Global Markets

Why it is in US interests to give up its dollar privilege to forge a more neutral financial order

Posted on 1min read

Much ink has been spilled speculating over the longer-term consequences for the US dollar of the unprecedented financial sanctions imposed on Russia in the wake of military action in Ukraine. Will it lead the world to de-doll arise? And will it contribute to greater international adoption of the renminbi?

Perhaps. But these lines of discussion miss a more profound point: what do we risk by weaponising the global financial commons?

Continue reading at SCMP.com...

* First published in The South China Morning Post (8 June 2022)

Image from SCMP.com

Share

The Asian Century needs better financial foundations

Posted on 4min read

Asia’s growing wealth has been accompanied by rising economic, cultural and political influence, prompting predictions that the region will come to dominate the 21st century. Investors have tended to focus most heavily on China, but the region is far larger than China alone.

Numerous other Asian nations are huge economies in their own right, and many have far more favourable demographics and higher long-term growth prospects. Nevertheless, the Covid-19 pandemic and intensifying Sino-US geopolitical tensions have radically transformed their operating environments. Without drastic changes to the underpinnings of their financial and economic systems, not only may the Asian Century never materialise, but underlying imbalances could precipitate social and economic turmoil.

The story of Asia’s rise in recent decades has been one of export-driven growth, leveraging the region’s abundant resources and its large supply of low-cost labour to produce goods and services for the West. This model has relied on three major factors.

First has been the political commitment of the West – and America, in particular – to open and free markets. Second, it has required the value of Asian currencies to be subdued (or, at least, certainly not set by market forces). Third has been Asian governments’ suppression of their own citizens’ consumption, partly via financial repression, but also through their social, fiscal, and industrial policies.

It is now clear that this model is not sustainable. A financially overstretched America cannot indefinitely continue spending beyond its means. The strains on middle class workers have already led to a surge in populist nationalism in the United States, which precipitated the Trump Administration’s trade war. The Covid-19 pandemic has generated further impetus for repatriating supply chains. Rising wealth and income inequality in a number of Asian countries is also threatening greater domestic instability.

China’s economic rise and growing trade with the region could certainly help cushion the blow of a fall in Western demand. However, while Chinese consumption and investment programmes such as the Belt and Road Initiative are a boon to its Asian neighbours, China has shown no inclination to run the protracted balance of payments deficits that the US has endured.

Chinese policymakers are acutely aware of the costs to the US of operating the primary global reserve currency and, as demonstrated by their cautious approach towards renminbi internationalisation, are unlikely to be willing absorb the rest of the world’s financial imbalances. Moreover, China’s rapidly ageing demographic profile will present it with numerous social and economic challenges over the coming decades, and likely limit its ability to absorb growing imports.

Singapore’s Prime Minister Lee Hsien Loong’s thoughtful 2020 article in Foreign Affairs shows that Asian leaders already recognise the need to respond to their changing internal and external environments. Shouldering this responsibility will involve domestic reforms and making use of their increasing influence internationally. In the financial sphere, this would include three broad steps.

First would be to pursue fiscal policies that deliver a broader distribution of the fruits of economic development. This is necessary not just for maintaining social stability; as jobs become increasingly automated, future economic growth and prosperity will depend ever more on well-educated and highly skilled populations.

Second, Asian governments must wean themselves off their dependence on undervalued exchange rates and allow their currencies to reflect their true relative economic fundamentals: currencies must be allowed to find a proper market price. To manage this transition and avoid the risks of the high currency volatility experienced during the Asian Financial Crisis, Asian leaders should push for reforms to the global monetary system – in particular, to reduce excessive dependence on the US dollar.

Third, to support the foregoing two steps, Asian countries should deepen their financial market connectivity to improve regional market efficiency and access to capital. Notwithstanding strong economic growth, regional stock markets outside China (including Hong Kong) and Japan lack sufficient liquidity to attract larger numbers of global investors. In the past, initiatives such as the Asean Trading Link to pool regional liquidity have been stymied by narrow nationalistic interests. Nevertheless, all stand to benefit from enlarging the overall pie. The Eurobond market provides a good example of this, with swaps clearing centred on London, safekeeping and collateral management primarily handled in Brussels and Luxembourg, and issuers and investors spread across multiple countries.

Regional cooperation is needed to support the further development of local currency bond markets to reduce Asian corporations and governments’ dependence on US dollar issuance. Such cooperation would include lowering the barriers to intraregional investment flows, acceptance of Asian local currency sovereign bonds as good collateral in regional clearing houses, and depository and collateral management services designed to meet the needs of the region.

The infrastructure supporting this should be spread across multiple financial centres across Asia – not to render such a vision more politically palatable to individual countries, but because this enhances the mutual dependencies that foster cooperation and avoids excessive control over the system by any one country, which might later be tempted to abuse that position of power.

Amidst ongoing geopolitical tensions between China and the US, if (as Prime Minister Lee asserted) Asian countries “do not want to be forced to choose between the two”, then they must pull together to build the firmer financial foundations required to support their continued economic development.

* First published in The Straits Times (14 May 2022)

Photo credit: Reuters

Share

Can Cryptocurrencies Challenge the Dollar’s Global Dominance?

Posted on 1min read

The rapid growth of cryptocurrencies in recent years has been viewed by many as a speculative bubble. However, it also reflects growing scepticism in fiat currencies and fears that prevailing monetary policies are debasing their value. While few today can imagine cryptocurrencies challenging the global dominance of the dollar, with its backing of the full faith and credit of the US Government, private currencies issued by commercial banks, railroad companies and even religious institutions had been widespread in the US until the 1860s. It was the National Bank Acts of that decade that imposed government supervision over the banking sector and helped establish a national currency. Ultimately, anything can serve as a currency – from cowrie shells or lumps of metal to bits of data on computer servers – so long as people believe in it. Where faith in a state-issued currency is undermined, the private sector will inevitably innovate to create substitutes.

 

Continue reading at World Financial Review...

* First published in World Financial Review (24 March 2022)

Photo credit: World Financial Review

Share

The Fed’s next steps: Monetary policy and implications for social stability

On 2 January this year, a protest broke out in the small Kazakh city of Zhanaozen over a sharp rise in gas prices.

Over the following week, unrest spread to major cities across Kazakhstan, posing the greatest threat to the country’s post-Soviet regime since independence.

Although for the time being subsided, recent events in this strategically located Central Asian nation could have far-reaching geopolitical consequences.

They also highlight what is at stake as the Federal Reserve contemplates its next monetary policy moves.

 

Continue reading at Trade Finance Global...

* First published in Trade Finance Global (16 February 2022)

Photo credit: Trade Finance Global

Share

How China Can Turn the Yuan Into a Global Reserve Currency

In the multidimensional geo-economic contest in which China and the U.S. are currently engaged, the future roles of their respective currencies have become a key focus of speculation. Concerns over debasement of the dollar have driven a surge in interest in cryptocurrencies. Meanwhile, the People’s Bank of China (PBOC) has been making steady advances in the roll-out of its own central bank digital currency (CBDC), dubbed the Digital Currency Electronic Payment (DC/EP).

It is conjectured that the Chinese CBDC will eventually eliminate China’s dependence on the dollar and dollar payment systems and propel the renminbi, also called the yuan, to usurp the dollar as the leading global reserve currency. However, the DC/EP alone is far from sufficient to truly internationalize the renminbi.

The Chinese CBDC could bring about a wide range of benefits, including raising financial inclusion, lowering the cost of payments across the economy, improved ability to monitor inflation and transmit monetary policy, as well as greater capacity to combat tax evasion, money laundering and other financial crime.

While the initial focus of the DC/EP is on domestic retail payments, the efficiencies offered could lead to increased use of the renminbi for invoicing and settling international trade. Nevertheless, trade accounts for a mere 10% of global cross-border capital flows; financial flows account for around 90%. Trade counterparties are unlikely to increase their acceptance of renminbi unless there are sufficient suitable renminbi-denominated investments for them to deploy the proceeds to. For the renminbi to match the dollar’s global status, therefore, it is necessary to massively expand the Chinese currency’s role in international capital raising and investment.
 

Continue reading at Caixin Global...

* First published in Caixin Global (24 December 2021)

Photo credit: VCG

Share

The Roots of the China-US Financial Cold War

Recent years have seen a steady escalation in China-US tensions, with many now claiming that the two countries are in a new Cold War. Analogies with the 20th-century conflict between the United States and the Soviet Union, however, are misplaced. At the outset of the Cold War, there was no meaningful trade or investment between the US and the USSR. With virtually no economic relationship to begin with, there was little to lose from strategic disengagement. Today, globalization has interwoven and integrated economies and supply chains around the world to an extent that would make a decoupling between China and the US not only economically damaging, but also quite likely to lead to a cascading set of international conflicts.

How did we find ourselves in this precarious position? And how can current tensions be de-escalated?

Continue reading at AsiaGlobal Online...

* First published in AsiaGlobal Online (9 December 2021)

Photo credit: DesignRage / Shutterstock.com

Share