks and sovereign wealth funds directly to the Hong Kong market.

The simultaneous launch of the gold clearing system with the other measures to deepen the use of the yuan do not seem coincidental. Connecting 70 central banks to the Hong Kong market starts the implementation of China's "Gold as a Service" strategy providing non-Western sovereigns direct access to gold trading, storage and settlement outside of London and New York. HSBC's and Standard Chartered's participation provide immediate credibility, as well as the seeds to their own disintermediation. It suggests Western banks are hedging their exposure to London's dominance.

The fact LCH accepted offshore yuan-denominated Chinese government bonds as non-cash collateral formally integrates yuan assets into Western risk frameworks, which is also quite notable.

One implication of the new parallel system is that gold flowing into Hong Kong vaults will reduce the metal available in London's custodial pool. It also means more than 70 central banks will have direct access to gold accumulation outside of Western systems.

The fact that such an infrastructure is now available does not mean that it will be used. We'll have to track volumes.

But the U.S. is helping to provide a tailwind to the use case…

Pentagon Says: More Money Please. The Pentagon said it would soon run out of money and might have to park jets and turn off exercises to conserve cash if Congress doesn't pass Trump's spending bill. The Iran War cost's initial estimate of $25 billion is now $132 billion, indicating the poor signal quality of the administration's projections. The Pentagon has now requested $67 billion of emergency supplemental spending and $350 billion in a Reconciliation 3.0 defence request. Stockpile replenishment costs have not been quantified but continue to rise as the U.S. drops more bombs.

With the war seeming to flare up again (Iran says the Strait of Hormuz is closed, missile attacks on U.S. bases, fresh U.S. strikes, Iran hit a commercial vessel), the costs may escalate further. Pete Hegseth said over the weekend, "Iran made a poor choice. Now they pay." But the U.S. is paying too…

U.S. June Deficit Numbers Don't Look Good. The Congressional Budget Office's June budget estimates receipts of $495 billion and total spending of $621 billion for a $126 billion fiscal deficit. June 2025 showed $526 billion of receipts and $499 billion of spending or a seasonal fiscal surplus of $27 billion. So, year on year we're seeing a sharp deterioration in the fiscal account. The U.S. public debt now sits at $39.4 trillion and estimated 2026 interest expense is around $1 trillion, numbers that should be shocking but the public is more shocked by FIFA's poor refereeing. While defence spending is one cause for the horrid numbers, Social Security benefits rose 5%, Medicare spending rose 8% and Medicaid spending rose 10%. The increased spending for Social Security, Medicare and Medicaid is not a surprise as under the accrual method, these cost increases have already been booked. Under the accrual method (reported by the Financial Report of the U.S. government), the 2025 budget deficit is 7% versus the cash reported fiscal deficit numbers of 6%.

The deteriorating fiscal credibility leads to a higher term premium and risk assessment demanded on Treasuries. This triggers diversification flows and creates a bid for the Chinese alternative asset and settlement rails that happen to be going live at the same moment. A year from now, I'm expecting the settlement volumes of China's parallel system to grow larger than most people think.

It's Hot. Usually in England, we get a day or two of hot weather. Occasionally we get a week. This year we've gotten a level (three heatwaves, a 37.7 Celsius temperature recorded in Lingwood, Norfolk, eight record days above 34 Celsius) that most of the country is now thinking about buying air conditioning, probably a high growth business for aspiring entrepreneurs.

The cause of the heat involves the jet stream, which is a river of fast-moving air at high altitude, driven by the temperature difference between the cold Arctic and the warm tropics. The larger the gap, the faster and more tightly coiled the jet stream stays.

The Arctic has been warming nearly four times faster than the global average, a phenomenon known as Arctic amplification. This is driven in large part by the melting of sea ice. Dark ocean water is exposed, absorbing more solar radiation and heating up faster.

The Tropics are also warming, but at a lesser rate. This lowers the temperature differential and slows the jet stream. The jet stream meanders more, like a drunken sailor, and causes larger waves. The larger waves create high-pressure systems and creating high-pressure ridges, known colloquially as a heat dome.

Air sinks from the high altitude and compresses as it descends; the compressed air heats up, like a bicycle pump that gets warm. The trapped, sinking, compressed air gets hotter, with no incoming weather system to displace it, leaving overnight temperatures uncomfortably hot.

El Niño may have made these conditions worse this year as record sea surface temperatures in the tropical Pacific may have raised global temperatures.

Arctic amplification is the leading theory to the heat domes, but it's debated. Other scientists say the jet stream is moving.

What happens if the ice completely melts? This is subject to intense debate, and no one knows. Maybe quantum computing will help with models. But the scenarios are that the Arctic continues to heat at a faster rate creating even worse blocking events and heat domes. A second school noted that the jet stream may move. This would make current temperature zones dry and move storms that produce rain more northward. A third camp thinks not much will happen and that the temperature differential will remain. Another scenario is that things may get colder in Europe, because the warm Gulf Stream may get blocked by colder waters from the ice melt.

It must be tough being a farmer. But it must also be a high-risk time for the reinsurance industry. Climate change is a tail risk not well priced into valuations or risk frameworks, but we'll be seeing some dramatic changes in the years ahead.

End Note

The World Cup has had its fair share of controversies, but it's been a boon for the American tourist industry. The Scots drank the Sam Adams brewery dry. "Freddy" the German fan's American odyssey went viral, as he discovered Texas's Buc-ee's. A Japanese supporter had a philosophical missive about free chips and salsa at a Mexican restaurant, saying, "Here, the gift arrives before you have even proven you can pay for dinner. This is not an appetizer. This is a declaration: we trust you. Eat." In a world of AI, wars and deficits, it's good to see sport bring nations together if only for a month.

Omar Sayed