Shi Donghui: How to ensure China's financial security under the conflict between Russia and Ukraine? -

BEIJING, March 25 (Xinhua) Question: How to ensure China's financial security under the conflict between Russia and Ukraine?

Author Shi Donghui Professor of Finance, Oceanwide School of International Finance, Fudan University

Financial security is an important part of national security and an important foundation for stable and healthy economic development. During the conflict between Russia and Ukraine, the financial sanctions imposed on Russia by western countries warned us that maintaining financial security is a strategic event related to the peaceful rise of China, and we must take precautions and attach great importance to it.

Financial sanctions: a "war" without smoke

From finance to science and technology, from transportation to trade, from media to culture, education and sports, under the correct interweaving of western government sanctions and private enterprise politics, the current sanctions against Russia are doing everything they can, and are forming a "hurricane" that tries to shock Russia's social economy, especially financial sanctions.

According to the sanctions measures that have been introduced, sanctions in the financial field can be divided into two levels. First, the flow level. For example, on March 2, 2022, the European Union said that it would exclude seven Russian banks from SWIFT, and then MasterCard and Visa also announced that they would stop their business in Russia. Second, the stock level. For example, MSCI governments in Europe, America and Japan announced the freezing of foreign exchange reserves held by the Russian central bank in these countries. Recently, Morgan Stanley Capital International and FTSE, the two largest index companies in the world, announced that they would remove Russian stocks from all indexes.

Severe sanctions may do more harm to the Russian economy than the Russian-Ukrainian conflict itself. The ruble exchange rate plummeted, the banking industry faced a structural liquidity deficit, and the market value of Russian overseas listed companies was wiped out, leaving only a little "bone residue". To make matters worse, the Russian central bank's international reserves of more than $400 billion exceed $600 billion, and foreign exchange reserves are deposited in foreign-issued securities or cash and deposits of foreign banks. Freezing measures will greatly weaken its ability to resist sanctions.

Currency mismatch: the "original sin" of emerging markets

For a long time, emerging market countries have always equated foreign exchange reserves with money in piggy banks, and regarded them as a powerful barrier to resist financial risks and ensure financial security. However, the financial sanctions imposed by the United States on Iran, Afghanistan and Russia in recent years have highlighted the mistake of this idea. The foreign assets previously considered as risk-free are now facing the real risk of being frozen and confiscated, and the foreign assets in the account are "visible and unnecessary". This is the embodiment of American financial hegemonism.

Undeniably, today's global financial system is still centered on the US dollar, and the US dollar is still the undisputed global dominant currency. According to IMF data, as of the third quarter of 20021,the US dollar accounted for 59% of the global public official foreign exchange reserves. Although this ratio is lower than 7 1% of foreign exchange reserves in 2000, it still far exceeds all other currencies including euro (20.5%), Japanese yen (5.8%), British pound (4.78%) and RMB (2.6%). At the same time, the US dollar also occupies a dominant position in international trade, settlement and financial markets. 88% of the world's foreign exchange transactions use US dollars, and 40% of the goods imported by other countries except the United States are denominated in US dollars. 62% of international bond issuance, 48% of all cross-border bank claims and 465,438+0% of SWIFT cross-border payment transactions are denominated in US dollars. In addition, the US dollar is the main anchor currency of about 65% countries with fixed or controlled exchange rates, and the GDP of these countries accounts for about 60% of the world economic output.

With its status as a global central currency, the US dollar has gained the so-called "exorbitant privilege" and become a global capital and resource control system. Broadly speaking, no country has ever been able to control the global monetary and financial operation, as well as the scale and direction of capital flow; In depth, no country has ever been able to develop such a broad and profound financial market and have unconstrained financial hegemony. Looking around, after the collapse of the Bretton Woods system, an international monetary system with the US dollar, euro, pound and yen as "key currencies" was formed, which actually "marginalized" the currencies of all countries except the United States, Europe, Britain and Japan. Take the SWIFT system as an example. At present, the global payment share of USD, EUR, GBP and JPY accounts for nearly 90%. Therefore, although SWIFT is known as a neutral organization, it is difficult to get rid of the political influence of the United States and the European Union.

For developing countries, domestic currency is not hard currency in the international market. Therefore, in this case, no matter which exchange rate system is chosen, the foreign currency assets and liabilities of these countries will still be greater than zero, and they will face different degrees of currency mismatch risks. The inevitable currency mismatch has become the inevitable result of the hegemony of the dollar and the "big stick" of the United States waving financial sanctions. Eichengreen, an internationally renowned financial economist, called the phenomenon that revenues and expenditures, assets and liabilities of "non-monetary center countries" are denominated in different currencies "original sin".

According to the data of the International Monetary Fund (IMF), the foreign exchange reserves of developing countries reached a record 14.9 trillion US dollars in 20021year, of which 78% were foreign exchange assets such as US dollars and euros, 13% were gold, and the rest were IMF positions and special drawing rights. Huge foreign reserves are the pillar of economic strength, but they are also the liabilities of currency center countries such as Europe and America. The United States can use the account and payment system under the dollar system to restrict, freeze and confiscate the transactions and payments of funds and assets in the account, or even remove them from the SWIFT system.

Financial Security: Challenges Faced by the Rise of China

At present, the possible threats to China's financial security mainly include: the crisis caused by the opening of the capital account, such as the asset bubble caused by the inflow of hot money, the currency crisis and financial crisis caused by capital flight, and the overseas listed companies being ordered to withdraw from the US market; The dollar trap caused by the accumulation of foreign exchange reserves, such as the decline in the purchasing power of the dollar caused by the excessive currency of the Federal Reserve and high inflation, and the freezing of China's dollar assets by the United States; Security problems brought by the payment and settlement system, such as individuals, enterprises and even central banks may be banned from using SWIFT and US dollar settlement systems, or require related parties to close accounts and freeze funds.

At the end of February, 2022, China's foreign exchange reserves reached US$ 3.213.8 billion, of which US debt was about US$ 0.06 trillion. The freezing of the Russian central bank's foreign exchange reserves in the west indicates that the faith in the currencies and bonds issued by Europe and the United States will no longer be strong, and gold and resources will gradually have a low credit level. Therefore, it is necessary to unswervingly diversify the foreign exchange (reserve) assets held, on the one hand, match different currencies according to the domestic currency demand structure of foreign exchange assets; On the other hand, further increase the holdings of gold reserves and commodities. Historically, war has often become an important node of international currency. The frequent weaponization of currency in the United States will prompt central banks to seek diversification of reserves other than dollars, and the currencies and reserve methods of countries around the world are undergoing tremendous changes.

As the core part of global financial and trade settlement, SWIFT's powerful network effect and competitive advantage based on major reserve currencies are difficult to subvert in a short time, and its position is irreplaceable in a short time. However, every weaponization of SWIFT is a major blow to its neutrality, and it will also prompt relevant countries to find a replacement for SWIFT. China needs to further strengthen the construction of RMB financial infrastructure, vigorously promote the development of CIPS system, expand the circle of friends, explore the use of blockchain, digital currency and other new technologies to build a new cross-border information and settlement system, speed up the testing and application of digital RMB in the cross-border payment field, form diversified international competition in the payment and settlement system, and eliminate the hidden dangers of US sanctions.

The listing status of China Stock Exchange is the focus of financial game between China and the United States in recent years. In March, 2022, the US Securities and Exchange Commission (SEC) listed five China stock companies as being at risk of delisting, which to a great extent showed that the financial game between China and the United States had entered the practical level. In this case, on the one hand, we should continue to play the important role of China as an international financial center where domestic enterprises are listed overseas; On the other hand, we can take advantage of the reform opportunities in the areas of capital account opening in Pudong New Area, Shanghai, and establish a more innovative and breakthrough international financial trading platform under the new development pattern of mutual promotion of domestic and international cycles, so as to provide corresponding financing, trading, investment and risk control services for red-chip enterprises and VIE-structured enterprises in the development process. This is not only the strategic fulcrum of China's active opening under the background of anti-globalization, but also a timely move under the situation of continuous opening of the capital market, which has overall significance.

As a rapidly rising country, the development level of China's financial market and the internationalization level of RMB largely determine the sustainability of China's rise. Under the background of the changing international financial and monetary system, further expanding China's financial opening to the outside world, providing more safe assets and high-quality assets for international investors, realizing "you have me, I have you" and realizing the internationalization strategy of RMB is the fundamental policy to ensure financial security. (Zhongxin Jingwei APP)

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