Institute for New Economic Thinking President Robert Johnson, HSBC Chief Executive for Greater China Helen Wong, and HKU Professor of Public Policy Xiao Geng spoke to the topic of changes to the global monetary order. The discussion was moderated by AGI Distinguished Fellow Andrew Sheng.
The world is changing at a rapid pace- but global finance has not kept up
In the 19th century, it can be said that the world was highly integrated under the British Empire. A thriving maritime trading system supported the sterling’s nascent efforts to become a global currency while on land, the silk road had taken off, linking east and west.
Fast forward to the latter half of the 20th century, the world saw trade and finance represent a quarter of global GDP and today, global finance is now at nine times global trade and four times that of world GDP. the digital share of trade and capital flows is also rising very rapidly.
Amid all this, we are seeing the phenomenal rise of approximately 40 per cent of mankind rising into the middle class. Today, the middle class, particularly the young in Asia, know about much more, move in high-speed, and are globally connected. Yet we continue to live in a uni-polar system which was brought about as a result of the Breton Woods Agreement which was reached in 1944; this is the same system which also saw the birth of the IMF and the World Bank. These institutions are now being challenged.
Threats to the old financial order
There are a number of threats to the old financial order. Firstly, there is profound financial deepening seen in emerging and developing economies, particularly within the Asian subset of that group. As an example, an estimated 84% of growth assets and 78% of growth liabilities in these countries have occurred in the last fifteen years, so we are looking at a very different structure of interdependence through finance—and finance in the age of digital communication is not well-anchored.
Secondly, the world is dealing with a system of insufficient aggregate demand even as it tries to draw in China, which is the largest economy in the world. There are still a lot of adjustments in front of us which will stress both China and the rest of the world. The challenge is how to make the most of that particular challenge.
Politics has thus far hampered the response of multi-lateral institutions to these changes. A dysfunctional U.S. political system has hampered America’s ability to put forward a constructive solution to adjusting multi-lateral institutions so they reflect China’s rise. Isolating China may be good marketing in America, but it is a dreadful policy to pursue, and this institutional evolution is bound to bring stress to the financial markets.
China’s rise can benefit the region
China’s role in the international arena began with the internationalization of the RMB. From a psychological standpoint, the RMB’s inclusion into the IMF’s Special Drawing Rights basket is critical because this inclusion should give companies, institutions, and investors around the world the confidence to use the RMB to settle trade and investments—this will ultimately lead the RMB to become a reserve currency.
But the currency still has a long way to go. Until November 2015, Swift data shows RMB use only constitutes 2.28 per cent of world global payments, while the U.S. dollar is used in more than 40 per cent of all payments; the Euro is almost at 30 per cent. So there is still a long way to go. The room for the RMB to become an international currency is big, but volatility and concerns about capital outflows have created new challenges for China’s financial policy makers.
For more than half a century, the international monetary order was dominated by institutions such as the IMF and the World Bank, and later by the Asian Development Bank. China’s rise and the establishment of the Asian Infrastructure Investment Bank (AIIB) will provide better access to China and to other emerging markets which are linked by the Belt and Road Initiative as well.
Asia remains a global growth hub. In 2016, HSBC expects China’s growth to be at 7.7 per cent; India’s growth will be at 7.4 per cent, and 4.2% for the ASEAN 6, or that region’s six biggest economies. Asia is where opportunities are.
… but it needs to fix its own problems.
The low interest rate regime adopted by Central Banks around the world may have brought an end to the Global Financial Crisis, but the policy also encouraged problems with non-performing investments and overcapacity within China to arise and intensify. A Beijing attempt to head these problems off has put a damper on the country’s economic growth, and we are now seeing stresses triggered by this slowdown and from the capital flight.