Abstract: The global financial turmoil set off by the COVID-19 pandemic has wide and long-lasting impacts, and it is very hard to cope with. Compared with the global market, China's financial market has remained relatively stable and resilient. Despite the challenges China is embracing new opportunities for building a global center for asset allocation. To this end, the author proposed the following: accelerate market-oriented financial reforms, press ahead with Renminbi internationalization, promote reform of Renminbi exchange rate regime and liberalization of China's capital account, and enhance regulation to prevent against imported risks.
I. COVID-19's impacts on China's financial market
The COVID-19 outbreak has quickly spread across the world since late February with crippling effect on the global financial market. Under its blow, prices of stocks, bonds, exchange rates, futures, gold, crude oil and other types of assets have seen violent fluctuations. Major financial indicators experienced record tumbles: the circuit breaker of the American stock market was triggered four times in ten days; the Dow Jones Index plummeted by 23% in the first quarter of the year, FTSE and DAX by 25%, and South Korean stocks by 20%—the worst collapse for all of them since 1987. The yield on 30-year Treasury bonds saw its biggest quarterly decline since 2012, while crude oil futures went through the greatest quarterly fall ever in history. Since April, the global financial turmoil has been suppressed to some extent by extraordinary relief measures, but violent turbulences keep striking back.
Different from the 2008 global financial crisis, the pandemic-induced global financial turmoil has wider and more long-lasting impacts which are harder to counter as the real economies fall also into recession. Under the tremendous shock, China's financial market also suffered fluctuations, but compared with the global financial market, it has remained relatively stable and resilient.
The stock market in China went downwards in early February, but after that, the virus was gradually brought under control, effective macroeconomic countermeasures were rolled out, and economic activities gradually picked up. As a result, for the first quarter of the year, the Shanghai Composite Index and Shenzhen SE Composite Index dropped by 9.83% and 4.49% respectively, much less than the 20-30% decline in most of the major stock indexes around the world. That shows a certain degree of resilience and immunity of the Chinese stock market to the pandemic's blow. The number of IPOs in Shanghai and Shenzhen and the sum of money they raised exceeded those listed on the New York Stock Exchange and NASDAQ. Of course, as the plunge in external demands drags the real economy in China down, and the industrial and capital chains become disrupted, the stock market will face further strains and the risks of stock pledges.
The Chinese corporate credit bond market has seen record high bond issuances and fundraising compared with the same periods in history, in order to provide more support for businesses amid the crisis. In the first quarter, issuance of corporate credit bond totaled 3 trillion yuan, up 35% year-on-year; the net financing scale exceeded 1.7 trillion yuan, an increase of more than 800 billion yuan over the same period last year. To be specific, private businesses issued about 210 billion yuan of debts, up 50% year-on-year, with net financing mounting to 93 billion yuan, reaching a new height in the past three years. Meanwhile, China is pressing ahead with the reforms of its bond market. However, default risks may significantly increase under the shock of the pandemic and the arrival of bond maturity peak. In the first quarter, we have already seen 40 defaulted bonds that added up to 54.7 billion yuan, rising above the 31 billion yuan of defaulted bonds during the same period last year by a whopping 76.5%.
The Renminbi exchange rate has remained stable in general despite some rises and falls. In the first quarter, Renminbi fell by 3.3% against the US dollar, mainly because panicked investors undersold non-dollar assets as the coronavirus spread across the globe. As a safe haven currency, the US dollar has seen tightened liquidity and the dollar index shot up as a result. But other major currencies have experienced sharp declines, including the euro, the pound, the Australian dollar and the New Zealand dollar, with Mexican pesos, Russian rubles, Brazilian reals and South African rands all depreciating by over 10%. In comparison, the Renminbi has done relatively well amid the global upheavals in the currency market.
II. The Chinese financial market is basically equipped as a global center for financial asset allocation
Despite the challenges the COVID-19 outbreak has posed to the Chinese financial market, new opportunities have also emerged for it to become a global center for financial asset allocation. In fact, the market is already equipped with necessary conditions for achieving that end.
To start with, the Chinese economy has very robust fundamentals. It has run a current account surplus for 25 consecutive years; it has the largest foreign exchange reserve in the world; and its national savings rate is higher than most major economies, standing at 47% in 2018, 20% over the global average.
Besides, China enjoys ample space for macroeconomic policy adjustments, and is capable to cope with economic and financial risks. The supply-side structural reforms over the past few years has stemmed the rise in macro leverage ratio; the debts of the central government, especially foreign debts, are kept relatively low, creating adequate leeway for fiscal policy adjustments; in terms of monetary policies, the interest rate has stayed at a reasonable level, with the yield on government bonds higher than that in Europe and the United States with less fluctuations, and the yield on Renminbi-denominated financial assets is quite attractive for global investors.
On top of that, the Chinese financial market has opened wider for both global and domestic investors, and it is now much easier for foreign investors to take a share in asset allocations in China.
Since the pandemic broke out, China has taken stringent containment measures, and the virus's transmission within the country has been largely put to a stop. That brought China out of the shadow earlier than any other economies and bolstered up its financial market. However, the outbreaks in the United States and Europe are far from reaching the turning point. While their limitless easing is becoming less and less effective, the prevailing zero or even negative interest rates have also slashed the yields on financial assets. In comparison, Renminbi assets are safer, more robust, and more profitable under the current circumstances.
In a report this March, Morgan Stanley picked China as a virus shelter and upgraded its rating on the Chinese stocks to overweight. There are increasing demands among long-term investors overseas for Chinese interest rate securities. Global investors have high expectations of the returns and the safety of their portfolios, and the Chinese financial market should take the chance to improve and meet their requirements, and forge itself as a global center for financial asset allocation.
This effort will be very important for China's economic and financial development:
First, it will drive the marketization of valuation and pricing, and the intensified competition from global participants will push the Chinese financial institutions to upgrade their products and services. To facilitate the allocation of financial assets around the world, the Chinese financial market will have to create a more open and transparent environment for investors both at home and abroad, provide more diversified financial products and services, and enhance the regulation and the development of the asset management sector in China.
Second, it will attract funds from various sources to support the development of Chinese businesses, spur their technological innovations, promote the mixed-ownership reforms, improve their corporate governance, and boost their competitiveness in the global market.
Third, it will help maintain China's balance of payments. With the trading surplus on the decline, foreign exchange inflows under the capital account will need to be increased.
Fourth, it will give China a stronger voice in global governance and rule-making, boost its modern financial services industries, empower Chinese financial institutions in global competition, support Shanghai's endeavor to build a global financial hub, and promote Renminbi internationalization.
III. Four suggestions for building a global center for financial asset allocation
Building a global center for financial asset allocation requires long, systematic efforts. It cannot be achieved overnight. It will bring tremendous benefits, but it will also incur huge risks and costs. Four suggestions are proposed here to this end:
First, accelerate market-oriented financial reforms. Establish a more market-based, rule-based, and international financial sector in China. Remove redundant administrative controls so that the market can play a decisive role in resource allocation. Press ahead with fundamental institutional reforms of security issuance, trading and exits, lift the proportion of direct financing to better serve real economies and meet people's demands. Further open China's markets for stocks, bonds, futures and foreign exchange in a coordinated manner so as to diversify the products and investment tools available, and broaden while deepening its financial market.
Second, press ahead with Renminbi internationalization. China should work to promote more widespread use of its currency in the financing of its overseas projects as well as in cross-border loan and trading settlements, encourage the denomination of bulk commodities in Renminbi, and increase swaps between yuan and foreign local currencies. It should explore the possibility of building a pool for cross-border funds of both Renminbi and foreign currencies, upgrade its foreign exchange management, and encourage transnationals to establish global or regional centers for fund management in China.
Third, promote Renminbi exchange rate reform and the convertibility of China's capital account. China should allow the Renminbi exchange rate to float across a wider range, and improve its exchange rate regime. The 13th Five-Year Plan sets the goal to realize the convertibility of the capital account, which is still yet to be achieved, and we must step up related endeavors during the 14th Five-Year Period.
Fourth, enhance regulation of the financial market, and build a supervision and early warning system for the entrance of foreign capital to prevent against imported risks. China should be prepared to deal with obstructions from Western powers, because its endeavor towards building a global center for financial asset allocation will undoubtedly ignite suspicion, misunderstanding or even backlash in the global community. It's important to take effective measures, seek understanding and explore possibilities of cooperation despite the doubts and disagreements. Meanwhile, it should prepare for the worst and be on guard against a financial war.
