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China’s Financial Opening-Up Under the Covid-19 Pandemic

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Authors: Chan Kung and Wei Hongxu*

As the Covid-19 pandemic continues to sweep across the world, globalization, 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 internationalization 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 global trading system to come to a standstill, disrupting personnel exchanges and logistics, thereby worsening the trend of counter-globalization. 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 organizations said that the pre-crisis international trade frictions have led to a slowdown in globalization and will worsen further after the crisis. Barry Eichengreen, a professor of Economics and Political Science at the University of California, Berkeley, believes that globalization 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 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 politics and economic landscape signifies things are shifting away from globalization and into regionalization 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 internationalizing 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 specialized and highly competitive international institutions will have a “catfish effect” that enables local financial institutions’ to compete better, achieve market optimization 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 internationalization. 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 internationalization. The RMB internalization 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 internationalization 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 internationalization 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 too 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 liberalization and RMB internationalization 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.

Final analysis conclusion:

In the presence of the Covid-19 pandemic, China should give a little more forethought pertaining its financial opening-up. On one hand, it should emphasize and accelerate the construction of the financial system to promote the opening of its domestic financial markets. On the other, a more cautious geo-approach is required to implement capital account opening and RMB internationalization.

*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

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Economy

COVID-19 Hits Hard, But Challenges BRICS

Kester Kenn Klomegah

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By and large, the coronavirus pandemic has taken a huge toll on Brazil, Russia, India, China and South Africa (BRICS). The pandemic, declared late January by the World Health Organization (WHO), allegedly originated (yet to be proved) from Wuhan city in China. However, the World Health Assembly on May 18-19 by a resolution agreed to launch an investigation into the origin of the disease, whose unyielding march across the globe since last year and has already left more than 320,000 dead.

Statistics made available as at May 20, showed that Brazil (310,087) in South America, Russia (317,554) in Eastern Europe or compared to, say in the former Soviet region, India (118,447) and China (84,507) both in Asian region, and South Africa (19,137) in Africa.  It means South Africa, with a population 57 million, has one-fifth of the total confirmed COVID-19 cases in Africa.

Further, assessing BRICS countries population in relation to the number of infections, Russia seems the worst spot among BRICS, and has taken the second highest in the world and that was followed in the third position by Brazil. Under a “pessimistic scenario”, the number of active cases could peak again when the expected “second wave of coronavirus” sets in and if strict precautions are not observed.

The COVID-19 has shattered nearly all economies. But at the same time, just as the COVID-19 has offered opportunities, so it also presents significant challenges. In the world including BRICS countries, the outlook remains bleak. BRICS is interested in both, taking advantage of the emerging opportunities and dealing with the challenges.

Experts have argued that BRICS members meet to discuss various global issues, and plan its joint collaborative projects on the global landscape. Comparatively, Russia, India and China, all these three still respond individually to varying opportunities and pursue different investment in the world. 

As experts noted, China and India lead in the pursuit of economic spheres of influence worldwide. Geography of investment largely explains why China and India seem to be leading, followed by Russia, among the five. With regard to coronavirus and the operations of WHO, Chinese President Xi Jinping, delivering a speech via video link at the opening of the World Health Assembly, pledges $2 billion to deal with COVID-19.

According to an executive decree published in April on the official website of Ministry of Foreign Affairs, Russia contributed $1 million to the World Health Organization (WHO) to fight the coronavirus. Figures unavailable for Brazil, India and South Africa.

Still put them together, BRICS is an upcoming and developing force to reckon with. Thus on May 7, Russia’s Health Ministry held a meeting of BRICS countries via videoconference focusing, particularly, on the issue of the novel coronavirus pandemic discussed joint efforts needed by BRICS countries. It was held within the framework of Russia’s BRICS chair-ship.

Participants from Brazil, Russia, India, China and South Africa discussed at the meeting all aspects, including measures on liquidation of the novel coronavirus infection, and submitted report to BRICS Health Ministries. “It is planned that the online platform will provide partners with an opportunity to share BRICS countries’ experience and develop joint steps towards reaching a better understanding of the ways to liquidate the COVID-19 outbreak,” according to the report.

The participating officials agreed that it is important to strengthen international cooperation, within the framework of which there has to be a transparent and timely exchange of information.

During the discussions, the countries also agreed to continue providing mutual support in activities to prevent and treat the novel coronavirus infection COVID-19, as well as to create favorable conditions for the supply of deliveries of medications and diagnostic materials, immune-biological preparations and medical equipment.

Under an “optimistic scenario”, the BRICS meeting by Health Ministers of BRICS countries pledged to adopt further collaborative steps as their collective contributions toward the eradication of the global pandemic.

It is worth to say that BRICS has to accelerate the implementation of some of its earlier initiatives. Over the years, the BRICS has wanted to expand cooperation in the fight against infections and the joint production and use of vaccines. Cooperation on countering infectious diseases has long been a priority for BRICS. For instance, the final declaration of the 2015 BRICS summit in Ufa, Russia, contains instructions by the leaders to work on managing the risk of disease outbreaks.

That declaration stated: “we commend the efforts made by the BRICS countries to contribute to enhanced international cooperation to support the efforts of countries to achieve their health goals, including the implementation of universal and equitable access to health services, and ensure affordable, good-quality service delivery while taking into account different national circumstances, policies, priorities and capabilities.”

Last month for instance, BRICS Ministers of Foreign Affairs /International Relations held a video conference chaired by Foreign Minister Sergey Lavrov. Brazilian Foreign Affairs Minister Ernesto Araújo, Indian External Affairs Minister Subrahmanyam Jaishankar, Chinese Foreign Minister Wang Yi and South African Minister of International Relations Grace Naledi Pandor took part in the meeting.

China and Russia have strong working relationship and both are members of BRICS. Russia objects to attempts by the United States to turn the World Health Organization (WHO) into a forum for settling political scores, Minister Lavrov said with colleagues during the video conference of BRICS Foreign Ministers held late April. Russia has been working closely together with China, and Russia has no reason to oppose China, according to Minister Lavrov.

Key Highlights from that meeting included:

The BRICS nations agreed to allocate $15 billion to the New Development Bank (NDB) so that it could set up a special loan instrument to support the revival of economies and help meet the emergency expenses incurred for responding to the coronavirus pandemic.

The BRICS nations further held discussions on ways to step up cooperation within the bloc to contain coronavirus pandemic, as well as to revive the economies that have received a major blow due to the travel restrictions and lockdown imposed in most countries to curb the spread of coronavirus. 

The meeting underlined the need for reforms in the multilateral systems and stated that this was the way forward. The bloc reiterated its support towards the World Health Organization, stating that it is a very important and unique platform, which employs the best professionals from around the world, including from the United States.

Chinese Foreign Minister Wang Yi called on all the BRICS members to firmly stand by multilateralism, by the international system centered around the United Nations and by the purposes and principles of the United Nations Charter.

Throughout 2020, – under the theme “BRICS Partnership for Global Stability, Shared Security and Innovative Growth” – Russia holds the BRICS pro tempore presidency.

The emphasis of the Russian presidency is on promoting science, technology and innovation and digital economy and health, and strengthening cooperation in the fight against transnational crimes. In addition to those, dozens of academic, sporting, cultural and artistic events planned for the year, culminates with the final BRICS Summit on July 21−23 in St Petersburg, chosen as the venue in accordance with the Presidential Executive Order No. 380 of 15 August 2019.

BRICS is the group composed by the five major emerging countries – Brazil, Russia, India, China and South Africa, – which together represent about 42% of the population, 23% of Gross Domestic Product (GDP), 30% of the territory and 18% of the global trade.

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Possibility of companies shifting from China

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US President Donald Trump made perhaps the strongest statement with regard to China, when he stated that US could totally snap ties with China. The US President also stated that the US could save 500 Billion USD, while referring to annual US imports from China (in 2018, US trade deficit vis-à-vis China reached 419.5 Billion USD)

In addition to adopting a strong stance against China by imposition of tariffs, and more recently on the outbreak of the coronavirus pandemic, the Trump administration has initiated some strong measures against telecommunication giant Huawei. In 2019, the US Huawei, along with 114 of its overseas-related affiliates, had been added to the “entity list,” citing national security concerns  (as a result of being designated on the ‘entity list’, Huawei needs an export license requirement on all exports, reexports, and transfers of items subject to the US Export Administration Regulations (EAR) to Huawei and its listed affiliates)

On May 15, 2020, The Bureau of Security and Industry (BIS), US Department of Commerce announced new rules, with the clear objective of restricting Huawei’s ability to use U.S. technology and software and to design and manufacture its semiconductors overseas. According to the rules, Foreign semiconductor makers using American software and equipment need to obtain licenses for selling to Huawei.

US measures to reduce dependence upon China and change supply chains

There are also strong indicators, that the US is thinking of coming up with some measures which incentivize US companies to relocate from China (Trump ever since taking over the US Presidency has been pitching for the same) and to shift supply chains. There was talk of a ‘reshoring’ fund to the tune of 25 Billion USD. It is not just the Republican Party, but there is bipartisan support for re-thinking economic ties with China in a post-covid world (China made products accounted for, 18%, nearly 1/5th of US imports).

There is an especially strong consensus on the point, that dependence for essential commodities on China needs to be reduced (one bill passed by a Democrat and Republican seeks to set up a panel, which can reduce drug supply reliance on China). Peter Navarro, Director of the White House Office of Trade and Manufacturing Policy, had also been pushing for the country’s medical supply chains to be U.S.-based. Navarro had even suggested an executive order according to which Federal Agencies were required to buy US-made medical supplies and pharmaceuticals.

With the aim of reducing dependence upon medical supplies from China, an important step was the recent decision of the U.S Department of Health and Human Services to award a four-year, $354 million contract to a private US company –Phlow Corp — to make Covid-19 drugs (this contract can be extended upto 812 Million USD over a period of 10 years).

Greater cooperation within Five Eye intelligence network to reduce dependence upon China

According to a report published by Henry Jackson Society all members of the five eyes intelligence network (Australia, UK, US, New Zealand and Canada) are dependent upon China for crucial imports. In the case of the US, it is dependent upon China for 424 categories of goods out of these 114 are linked to national infrastructure. Australia is the most dependent upon China – it imports 595 categories of goods from China, and 167 of these have applications in critical national infrastructure. The report also sought greater cooperation within the network for reducing dependence upon China.

It would be pertinent to point out, that not just US, but Japan has earmarked over 2 Billion USD (2.2 Billion) for facilitating Japanese companies from China back to Japan, and other countries. The bulk of this package (2 Billion USD) is targeted towards getting Japanese companies to relocate to Japan, the remaining amount is meant to be used for helping Japanese companies to shift to other countries such as Vietnam.

Possibility of companies shifting from China and likely beneficiaries

In the midst of the US-China trade wars, a number of companies shifted their base from China to Vietnam. According to a study out of 56 firms which shifted their base from China, almost half (26) shifted to Vietnam due to the investor friendly environment

Even in the aftermath of the coronavirus pandemic, some firms (including Google and Microsoft) had expressed their keenness to shift production of hardware from China to Vietnam

Recently, TSMC (Taiwan Semi Conductor Manufacturing Company), the world’s largest contract chip maker also announced that it would build a 12 Billion plant in Arizona, US (the plant would be operational in 2024). While the US Secretary of Commerce, Wilbur Ross, hailed this announcement, TSMC is likely to be impacted by the Trump administration’s new rule which seek to restrict global chip supplies to Huawei.

Why China is a preferred destination for US companies

While some US companies may look to relocate from Beijing, it is important to have an understanding of ground realities, and the views of investors. China is attractive for many investors due to a plethora of factors; this includes the large Chinese market, a rising middle class, and the ever increasing popularity of American goods amongst young consumers. Even after the outbreak of the coronavirus, retailers like Walmart and Costco are seeking to expand their operations in China. A number of other American companies continue to bet on the Chinese market.

In a Survey of 25 companies (by the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai), 44% stated that decoupling of US and Chinese economies was impossible. This is a significant drop from October 2019, where 2/3rd — 66% — of companies surveyed had stated that US and Chinese economies were too closely intertwined, yet it still is substantial (what is important is that only 16% of those surveyed had emphatically stated that they would shift their production outside China).

Conclusion

While it is true, that some companies are likely to shift from China, Beijing will seek to introduce policies which woo foreign investors. China had in fact introduced incentives for foreign companies (including greater regulatory transparency) in the beginning of 2020.

Apart from this, it also possesses some major advantages, which have been discussed earlier, vis-à-vis other countries. While countries like US, Japan, Australia, India and Vietnam need to work jointly towards shifting supply chains, it is important to be realistic and pragmatic, and understand that supply chains are not likely to change over night.

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CPEC: Whether a Debt Trap for Pakistan or Not?

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April 2015, was a historic month for the Sino-Pakistan relations when China and Pakistan signed an agreement worth $46 billion for the China-Pakistan Economic Corridor That with the passage of time increased and reached $62 billion.The time tested, and deep-rooted Sino-Pak relations would go down into the annals of history as an everlasting era of bilateral bonding and mutual trust. This high significance corridor runs through one of the most vital geostrategic locations in South Asia.As far as the first phase of CPEC is concerned, the recent statistics show that it is going satisfactory in which Pakistan has completed some significant energy projects. Now Islamabad aims to improve its transmission system so that it can cut down on the outages. Similarly, infrastructure projects such as motorways are going well.

According to ISPR Official Documentary on the progress of CPEC, the multi-beneficial CPEC opened for trade purposes on October 2016. On that date, a convoy of 95 trucks left the Sust dry port for their journey across the CPEC right up to Gwadar Port. Besides, Pakistan Army and other law enforcement agencies made full proof security arrangements for safe transportation of these trucks along the CPEC. Also, the safe passage of these convoys to Gwadar is a hallmark to the untiring efforts of the government of Pakistan and Pakistan Army. Besides, the success has not come up easy today while passing through the Khunjrab Pass where the altitude reached 4700 meters, one reminded of 800 Pakistan Army and 300 Chinese engineers were laid their lives for this dream to come true. After the successful completion of phase one Pakistan is going into phase two which is going to be industrialization, modernization of agriculture, livelihoods, the concentration of special economic zones, and relocation of industry especially labour-intensive costs are going up.

Concerning the success of CPEC, many scholars, writers, and experts shared their views such as Former Amb. Abdul Razak Daood, a Foreign Minister Shah Mahmood Qureshi, said that CPEC headed in the right direction and it is not a debt trap instead of a project of peace, prosperity, development and job creation for Pakistan. Meanwhile, Saad Hashmi, Economy Expert at Topline Securities, expressed that CPEC was not going to become a debt trap for Pakistan rather a game-changer through its progress and stability. He further argued that when Islamabad would spend all that money in power projects, infrastructure and industries resultantly the GDP growth of Pakistan would improve on that bases Islamabad could quickly return its loans. Such as,Neelum-Jhelum Plant (a largest overseas hydropower project) that provides 500 million kWh of electricity a year, this will alleviate 15% of power shortfall in Pakistan along with generating Rs45 billion or $400 million.

When it comes to the criticism over CPEC as a debt trap by the countries such as the US and India, their disparagement does not base on facts rather personal grudges with Islamabad and Beijing. As US assistant secretary for South Asia, Alice Wells criticized that project and called it debt trap, but both Pakistan and China denied her allegations. In this regard, the Planning Commission of Pakistan told that “the debt repayments will start in 2021 with about $300-400 million annually and gradually peak to about $3.5 billion by the fiscal year 2024-25 before tapering off with total repayments to be completed in 25 years.” It further explained that “CPEC is not imposing any immediate burden concerning loans repayment and energy sector outflows.” It shows that Islamabad can return its loans from the benefits of the investment to the economy of Pakistan. Besides, CPEC is “an engine for economic growth and expects to increase Pakistan’s GDP growth by 2 to 3pc.” That is why CPEC is considered not a ‘debt-trap but a boon for Pakistan. If China lends money to Pakistan at one of the lowest interest rates in the world, how can it be a debt-trap?

On 23rd of July 2018, a statement by the Chinese Embassy in Pakistan showed that CPEC had achieved significant progress in the last five years. It further explained that “CPEC has effectively alleviated energy crisis and infrastructure shortage that Pakistan considers as two bottlenecks in its development, and played a positive role in maintaining the relatively high economic growth in the country.” Also, Noor Ahmed, secretary of the Economic Affairs Division of Pakistan, told that share of Chinese loan is about 10 per cent of total foreign debt while the country’s total external debt is about $106 billion. Meanwhile, the remaining 89-90 per cent foreign debt is from the International Monetary Fund (IMF), Paris Club, and other western organizations.

According to the Ministry of Planning, Development and Reform, CPEC has so far created 75,000 direct jobs, and it has the potential to further generate 800,000 to 1,500,000 posts till 2030. The progress of the CPEC projects portrays that it is going to be beneficial for Pakistan instead of a debt trap. Such as Yao Jing, Chinese Ambassador to Pakistan, expressed his views by saying “Beijing would only proceed with projects that Pakistan wanted, this is Pakistan’s economy, this is their society.”Pakistan has to return the Chinese loans by 2037-38 that is much time, and Islamabad could quickly generate massive money from the completed projects, in this regard, it will be feasible for it to return its loans from the profits of successful projects under CPEC. These projects aim to generate a considerable amount of money resultantly strengthening the economy and GDP of Pakistan.

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