liberalise domestic finance and seek limited globalisation of finance

context: In a global environment increasingly defined by ‘de-risking’ and the potential weaponisation of the USD-centric financial system, the PRC is seeking to build a financial sector that prioritises economic growth and adaptability. This shift aims to insulate the PRC from external pressure while asserting a new, state-led logic on the global financial architecture that challenges the dominance of Western liberal norms.

Xia Bin 夏斌 China Chief Economist Forum chair argues that the PRC’s rise as a financial power requires a new economic logic

  • during times of great changes in global power dynamics, economic policymaking becomes incredibly complicated and unpredictable
    • new political economy thinking that goes beyond mainstream theories is required
  • adopting a financial strategy that can preserve globalisation is crucial for the PRC
    • this strategy doesn’t necessarily have to be adversarial to other nations’ interests
      • it can be an avenue through which the PRC can establish itself as the preeminent global power
  • there are contradictory demands on the PRC financial sector
    • growth opportunities include
      • a high savings rate, industrialisation and urbanisation, globalisation, and institutional reform
    • challenges include
      • geopolitical tensions, territorial disputes, climate change, domestic income inequality and demographic problems, soft power lag, etc.
  • the PRC needs to globalise its financial sector as soon as possible
    • this should not be rushed and must be pursued with ‘risk isolation’ and ‘shock absorption’ in mind
  • the PRC system has ‘financial lags and weakness’
    • the RMB exchange rate is not free-floating
    • the RMB does not have strong pricing power in commodities
    • internationalisation of financial markets is still underdeveloped, meaning cross-border flows are slow
  • the way forward: the PRC should liberalise domestic finance and seek limited globalisation of international finance
    • core components of this strategy include a floating RMB exchange rate, capital account management, RMB internationalisation and domestic financial reform
    • the key to implementing these components lies in managing the coordination and sequencing
      • exchange rate flexibility relies on RMB internationalisation, which in turn requires domestic reforms
    • ‘limited globalisation’ refers to when all these components are gradually advanced and mutually reinforcing and market risk is mitigated by integrating different ‘firewalls'
  • a managed floating exchange rate is necessary for this transitional global period
    • the PRC is far too big and far too developed for a fixed exchange rate pegged to another currency
      • at the same time, the PRC’s macroeconomic control capabilities and level of market development cannot support a fully floating system
    • the advantage of a managed system is that the RMB can ‘free-ride’ on the dollar’s influence while releasing pressure for RMB appreciation
      • it also allows for the PRC to provide the right conditions and ample time for economic restructuring and transformation