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Will Asia pioneer the “de-dollarization” process?

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Denmark-based Saxo Bank has released a new batch of “outrageous” predictions for 2020 that it believes could potentially destabilize the entire international system existing today. The bank’s experts predict, among other things, that in the coming year, the Asian Infrastructure Investment Bank (AIIB) may launch “a new reserve asset, called the Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the ADR the world’s largest currency unit.”

Blockchain technology will give the ADR additional reliability and ensure maximum transparency of payments effectively making it a conventional unit in a basket of leading world currencies and gold, with the Chinese yuan heavily prominent in the mix and the US dollar weighted at below 20 percent. 

According to the Danish bank, this step is clearly aimed at de-dollarizing regional trade. Local economies will multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up on their growing reliance on the Asian market.

The ADR will quickly take a sizable chunk of global trade away from the US dollar, leaving the United States ever shorter of the inflows it needs to fund its double-digit deficits. The US dollar will lose 20 percent against the ADR within months and 30 percent against gold.

By the close of the 1990s, Southeast Asian countries had started coming forward as the main competitors for US companies with local political and economic elites getting increasingly wary of the imbalances of the “unipolar model of globalization” where capital continues to accumulate mainly in countries issuing world reserve currencies. It looks like the world’s leading powers now have in mind the scenario of a possible collapse of the modern world order. The policy of sanctions and financial and economic pressure, which has recently been pursued by Washington raises the prospects of a financial system or systems being created that would be independent of the United States. In Asia and Eurasia, new political alliances are emerging, including in the form of region-wide financial institutions.

The processes currently unfolding in the financial and economic life of Asia and elsewhere in the world, are in large part associated with the trade war that has been going on between the United States and China for the past few years, taking in ever new trade and economic sectors and now threatening to spill over into the sphere of finance as well. Still, the scope of this rivalry has not yet reached a Cold War level. In fact, Saxo Bank predicts an escalation of the US-China trade war to a level typical of the Great Depression era. If this is what is going to happen, the US dollar, this symbol of US dominance in the global financial system, may effectively be weaponized to undermine the development potential of any outside rivals, China included, who would no longer be able to make financial settlements, receive and issue loans, and finance their existing obligations. And all this without any immediate threat of the use of military force. One possible way of avoiding this scenario would be to create a regional reserve currency not directly dependent on either the US dollar or the Chinese yuan.

Another major factor in the evolution of the financial architecture of Asia is that China, now the world’s second biggest economy, wants to be able to “better defend its economic interests and influence decision-making processes pertaining to global economic development.” To this end, Beijing “needs to participate in international institutions where its voice will carry decisive weight.” The creation of AIIB in 2014, where half of the bank’s capital currently belongs to Beijing, was just one step in this direction. Many experts believe that China wields an unofficial veto right in the Bank’s key decisions. However, as noted by Professor A. Kuznetsov, official Beijing keeps insisting that “newly created institutions present competition, not an alternative,” to the IMF and the World Bank.

Overall, the Asian reserve currency’s prospects depend on how regional and global financial and economic trends are perceived by the major global economies. Ever since the emergence of the global money concept, there has been only one leading world currency in use: first the Dutch guilder, then the British pound and later the US dollar. Right now, expert opinions relevant to the dynamics of the US dollar’s share in the global currency vary significantly. According to a European Central Bank report released in June 2019, “the US dollar remains the world reserve currency, but its predominance has been significantly shaken.” This trend towards a diversification of reserves and a year-on-year contraction of the US dollar’s share in the world central banks’ reserves is likewise acknowledged by a review of global trends released by the International Monetary Fund. The greenback is gradually being replaced by the euro, the Japanese yen and the Chinese yuan. There are more and more payment mechanisms independent of the United States popping up, with The Economist writing about China working hard to create its own international payment system based on the yuan. There has also been talk about China paying in yuan for its Iranian oil imports.

Is all this enough to predicate the emergence of an alternative payment system though? The US dollar still accounts for a significant share of investment and global trade, including in oil, natural gas and metals. There are at least three factors still preventing the yuan from becoming a world currency: the high cost of “financial transactions associated with the receipt and distribution of information”; “China’s overdependence on Hong Kong as a regional offshore financial center,” and the People’s Republic’s inability “to exert political influence on other world economic centers, mainly  the US and the EU.” There are still four factors testifying to the yuan’s increasing value as a regional currency: the projected “growth of the Asian countries’ incomes” leading to “an increase in demand for Chinese goods”; “the implementation of multilateral projects as part of the “One Belt, One Road” initiative, resulting in increased yuan usage in the countries of Central and Southeast Asia”; “The development of the Asian bond market leading to the standardization of international debt in RMB”; “increased demand for RMB by commercial banks and enterprises as part of the Multilateral Initiative to conduct swap operations between central banks.”  

Finally, the process of the yuan’s “internationalization” is slowed down by the Chinese authorities’ need to maintain short-term growth, while simultaneously countering “adverse external shocks.”

Well, at the end of the day the global financial system may “naturally” break up into several relatively independent currency zones: the dollar, the euro and the yuan (or yen). In future, the world may likewise rest on a similar balance of power. However, these currency zones will inevitably find themselves competing among themselves, which will be a test of strength for all currency macro-regions. At the same time, the countries of the Asia-Pacific region will face a hard choice. As recently as the dawn of this century, uniting around the Japanese yen was seen by most of them as the most logical option. Now that the People’s Republic of China has turned into a regional economic powerhouse and the world’s second economy, the need for closer interaction between the economies of the Asia-Pacific region and the Chinese yuan is becoming increasingly evident. Meanwhile, the low level of mutual trust between a number of leading Asian countries and China may become a hurdle on the way of creating a common reserve currency.

Finally, the past 3-4 years have seen a slowdown in China’s economic growth, which, in turn, could drive down commodity prices worldwide. As a result, raw materials exporters, including Russia and Saudi Arabia, whose budget deficit this year exceeds four percent of GDP, will find themselves on the losing end. Meanwhile, China and Saudi Arabia account for a significant part of the US public debt. Faced with mounting economic woes, Beijing and Riyadh might be forced, together or separately, to start selling US government bonds, “which will inevitably send their value into a tailspin,” with a knock-on effect in the financial markets and the bankruptcy of a number of leading financial institutions. Such a course of events may be fraught with a new financial meltdown.

An “end of the dollar’s dominance” for any other reasons, including a “sudden” emergence of a very strong alternative reserve currency, would  “result, first and foremost, in a large-scale economic crisis in the People’s Republic,” “a collapse of oil prices” and a quick slump in “economic activity around the globe.”. Therefore, China, as a founding member of the AIIB, which Saxo Bank calls the potential issuer of ADR, is hardly interested in a depreciation of the US dollar.

One should also bear in mind the fact that all leading EU countries, including Britain, Germany, Italy and France, happen to be members of the AIIB. Therefore it can be assumed that Europeans, who are intent on strengthening the euro’s global standing, may not be all too happy about  the prospect of a new reserve currency coming along that could challenge  not only the dollar, but the single European currency as well.

Although the emerging economies’ share in global savings is currently close to 50 percent, “this money keeps flowing, via international reservation channels, into the Anglo-Saxon center of the global financial system, with limited possibilities for its productive placement.”

The current model of globalization is losing momentum too. This can somewhat reduce frustration with development imbalances, but per se it will hardly be able to correct the overall structural imbalances of the global economy. Economists warn about the dangers of creating a system of payments alternative to the dollar, which could bring about exchange rate fluctuations and a chaotic “capital spillovers” from one reserve currency to another and back. One thing is clear: the harder Washington tries to destroy the established “rules of the game,” the louder the calls for the creation of global or regional financial systems alternative to the dollar will get. However, the creation of such systems will require large-scale and lengthy political and organizational efforts, while the price tag will be prohibitively high too. Therefore, it is highly unlikely that anyone will venture to predict exactly when this is going to happen.

From our partner International Affairs

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Warning Signs in China’s Economic Outlook as COVID-19 Spreads

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New variables both within and outside of China in 2022 have placed the country’s economy under new pressure. In the first quarter, its economic growth rate was only 4.8%, which was 0.7 percentage points lower than the annual economic growth target of 5.5%, indicating that it will face challenges in stabilizing economic growth this year. Judging from the economic performance of various sectors in the first quarter, there have been some noteworthy risk signals in the country’s domestic economy. Among them, the Yangtze River Delta and the Pearl River Delta, the two largest regional economic pillars in China, have shown signs of slowing down in economic growth.

According to the data released by the Shanghai Municipal Bureau of Statistics, the GDP of Shanghai in the first quarter was RMB 1 trillion, a year-on-year increase of 3.1%. From January to February, the city’s economic operation began rather smoothly, yet in March due to the obvious impact of the COVID-19 pandemic, the growth rate of some economic indicators slowed down. In the first quarter, the added value of Shanghai’s industrial enterprises above the designated size increased by 3.9% year-on-year, 8.0 percentage points lower than the growth rate from January to February. The total sales of goods increased by 2.0%, and the growth rate dropped by 4.1 percentage points. The total investment in fixed assets increased by 3.3%, and the growth rate dropped by 9.3 percentage points. Meanwhile, the total retail sales of consumer goods changed from an increase of 3.7% in January to February to a decline of 3.8% in the first quarter. The total import and export of goods increased by 14.6%, and the growth rate was 7.4 percentage points lower than that in January-February.

On the other hand, according to data from the Guangdong Provincial Bureau of Statistics, the GDP of Guangdong in the first quarter was RMB 2.85 trillion, a year-on-year increase of 3.3%. The added value of industries above the designated size was about RMB 0.98 trillion, a year-on-year increase of 5.8%. Fixed asset investment increased by 6.2% year-on-year; total retail sales of consumer goods up 1.7% year-on-year; and total import and export of goods rose by 0.6% year-on-year. In terms of finance, in the first quarter, Guangdong’s local general public budget revenue was about RMB 0.35 trillion, a year-on-year increase of 1.4%. Local general public budget expenditure has increased by 8.7%.

In the Chinese economy, the two provinces of Shanghai and Guangdong have a unique and important position.

Shanghai is not only highly crucial in China’s urban economy, but also leading the Yangtze River Delta region as well. In 2021, its GDP was RMB 4.3 trillion while the GDP of the whole of China was RMB 114.4 trillion. The total GDP of the 41 cities in the Yangtze River Delta region was RMB 27.7 trillion, accounting for 24.2% of the national GDP. There are 24 cities in the country with a GDP exceeding RMB 1 trillion, and there are 8 cities in the Yangtze River Delta (Shanghai, Suzhou, Hangzhou, Nanjing, Ningbo, Wuxi, Hefei, Nantong) accounting for one third. Shanghai is also one of the most internationalized cities in China, which also functions as the country’s center of international economy, finance, shipping, and trade. In addition, the city also proposes to build a global science and technology innovation center.

Guangdong is China’s largest province in terms of economic scale. Its GDP in 2021 was RMB 12.43 trillion, an increase of 8.0% over the previous year. In terms of sub-regions, the GDP of the core area of the Pearl River Delta accounted for 80.9% of the province, while the eastern and western parts, as well as the northern ecological development area accounted for 6.2%, 7.0%, and 5.9% respectively. The Pearl River Delta region is also the main body of the Guangdong-Hong Kong-Macao Greater Bay Area. In 2021, the total economic volume of the Greater Bay Area was about RMB 12.6 trillion. There are 25 of the world’s top 500 companies in the region, and it has over 60,000 high-tech enterprises, most of which are located in the Greater Bay Area. As of the end of 2021, there are 5 cities with a GDP of trillions in the Guangdong-Hong Kong-Macao Greater Bay Area, with a combined GDP of RMB 10.56 trillion.

It is precisely because of the important position of Shanghai and Guangdong in the country’s economy that their signs of a downturn in the first quarter this year are worthy of attention. These two provinces represent the development of the Yangtze River Delta and the Pearl River Delta respectively to a considerable extent. If there are issues in their economy, it would signify that China’s twin pillars in the most economically developed coastal areas will not be able to support the whole nation’s economy. If this happens, there will undoubtedly be a huge negative impact.

Looking back at the economic development of Shanghai and Guangdong in the first quarter of this year, the impact of the pandemic is clearly seen. In Guangdong, this is mainly due to the COVID-19 outbreak in Shenzhen in March. As Shenzhen acted quickly, and after locking down for a week, the outbreak has been brought under control and the city reopens subsequently. The situation in Shanghai is much dire. It has been a month since different urban areas are under lockdown and the city has been completely closed off in April. Based on the economic scale of Shanghai in 2021, the average daily GDP of Shanghai is about RMB 11.8 billion, and the average monthly GDP is about RMB 360 billion. If the lockdown of Shanghai continues, its economy will be enormously affected.

It should also be pointed out that with the current measures and policies against COVID-19, various areas have also seen the systematic suspension of many economic activities, especially the shutdown and interruption of logistics systems. This, in turn, has resulted in the obstruction of the flow of economic elements. This situation is still quite severe, where localized shocks in the economy are spreading or spilling over to other regions through obstruction of transportation and logistics.

As COVID-19 continues to hit Shanghai, the authority’s goal of “dynamic clearing” still faces major challenges. However, judging from the pressures China’s economy is facing this year and the development tasks it is currently undertaking, the country needs to pay more attention to economic growth in its balancing of pandemic control and the economic goal. As emphasized by China’s Central Economic Work Conference at the end of last year, “stabilizing the macroeconomy is not only an economic issue but also a political one”.

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G7’s potential should be utilized positively

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UK Government / flickr (CC-BY-ND 2.0)

The G7 Foreign Ministers of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States of America, and the High Representative of the European Union, have met in a fundamentally changed strategic and security environment. The Russian-Ukraine issue was dominating in their deliberations. As this issue has a direct regional and global impact, it was expected to remain a core issue during the G7 discussions.

G7’s share in global wealth, resources, and political influence is domination. They have been contributing to geopolitics a lot and possess the capability to transform the whole world into a better place to live.

G7 understands its potential and global responsibilities. So during the meeting, almost all burning issues were discussed:-

The climate crisis is accelerating and threatening the very existence of humanity. Together with the international community, G7 must act decisively and urgently. It reaffirmed the belief in international solidarity and the need to mitigate and overcome this existential, human-made threat.

The fight against COVID-19 and its global consequences is far from over. It is paramount to reaffirm our commitment to increased efforts to respond to the pandemic and to prevent a similar threat from emerging again. Equitable access to and provision of vaccines, therapeutics, and diagnostics must go hand in hand with immediate support, especially in critical ’last mile’ contexts, and with a focus on humanitarian efforts as well as opportunities for green, inclusive and sustainable recovery from COVID-19.

The present and the future of this planet are at stake. Based on a strong sense of unity, the G7 is determined to uphold our values and defend our interests. It commits to preserving strong, vibrant, and innovative societies and upholding the rules-based international order to protect the rights of all, including the most vulnerable. It commits to engage with partners and multilaterally for a peaceful, prosperous, and sustainable world, and to increase coordination on economic security.

Iran, North Korea, Palestine-Israel, Sudan etc., most of global issues were also discussed. China remains important during their discussions. Regarding China, the G7 declared its strong statement. In response to it, the Chinese authorities have expressed deep concerns;

China on Monday urged the Group of Seven (G7) to stop smearing China and interfering in China’s internal affairs. Foreign ministry spokesperson Zhao Lijian made the remarks at a daily news briefing when asked to comment on the communique issued by a G7 meeting of foreign ministers, which contains various items relating to China including Hong Kong, Xinjiang, human rights, maritime issues, the situation in Ukraine, peace, and stability across the Taiwan Strait, among others.

“China’s positions on issues relating to Hong Kong, Xinjiang, and Taiwan, as well as maritime issues, are consistent and clear,” Zhao said, adding that China has expressed its firm opposition to the G7 presidency.

“The lengthy G7 communique is filled with preposterous allegations not even worth refuting. In total disregard of China’s solemn position and objective facts, it grossly interferes in China’s internal affairs, maliciously slanders and smears China, and once again exerts pressure on China using such pretexts as the Russia-Ukraine conflict,” Zhao said.

China urges the G7 to uphold the international system with the United Nations at its core, international order based on international law, and the basic norms of international relations based on the purposes and principles of the UN Charter, Zhao said. He called on the G7 to respect China’s sovereignty and to cease slandering China and interfering in China’s internal affairs in any form.

“We urge the G7 to act in the interest of world peace and development, stop applying double or multiple standards, stop sending military aircraft and warships to other countries’ doorsteps to flex muscles at every turn, stop wantonly instigating color revolutions in other countries, stop arbitrarily resorting to illegal sanctions or long-arm jurisdiction, and stop fabricating and spreading lies and rumors about China,” the spokesperson said.

He also urged the G7 to assume its responsibility, fulfill its due international obligation, safeguard true multilateralism, focus on global governance, strengthen cooperation with the UN, G20, and other multilateral mechanisms, and play a positive role in addressing global challenges and promoting world economic recovery, instead of clinging to the Cold War mentality and ideological bias, pursuing “small clique” group politics, creating confrontation and division, and bringing chaos to the world.

As a matter of fact, G7 controls the major portion of resources, economy, and trade. It possesses the potential to transform the whole world into a better place to live for everyone. It has the capacity to resolve any outstanding issue being faced for as long as several decades, like Palestine, Kashmir, etc. G7 may utilize its capabilities to save humankind and the total welfare of human beings. Bashing, threatening, and coercion, will complicate the situation further and may harm humanity. G7’s potential should be used positively.

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China’s Policy Logic and Economic Rationale

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Authors: He Jun and Wei Hongxu

Recently, Morgan Stanley mentioned that “we are standing at an important turning point in China’s economy and capital market. The resetting of the underlying logic of the economy brought about by the new goals is marked by the supervision of Internet giants. China is changing the underlying logic of economic development: shifting from priority growth to fairness”. In their view, this policy orientation, coupled with Chinese economic rationale, will have a long-term and far-reaching impact on China’s future development, business, and investment.

Since economic rationale is a part of social phenomenon, the fundamental basis of economy logic also lies in changes in demographic factors. Although human factors are crucial in economic activity, they are often overlooked due to the long-term and individual nature of changes in population quality and scale. On the contrary, industrial development and policy choices pay more attention to changes in external factors such as cost, technology, and capital. However, the underlying logic changes caused by demographic shifts are often decisive and could serve as the basis for corporate decision-making and macro-policy.

China’s transition from a high-growth era to high-quality diffusion shows that the underlying foundation of the country’s economic development has changed fundamentally. From the demand side, the past trend of counting on exports and investment as economic drivers will soon become obsolete. At the same time, driven by continuous investment on the supply side in the past, the steady growth of production capacity not only conforms to domestic demand, but also the subsequent expansion of exports has also turned China into the world’s factory, resulting in excess production capacity. After its rapid development, internal contradictions continue to accumulate, resulting in a widening gap between the rich and the poor, excessive collection of environmental resources, declining investment returns, and rising labor costs in the country. These factors have deprived China’s economy of its potential for scale expansion. On this basis, China’s economy began to turn inward. Upgrading value content and output efficiency have become the key to improving its industrial productivity and competitiveness.

From the underlying logic, China’s population structure is undergoing a trend adjustment. The declining share of labor force driven by continuous urbanization and the rural population transfer has alternated labor supply. The low-end labor force has now become relatively insufficient, while the industrial labor costs continue to rise. This makes cost-push expansion increasingly onerous. On the other hand, with the development of urbanization to a certain stage, rising land prices, housing, and education costs begin to erode the spending power of households, causing an increasingly inadequate domestic demand. These two aspects are eroding the long-term growth potential of the Chinese economy. The recent drop in China’s economic growth rate is not only caused by cyclical factors driven by demand, but also by structural factors at the supply side.

In terms of policy trends, whether it is the “13th Five-Year Plan” poverty alleviation, or the current policies on common prosperity and unification of the large market, the fairness of these supply-side structural reform policies is being strengthened. The purpose is to enhance the contribution of science and technology and human capital to the economy. By increasing household income and spending power, China’s economy can achieve endogenous economic growth. Despite increased macroeconomic pressures and the need for countercyclical policies, macro foundation has yet to change significantly. The focus remains on decisive regulation and quality improvement, which is the logic of the policy change.

While implementing the supply-side reform, the Chinese economy still needs to improve the structure of supply through incremental expansion to achieve a balance between efficiency and fairness. Morgan Stanley revealed that, on the one hand, the efficiency improvement brought about by digital industrialization is the main area for China’s future market expansion. On the other hand, further urbanization still has great significance in the market space. These two aspects will be the main essence of China’s economic growth in the future, and therefore the focus of policy support and catalyst. Overall, under the new underlying logic, increasing households’ income, reducing class gaps, and increasing the output of capital and labor would be the main lines of sustainable development in the future. This pattern suggests that economic expansion has become relatively less important in policymaking. As noted by Morgan Stanley, China “is shifting its regulatory priorities to a balance between growth, sustainability, improving social imbalances, and maintaining security. This will shift the division of economic benefits to workers and reduce corporate profits”.

Yet, the policy-oriented changes under this underlying logic could be precarious. Due to the dominant role of government policies in market supervision, education, transformation of scientific and technological achievements, as well as the allocation of public resources, the impact of policies on economic and market development is getting more pronounced. For the industry and market players, future development must consider even more policy influences. At present, education and the consolidation of internet platform companies have had a significant impact on related fields and investors. Concernedly, as policy influence continues to expand, so do the risks posed by policy excesses. Although the current policy does not emphasize “one-size-fits-all” but rather “precise regulation”, it is often strenuous to achieve “moderate” and “balance” in the current policy implementation capacity. Meanwhile, the risk of excessive supervision continues to cause harm to economic activities. Therefore, under the expanding policy influences, policy decision-making should be more cautious to prevent harm or excessive intervention in the market and economic activities.

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