One of China’s senior-most political and banking figures has called for China to take advantage of the opportunities presented by the COVID-19 pandemic to drive through urgently needed financial reforms.
Sheng Songchen (盛松成), a member of the National People’s Congress (NPC) and twenty-year veteran of the Chinese central bank, said in an essay written for Diyi Caijing that China still needs to “expand external opening, introduce more foreign investment, as well as raise the scale and quality of Chinese outbound foreign investment – in particular direct investment.”
Sheng points out that despite its disastrous impacts the Novel Coronavirus pandemic has provided China with an outstanding opportunity to advance such financial reforms.
“Since the outbreak of the global Novel Coronavirus pandemic, China’s economy has led recovery, domestic financial markets are stable overall, and interest and exchange rate reforms have obtained outstanding results,” he wrote.
“At present we need to steadily advance opening of the capital account to create beneficial conditions for internationalisation of the renminbi, and avoid economic decoupling.
“We welcome a new window of time for bi-directional opening of the capital account, and driving the further integration of the Chinese economy into the world economic system.”
Sheng highlighted the importance of capital account opening as a means of driving the overseas expansion of Chinese enterprise and thwarting the protectionist measures adopted by other nations.
Faced with trade protectionism, China needs to implement bi-directional opening of the capital account, and re-drive external direct investment.
This will be of benefit to averting the tariffs or non-tariff barriers imposed by certain countries on our products, and driving exports of relevant domestic products, raising international market share.
It is also of benefit to directly absorbing advanced technology and brands, improving the international deployment of China-invested enterprises, raising the international reputation of China-invested enterprises, and of benefit to reaping the population dividends of certain developing countries.
On the other hand, demand for the renminbi in overseas markets is constantly increasingly, and we need to break through the “one leg” method of only relying upon the current account to export the renminbi, and establish an export channel via the capital account to jointly expand international renminbi usage.
Sheng also points out that the COVID-19 pandemic creates propitious conditions for capital account opening by China.
While Chinese GDP fell by 1.6% YoY in the first half, it saw growth of 3.2% in the second quarter, as compared to other major economies whose GDP’s have plunged. This disparity will give China an advantage when it comes to monetary policy settings.
As a result of the impacts of the pandemic, countries in general are using a number of irregular fiscal and monetary policies to continue to support employment, aid enterprises and prop up financial markets.
Central banks around the world are significantly expanding balance sheets and significantly reducing interest rates, as well as signalling that low interest rates will continue until 2022 at least.
With global monetary issuance increasing, China’s interest spread with major economies is larger, and this is a good opportunity for bi-directional capital account opening.
Sheng also highlights the fact that other conditions for the bi-directional opening of China’s capital account are “basically mature,” including the steady advance of interest rate market reforms, the maturation of mechanisms for exchange rate formation, and a steady rise in China’s foreign reserves.