OPINION: China’s financial opening up under the Covid-19 pandemic
As the Covid-19 pandemic continues to sweep across the world, globalisation, trade and production activities are hit hard. Despite the pandemic’s presence, China continues to promote its financial opening-up. For starters, China is removing the restrictions on foreign financial institutions' access to the Chinese market at a pre-pandemic pace, as well as opening-up various financial industries such as securities firms, asset management, and insurance.
Then, China has relaxed the restrictions imposed on international capital entering the Chinese market. However, the turmoil in the international financial market caused by the pandemic is continuously affecting China's financial system too. Due to the profound changes in the global economy and financial system caused by the pandemic, the act of reopening the financial world continues be questioned. Issues like the patterns that may crop up in the market’s opening-up in the future and the progress of the internationalisation of RMB are some questions worth pondering about.
Comparing the situation to the time before the pandemic took place, the current international financial system and the global economic landscape have undergone great changes. The pandemic has caused the global trading system to come to a standstill, disrupting personnel exchanges and logistics, thereby worsening the trend of counter-globalisation. In particular, the pandemic has hugely impacted the global industrial and supply chains.
Following the pandemic, the reconstruction of industrial and supply chains will show a more regional trend. Officials from international organisations said that the pre-crisis international trade frictions have led to a slowdown in globalisation and will worsen further after the crisis. Barry Eichengreen, a professor of Economics and Political Science at the University of California, Berkeley, believes that globalisation has begun slowing down.
This is not only indicated through the slowdown of trades but the increasing trade barriers and capital outflows from capital control countries too. Concurrently, global capital markets have been hit hard, and major central banks headed by the Federal Reserve have adopted a never-before-seen loose monetary policy, further reducing interest rate levels to maintain the bubble of financial assets.
This caused the global financial system to experience turbulence and differentiation. In spite of that, the dollar ’s position in the international financial system has actually strengthened, and emerging markets have been seriously affected, bearing the pressure of capital outflows and exchange rate depreciation.
Due to the pandemic and the tremendous changes happening within the international economy and finance, China's economy has also suffered. Particularly, its consumption, investment, and foreign trade all experienced substantial declines in the first quarter. Likewise, the nature of the conflict between China and the United States has turned into a sociopolitical one, due to the countries’ differences in managing Covid-19.
In fact, China is expected to face a harder time on the international level in the future. The important question now is, will China’s financial opening-up lead to further domestic financial risks and market turmoil? Follow up question, will it worsen China’s economy and social stability? This is perhaps China’s biggest financial concern as far as opening up is concerned.
To ANBOUND’s researchers, the changes in the international political and economic landscape signify things are shifting away from globalisation and into regionalisation and geopolitics. Going by ANBOUND’s earlier discussions on the "Crisis Triangle", in the future, be it economic or financial fields, we anticipate competition for market space to further intensify. Therefore, China's reopened financial system needs to focus on improving the financial market system, either by opening the financial market and capital opening or internationalising RMB.
China's financial market has been relatively closed off in the past. Not only are its market rules and legal systems inadequate, its financial institutions generally lack competitiveness as well. It’s not surprising to see investors lack professionalism, which results in a "blockage" within the currency transmission mechanism, on top of poor efficiency in financial resource allocation.
With that in mind, introducing specialised and highly competitive international institutions will have a "catfish effect" that enables local financial institutions’ to compete better, achieve market optimisation options, and improve the overall financial system. Furthermore, it enables foreign financial institutions to better serve Chinese enterprises and improves the efficiency in allocating financial resource too.
Up to this point, many institutions and researchers continue to confuse China’s financial opening-up with RMB internationalisation. In fact, looking at China’s history of financial reform and past opening-up(s), its financial opening has been an ongoing journey, yet it was never once in sync with the level of RMB internationalisation.
The RMB internalisation is more related to the changes in the exchange rate. When the RMB exchange rate saw a depreciation beginning 2015, it joined the SDR currency basket too. China and many other countries have signed currency swap agreements, though the offshore RMB is still shrinking. The situation has not changed with the opening-up of China’s bond and A-share market represented by the expansion of the Shanghai-Shenzhen-Hong Kong Stock Connect.
While foreign investment in China's financial market is still increasing, the overseas use of the RMB as a trading and investment tool has not changed significantly. Not long ago, Yi Gang, governor of the People's Bank of China, mentioned the internationalisation of the RMB is dependent on the market. The central bank's focus is to provide infrastructure, reduce restrictions on the use of RMB, while the market decides which currency to use. Therefore, the internationalisation of the RMB is closely related to China's geo-influence in the international economy and trade scene.
Given the current turmoil in the international financial market, adhering to the opening-up of the financial market through system construction and upgrading should be China’s focus in its financial opening-up, meaning the country should continuously deepen the capacity and improve its financial market‘s attractiveness.
Done well, it will attract the entry of international financial institutions, even with restricted capital flows; and international capital will to value the return on Chinese assets and risk diversification. That said, China needs to be cautious in opening up the capital account to avoid the impact of U.S. dollar capital. For a long time, the U.S. dollar has and will continue to occupy the top position in the international financial system.
China's capital liberalisation and RMB internationalisation need to be promoted gradually in the form of regional trade settlement and bilateral financial cooperation. This means that China should adopt the means of "geo-development”, as the outcome will depend on China's political and economic geo-influence.
Chan Kung is now ANBOUND Chief Researcher. Wei Hongxu is a researcher at ANBOUND Consulting, an independent think tank with headquarters in Beijing.