China's Growing Economy: The Role of Technology-led Innovations and Partnerships
China's finance sector is a dynamic and ever-evolving landscape shaped by various factors, including government policies, global economic conditions, and domestic market demands. Staying ahead of the curve of the latest finance trends in China is vital for businesses, investors, and individuals seeking to make critical, timely, and informed decisions. Here is a quick rundown of the latest trends in China’s finance sector that you need to know:
- China's central bank has been actively defending the renminbi (RMB) value, signalling its intention to prevent significant depreciation against the U.S. dollar. This defence of the RMB is substantial as it aims to maintain currency stability and preserve economic competitiveness.
- DBS, the largest bank in Southeast Asia, has been expanding its presence in the Greater Bay Area in China to tap into the region's wealthy population. This move aligns with DBS's strategic goal to capture opportunities in the growing Chinese market, especially after DBS bought a 13% stake in the Shenzhen bank for $825 million, sparking the potential for aggressive growth in Asia’s most significant economy .
- Energy security has emerged as a crucial factor in China's supply chain and commodities trade. China's increasing demand for energy and efforts to enhance self-sufficiency in energy supply have implications for global commodity markets. In fact, China comprises nearly half of the world’s investment in renewable energy, spending $361 billion on renewable energy projects up until the end of 2020 . China's investment in renewable energy sources, as well as its pursuit of energy diversification strategies, can potentially impact global supply chains and commodities trade. In 2023, reports indicate that China is expected to double its capacity in producing renewable energy and is on course to hit its 2030 goal five years ahead of time, with an estimated total production of 1,200 gigawatts of renewable energy through wind and solar power.
- Property volatility. A recent Reuters poll suggests that there will likely be no growth in new home prices in China in 2023, highlighting the intense pressure on the property sector. However, there is a gradual expectation of recovery in the property sector, with a projected 1.0% rise in new home prices and a 1.0% fall in property sales for 2023 .
China's finance sector has been experiencing consistent growth. As measured by the Money Supply M2, the country's money supply has witnessed steady growth in recent years (See graph below). This growth reflects the country's robust lending activity and liquidity in its financial system, contributing to the overall expansion of China's finance sector.
To accommodate this, Swap Connect and eCNY are two notable, innovative developments transforming cross-border trade and digital currency usage in China.
- Swap Connect enables cross-border trading in Chinese government bonds, providing foreign investors with direct access to this significant market which strengthens China's bond market and promotes the internationalization of the renminbi (RMB).
- eCNY, the digital yuan, is China's central bank digital currency (CBDC), designed to facilitate digital transactions within the domestic economy that caters to the needs of businesses and individuals in a rapidly digitising economy.
In this article, we take an immersive look into the workings and impacts of Swap Connect and eCNY, shedding light on how these developments are reshaping finance, trade, and payments in China.
Swap Connect
Photo by Joshua Mayo on Unsplash
With Swap Connect in place between the two regions, this facilitates offshore investors’ access to the mainland interest rate swaps (IRS) market, allowing mutual access to interest rate swaps trading, promoting financial derivatives markets, and deepening financial integration between China and Hong Kong. This is a crucial milestone as it expands investment opportunities for international investors, providing them with direct access to the mainland's interest rate swap market, which was previously primarily accessible to domestic investors.
This creates a more inclusive and open market environment and contributes to developing a more diversified and dynamic financial market in both China and Hong Kong. This, in turn, creates a rippling effect to the rest of Asia and globally in the following ways.
1. Hedge interest rate risks by enabling investors to trade in derivatives as part of Swap Connect’s mechanism in China’s bond market. In the first few years of China’s Bond Connect program from 2017 to 2021, investors from overseas and Hong Kong were able to partake in the bond market, holding a total of RMB 4 trillion worth of RMB-denominated bonds.
Notably, in 2022, a record net outflow in Chinese bonds unfolded as overseas investors sold off a staggering 91 billion USD, an ongoing trend persisting to 2023. This was due to varying factors, including the Russia-Ukraine war, China’s zero-COVID policy, and, more particularly, the aggressive interest rate hikes in the US, causing the diverging bond yields.
This is where Swap Connect comes into play by serving as a convenient entry point for investors seeking access to mainland China's highly liquid interest rate swap market in mainland China. By facilitating direct participation, it offers investors more precise and efficient interest rate risk hedging tools for their investments in China's bond market, enhancing their investment strategies and providing additional opportunities for portfolio diversification and risk management.
2. Boost to RMB internationalization: Swap Connect promotes the use of the Renminbi (RMB) in global markets, contributing to the internationalization of the Chinese currency. By allowing offshore investors to settle interest rate swap transactions in RMB, it increases global demand for the currency and positions it as an important player in international trade and finance.
3. Enhanced Financial Integration with neighbouring economies: The deepening financial integration facilitated by Swap Connect has spillover effects on neighboring economies in Asia. Countries with close economic ties to China and Hong Kong benefit from the enhanced financial connectivity, as it provides new investment avenues, opportunities for financial cooperation, and a platform for sharing best practices in financial market development.
To complement this, Swap Connect enables the expansion of the liquidity pool in Asian financial markets. By providing offshore investors direct access to China's interest rate swap market, it enhances trading activity and liquidity in the region. This increased liquidity benefits market participants by providing better pricing opportunities, hedging instruments, and risk management tools.
These impacts contribute to the deeper regional and global integration of China and Hong Kong's financial markets, fostering economic growth and cooperation in the region.
eCNY
Photo by Eric Prouzet on Unsplash
eCNY has had significant milestones since its release in April 2020. By the end of 2021, the People's Bank of China reported that the official eCNY app had 261 million users . Furthermore, by August 31, 2021, over 100 billion yuan (approximately $14 billion) had changed hands through the eCNY (Please note that as of October 2021, the central bank has yet to release official figures on eCNY adoption and usage).
Like WeChat Pay (Tencent) and AliPay (Alibaba), eCNY also serves as a digital payment system, but unlike them, eCNY is issued by the People’s Bank of China, making it a government-backed digital currency rather than private companies. eCNY is designed to ensure privacy and data protection, with the central bank controlling user data. On the other hand, WeChat Pay and AliPay, being operated by private companies, may have different approaches to data collection and usage and are often perceived as less reliable than banks if any issues arise.
As it seeks to shift away from the US dollar, there is potential for the eCNY to affect other currencies in Asia. The digital currency could also enable China to bypass international payment systems that leverage the US dollar and eventually establish an alternative cross-border payment system for the yuan, which may compete with other Asian currencies.
Additionally, the shared use of eCNY with other countries may contribute to cost savings and further economic integration between China and its regional trading partners. Therefore, it is possible that the eCNY's implementation may have ripple effects in Asia and potentially reshape the regional financial landscape.
The rise of eCNY has raised the notion of the ongoing and future implications of how it will affect China’s position as a financial powerhouse.
1. Substituting current money supply components: The adoption of eCNY could lead to substituting other money supply components in China's economy. The eCNY could be exchanged for physical banknotes, bringing down the issuance of paper money by banks.
2. Altering Reserve Requirements: eCNY could also see a decrease in bank reserves since digital currencies incur little transaction fees for commercial banks. As a result, the commercial banks will hold an influx of more reserves; the People's Bank of China, the country's central bank, will likely need to review and adjust its reserve requirements for the banks.
3. Facilitating cross-border trade: China continuously seeks ways to increase cooperation among nations. eCNY is expected to facilitate cross-border transactions and reduce transaction costs, especially for small-to-medium-sized enterprises, potentially increasing China's competitiveness in international trade.
4. Elevating China's influence over the global payment industry: With the introduction of eCNY, China is ubiquitous in any US-backed global payment system like the SWIFT. As a result, China could raise its status as a leader in international finance, especially as countries look to diversify their reserves into RMB.
5. Increased global use of RMB: eCNY is expected to increase the international use of the renminbi (RMB), the Chinese currency. Global transactions using RMB have increased steadily over the years, and it is currently the world's sixth-largest payment currency. By promoting the use of eCNY, China aims to internationalize RMB further and reduce dependence on the U.S. dollar, though it remains up for debate at this time.
eCNY could be seen as a measure to reduce reliance on the US dollar in international transactions. China has expressed its desire to promote eCNY in cross-border transactions, which could diminish the significance of the US dollar in global trade. However, it is essential to note that despite the ongoing talk of de-dollarization, the US dollar still holds a dominant position in international trade and currency reserves.
Overall, while the introduction of eCNY may have implications for the global currency landscape, the full impact on the US dollar as an international currency is still uncertain and subject to various factors and dynamics.
Moving forward with Tech-led Innovations and Partnerships
China's fintech growth has implications for Asia and the dominance of the US dollar. China's advancements in fintech could shape the financial landscape in other countries, and challenge the US dollar as the primary international currency.
However, the global economic landscape is influenced by various factors. Vigilance, adaptability, and investment in innovation remain crucial for all economies to navigate the evolving financial landscape. In the Fixed Income & FX Leaders Summit APAC, we will be delving deeper into the implications of China’s evolving economy and how you can take the next best step forward with technology.
Session: Day 1, 12 50PM: “Fire-side Chat: How can you best adapt your investment strategies to capitalise on China’s reopening and easing of monetary fiscal policy and best hedge risks and diversify your portfolio? “