Concerns are mounting in the West about the expansion of China’s military. Ground forces are being modernized, the navy expanded, and new silos for China’s nuclear weapons built. The goal behind this is clear to Zhao Tong: China wants to achieve military superiority over the US. The military expert warns that the West should take Beijing’s military ambitions very seriously. In Hong Kong, the consequences have long been visible – and the situation in Taiwan will also change as a result. In our interview, the Chinese military expert explains why the US is partly to blame for this development.
Frank Sieren shows that cooperation between the US and China is not only possible, but can even be fruitful. In today’s analysis, he explains how scientists from both nations, artificial intelligence and China’s ancient classics are coming together to collectively decode long-forgotten characters. “Handian Chongguang” is an impressive project that connects the US with China, the Song Dynasty with the 21st century and ancient characters with digital software – to bring China’s classics back to life.
Meanwhile, Beijing has called dozens of officials to account in response to recent Covid outbreaks. The delta variant is spreading rapidly – and shows the authorities the limits of the “zero-covid” strategy. But the government has no intention of changing course – even impacting German companies.
I hope you enjoy our latest issue!
In the West, people look with fear and concern at China’s military build-up. What is behind this? How would you describe the People’s Republic’s overarching strategy?
There are two main categories: China’s first objective is to be able to defend what it perceives to be its national interests. This includes a national unification with Taiwan, as well as securing territorial claims, including land borders with India and maritime claims in the South China Sea.
China also has a new need to protect its expanding foreign interests, such as economic investment and the growing number of citizens conducting business or studying abroad.
Have military ambitions changed since Xi Jinping took power?
With regard to the first category just mentioned, the mindset has remained more or less the same. China sees the biggest challenge to its security interests stemming from other major powers that might interfere. But what has changed is the pace of military modernization. In recent years, China has been able to invest more in its military sector due to rapid economic growth. After Xi Jinping came to power, he called for realizing the “dream of a strong military.”
China’s military expenditures are growing by around seven percent annually and rank second in the world – but well behind the US. Critics stress, however, that the official numbers do not adequately reflect China’s military might.
As a Chinese analyst, I am not in a position to critically evaluate China’s officially declared military budgets. But I agree with your description that foreign analysts have different views on how the officially announced budget actually reflects the level of military investment. They have pointed out that it’s hard to tell exactly what is included in the defense budget, for example, regarding certain research and development spending. And, of course, you have to take into account the purchasing power of a country. That would significantly change the level of China’s budget in relation to other countries’ expenditures.
To what extent is the West – especially the US – accelerating the militarization of China with a much more aggressive China policy?
If China sees a greater threat in the U.S., then there is a growing urgency on Beijing’s part to continue building up its military power to counter this perceived threat. Let me give you an example: China had maintained a rather restrained nuclear strategy up until now. For decades, its nuclear arsenal was much smaller compared to the United States because China’s overall security relationship with the United States during that time, while not good, was relatively stable. China saw no immediate nuclear threat from the United States.
But now China is expanding its nuclear forces faster than ever before.
China’s leader Xi Jinping himself has ordered the Chinese military to accelerate the development of strategic deterrence capabilities. That is a clear signal from the highest level. And it is driven by several forces.
China’s original goal was always to build up a survivable and secure second-strike capability so that the US would not consider striking China with nuclear weapons. So it only needed enough nukes to survive a preemptive strike by the US, and then still have enough nukes to launch a retaliation against the US mainland.
But now, many Chinese strategists argue that China needs to expand its nuclear power because the US is demonstrating much greater hostility toward China. From an analytical perspective, this doesn’t make sense. After all, no matter how hostile your opponent is, as long as you have a safe second-strike capability, you can keep them from using nuclear weapons first.
To what extent should this worry the US?
The United States is not necessarily worried that China will be the first to resort to nuclear weapons in case of a military conflict. But they do worry about the uncertainty behind the reason for the expansion of China’s strategic nuclear arsenal: Some critics argue that China could change its traditionally modest nuclear stance in the future and increasingly use its arsenal to exert pressure rather than deterrence.
To keep things in perspective: The US still has about 12 times as many nuclear warheads as China. In other areas, however, such as naval forces, China is rapidly catching up.
If you look at the number of military ships, China is already owning a greater number than the US Navy. But in purely qualitative terms, the US clearly still has the most advanced naval technologies. However, China is catching up very, very quickly.
And future developments are really worrying from the US perspective. The current US military budget is likely to stagnate for the foreseeable future, held back not least by the many checks and balances. China, on the other hand, is willing to invest more resources, in part because the Chinese public perceives the defense industry as a core interest of the nation. It is largely safe from public scrutiny.
What role do future technologies play in the arms race? China is investing heavily in artificial intelligence and big data.
This is difficult to predict because both militaries keep their specific AI programs very secret. Moreover, it is not easy to predict which government system will be able to use AI more efficiently for military modernization.
What do you mean?
China’s system is more centralized and top-down. There is also less concern about privacy or legal restrictions. And, of course, China has also implemented the so-called civil-military fusion strategy, which will allow the government to use civilian technologies for national defense purposes.
In the US, a different system prevails: Programmers actually have to worry about breaking the law or invading people’s privacy. In other areas, however, they are less restricted: they don’t have to worry about crossing the government’s red lines. They can act more freely.
Unlike the Chinese military, which has to spend time attending party meetings, studying every important speech by leaders, and doing all sorts of work to implement party policy. Last but not least, US private companies sometimes have stronger incentives to cooperate with the military – without having to fear that their patents will be arbitrarily taken by the government without benefiting financially.
What is your conclusion? Is it only a matter of time before the Chinese military overtakes the US as the number one?
I can state my understanding of how the Chinese think: ultimately, economic power dictates military power. So if China’s economy can overtake the US economy in the future, sooner or later China’s military will also dominate. And according to Western scientists, the Chinese economy will pass the US as early as 2028. That makes the government confident that time is on its side. That’s why the Chinese leadership is focusing heavily on economic development: because it determines everything else.
In Europe, the left, in particular, argues that China has only one military base abroad and should not be demonized as a threat. Is that naive?
No country develops military power with the express purpose of conquering other nations. All states, including China, only want to defend their supposed national interests. But the question is: is it really legitimate to defend those interests by military means? For example, if a country has a territorial dispute, is it justified to simply use its military might? Or shouldn’t international law play a role?
Let’s return to China. Beijing perceives a possible US military intervention as the greatest threat. This is why the government believes it needs to build a military force equal in power to Washington and all its allies in the region. While the goal might be self-defense, China’s approach may be seen as ambitious by other countries, as Beijing needs to build some kind of military superiority in the region to achieve this defensive goal.
And what happens when China achieves this goal?
Then, China’s military superiority will de facto prevent the U.S. and its allies from intervening when China asserts its national interests. Take Taiwan, for example. The demand for national unification with Taiwan is an important goal of the current political leadership. However, I do not believe that there is any desire to instigate a premature conflict. As long as doubts about a potential U.S. intervention remain, China’s military is not yet strong enough. However, when China has achieved obvious military superiority, the US will know that it cannot prevail in this conflict. At that point, China can achieve its goal without firing a shot. And recent developments have confirmed China’s thinking: Having already secured some military power, it did not need to worry about violent foreign intervention when it took steps to deal with the Hong Kong situation.
Do you think a military conflict between the US and China is a realistic scenario?
I do not believe that China intends to provoke a conflict. Its leaders’ priority is clear: it needs time to build extensive national power. And as soon as China’s power is strong enough, it can defend its perceived interests without having to fight.
Could bilateral disarmament negotiations help to curb the arms race between both superpowers?
I am very pessimistic about this. Both sides can no longer come to an agreement even on basic factual issues, for example, Xinjiang. The West sincerely believes that a terrible humanitarian crisis is taking place there. In China, on the other hand, most experts believe that it is entirely fabricated by Western media and that actions by the government in the region do not violate any legal or moral standards.
Instead, they believe that the West is deliberately demonizing China – over Hong Kong, Xinjiang, or Taiwan, for example – not because it cares about democracy or human rights, but out of concern that China might replace the West as the dominant power in the international system. If the two sides can’t even agree on such substantive issues: how can they possibly find common ground on disarmament?
What path will China choose instead, regarding the West?
The trend is concerning: China sees efforts of talking to the West and convincing it through dialogue as futile. Instead, the nation’s leadership is convinced that the only way to change the opinion of Western countries is by building up its power. Because power is the only thing the West respects. This also means that there is no internal Chinese consensus on disarmament controls that would limit China’s military development.
Tong Zhao was born in the central Chinese province of Henan. He completed his master’s degree in international relations at the renowned Tsinghua University before earning his doctorate at the Georgia Institute of Technology. The military expert is currently conducting research on disarmament and nuclear weapons policy at the Carnegie-Tsinghua Center for Global Policy.
The great powers in history have tended to have one thing in common: size matters. While a large market does not guarantee dominance in other realms, it certainly helps, perhaps more than any other single factor. This was true of the United States, and now it applies to China. Beyond being a leading economic and trading power, China is increasingly – and inexorably – becoming a global financial power.
Somehow, too many economists in the West did not see this coming. Even a decade ago, few were bullish about the growth of China’s external financial strength, with skeptics highlighting the country’s vulnerabilities.
A rare exception is Brown University’s Arvind Subramanian. In his 2011 book Eclipse: Living in the Shadow of China’s Economic Dominance, Subramanian argued that China’s dominance was not only more imminent, but would also be broader than virtually anyone expected, involving huge financial influence among the domains that China would reshape. Given his prescience, the title of the Chinese translation of his book – The Big Forecast – might have been more apt.
Why did Subramanian see so clearly what most economists didn’t? His model, unlike the standard analytical framework of economics, included the variable of size.
A decade later, China’s financial influence is becoming impossible to ignore. In the 20 months beginning on April 1, 2019, 364 renminbi-denominated onshore Chinese bonds – issued by China’s government and “policy banks” – were added to the Bloomberg Barclays Global Aggregate Index.
The first time domestic Chinese bonds were included in a major global index was a milestone in the opening up of China’s financial markets. And it was followed by more progress, with JP Morgan adding Chinese government bonds to its flagship index in the first quarter of 2020. FTSE Russell will follow suit, beginning later this year.
With that, Chinese bonds will be included in all three of the major bond indices tracked by global investors. It should not be surprising, then, that the RMB Globalization Index, which measures growth in offshore renminbi usage, reached new highs this year, following three years of 40% annual growth.
The rapid internationalization of China’s bond market has accelerated the internationalization of the renminbi – a process the government has long sought to facilitate. In 2010, China allowed central banks, renminbi offshore clearing banks, and offshore participating banks to invest in China’s interbank bond market.
China launched the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect two years later. Both use a two-way renminbi-settlement system. The People’s Bank of China (PBOC) has also allowed eligible foreign institutional investors to access the China Interbank Bond Market directly, without quotas or restrictions, since 2016. And in 2017, it established China Bond Connect, which gives overseas investors access to fixed-income markets in mainland China via trading infrastructure in Hong Kong.
These efforts are bearing fruit. According to the Financial Times, overseas investors have bought a net $35.3 billion worth of Chinese stocks through the Shanghai- and Shenzhen-Hong Kong Stock Connects so far this year, an annual increase of about 49%. As of July, they held more than $228 billion in renminbi-denominated A-shares of China-based firms through these channels.
Moreover, overseas investors have purchased more than $75 billion worth of Chinese government bonds this year, up 50% year on year, and about $578 billion in Chinese bonds through the China Bond Connect channel. Foreign investors now hold a total of $806 billion in Chinese stocks and bonds, up 40% from a year ago.
Ultra-loose monetary policy in the US and the European Union during the COVID-19 pandemic has undoubtedly helped to fuel this surge in purchases of Chinese assets. A huge amount of money is flowing out of the US and the EU, and China is a safer destination for it than other emerging-market economies.
But that does not mean this is a short-term trend. The annual Global Public Investor Survey, published by the Official Monetary and Financial Institutions Forum, shows that 30% of central banks plan to increase their renminbi holdings in the next 12-24 months, compared to 10% last year. In Africa, almost half of central banks plan to increase their renminbi reserves.
As a result, the renminbi’s share of global foreign-exchange reserves is on track to rise at an average annual rate of roughly one percentage point for the next five years. Research by Goldman Sachs and Citi predicts that the renminbi will be among the world’s top three currencies within a decade.
As China opens its capital markets, it is also quietly pushing forward the development of its central bank digital currency (CBDC), the e-CNY. The CBDC is currently being tested in a representative sample of ten key cities, placing China well ahead of the vast majority of other central banks: while 80% have begun to design a digital-currency system, only 16% of them have reached the pilot stage.
China has also been developing a digital cross-border payment system. Now, the PBOC has joined with the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the United Arab Emirates to launch a multilateral research project, Multiple CBDC Bridge, which will explore ways to incorporate digital currencies into cross-border payment systems.
While the e-CNY is currently being positioned as a cash-payment voucher, its potential is huge. As China’s Belt and Road Initiative facilitates an increase in trade and investment flows, the e-CNY will expand the renminbi’s use in settling cross-border transactions, reduce dependence on the US-led SWIFT network, and lay the groundwork for the establishment of a more convenient regional digital-currency payment network led by China. Most importantly, the e-CNY will certainly help China to internationalize its multi-trillion-dollar domestic debt, thereby creating a huge market to turn the renminbi into an internationalization currency.
Whatever challenges China faces, its financial rise can no longer be ignored. And Subramanian’s decade-old prediction remains valid: It will happen faster and more comprehensively than most observers expect.
Zhang Jun, Dean of the School of Economics at Fudan University, is Director of the China Center for Economic Studies, a Shanghai-based think tank.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
After around 17 months, a herd of Asian elephants after gaining international notoriety for their unusual wanderings appears to be on its way back home again to Yunnan. The 14 animals were led across the River Yuanjiang. From here, a path should lead them back to the nature reserve in Xishuangbanna Dai, near the border to Myanmar. But it is still a long way to go: Earlier this week, the herd was still some 200 kilometers from its reserve. The wild herd made headlines around the world for seemingly roaming haphazardly through Yunnan, causing extensive damage to property. Aerial photographs showing the animals taking a nap went around the world. Experts continue to puzzle over what might have caused the elephants to leave the nature reserve.
Concerns are mounting in the West about the expansion of China’s military. Ground forces are being modernized, the navy expanded, and new silos for China’s nuclear weapons built. The goal behind this is clear to Zhao Tong: China wants to achieve military superiority over the US. The military expert warns that the West should take Beijing’s military ambitions very seriously. In Hong Kong, the consequences have long been visible – and the situation in Taiwan will also change as a result. In our interview, the Chinese military expert explains why the US is partly to blame for this development.
Frank Sieren shows that cooperation between the US and China is not only possible, but can even be fruitful. In today’s analysis, he explains how scientists from both nations, artificial intelligence and China’s ancient classics are coming together to collectively decode long-forgotten characters. “Handian Chongguang” is an impressive project that connects the US with China, the Song Dynasty with the 21st century and ancient characters with digital software – to bring China’s classics back to life.
Meanwhile, Beijing has called dozens of officials to account in response to recent Covid outbreaks. The delta variant is spreading rapidly – and shows the authorities the limits of the “zero-covid” strategy. But the government has no intention of changing course – even impacting German companies.
I hope you enjoy our latest issue!
In the West, people look with fear and concern at China’s military build-up. What is behind this? How would you describe the People’s Republic’s overarching strategy?
There are two main categories: China’s first objective is to be able to defend what it perceives to be its national interests. This includes a national unification with Taiwan, as well as securing territorial claims, including land borders with India and maritime claims in the South China Sea.
China also has a new need to protect its expanding foreign interests, such as economic investment and the growing number of citizens conducting business or studying abroad.
Have military ambitions changed since Xi Jinping took power?
With regard to the first category just mentioned, the mindset has remained more or less the same. China sees the biggest challenge to its security interests stemming from other major powers that might interfere. But what has changed is the pace of military modernization. In recent years, China has been able to invest more in its military sector due to rapid economic growth. After Xi Jinping came to power, he called for realizing the “dream of a strong military.”
China’s military expenditures are growing by around seven percent annually and rank second in the world – but well behind the US. Critics stress, however, that the official numbers do not adequately reflect China’s military might.
As a Chinese analyst, I am not in a position to critically evaluate China’s officially declared military budgets. But I agree with your description that foreign analysts have different views on how the officially announced budget actually reflects the level of military investment. They have pointed out that it’s hard to tell exactly what is included in the defense budget, for example, regarding certain research and development spending. And, of course, you have to take into account the purchasing power of a country. That would significantly change the level of China’s budget in relation to other countries’ expenditures.
To what extent is the West – especially the US – accelerating the militarization of China with a much more aggressive China policy?
If China sees a greater threat in the U.S., then there is a growing urgency on Beijing’s part to continue building up its military power to counter this perceived threat. Let me give you an example: China had maintained a rather restrained nuclear strategy up until now. For decades, its nuclear arsenal was much smaller compared to the United States because China’s overall security relationship with the United States during that time, while not good, was relatively stable. China saw no immediate nuclear threat from the United States.
But now China is expanding its nuclear forces faster than ever before.
China’s leader Xi Jinping himself has ordered the Chinese military to accelerate the development of strategic deterrence capabilities. That is a clear signal from the highest level. And it is driven by several forces.
China’s original goal was always to build up a survivable and secure second-strike capability so that the US would not consider striking China with nuclear weapons. So it only needed enough nukes to survive a preemptive strike by the US, and then still have enough nukes to launch a retaliation against the US mainland.
But now, many Chinese strategists argue that China needs to expand its nuclear power because the US is demonstrating much greater hostility toward China. From an analytical perspective, this doesn’t make sense. After all, no matter how hostile your opponent is, as long as you have a safe second-strike capability, you can keep them from using nuclear weapons first.
To what extent should this worry the US?
The United States is not necessarily worried that China will be the first to resort to nuclear weapons in case of a military conflict. But they do worry about the uncertainty behind the reason for the expansion of China’s strategic nuclear arsenal: Some critics argue that China could change its traditionally modest nuclear stance in the future and increasingly use its arsenal to exert pressure rather than deterrence.
To keep things in perspective: The US still has about 12 times as many nuclear warheads as China. In other areas, however, such as naval forces, China is rapidly catching up.
If you look at the number of military ships, China is already owning a greater number than the US Navy. But in purely qualitative terms, the US clearly still has the most advanced naval technologies. However, China is catching up very, very quickly.
And future developments are really worrying from the US perspective. The current US military budget is likely to stagnate for the foreseeable future, held back not least by the many checks and balances. China, on the other hand, is willing to invest more resources, in part because the Chinese public perceives the defense industry as a core interest of the nation. It is largely safe from public scrutiny.
What role do future technologies play in the arms race? China is investing heavily in artificial intelligence and big data.
This is difficult to predict because both militaries keep their specific AI programs very secret. Moreover, it is not easy to predict which government system will be able to use AI more efficiently for military modernization.
What do you mean?
China’s system is more centralized and top-down. There is also less concern about privacy or legal restrictions. And, of course, China has also implemented the so-called civil-military fusion strategy, which will allow the government to use civilian technologies for national defense purposes.
In the US, a different system prevails: Programmers actually have to worry about breaking the law or invading people’s privacy. In other areas, however, they are less restricted: they don’t have to worry about crossing the government’s red lines. They can act more freely.
Unlike the Chinese military, which has to spend time attending party meetings, studying every important speech by leaders, and doing all sorts of work to implement party policy. Last but not least, US private companies sometimes have stronger incentives to cooperate with the military – without having to fear that their patents will be arbitrarily taken by the government without benefiting financially.
What is your conclusion? Is it only a matter of time before the Chinese military overtakes the US as the number one?
I can state my understanding of how the Chinese think: ultimately, economic power dictates military power. So if China’s economy can overtake the US economy in the future, sooner or later China’s military will also dominate. And according to Western scientists, the Chinese economy will pass the US as early as 2028. That makes the government confident that time is on its side. That’s why the Chinese leadership is focusing heavily on economic development: because it determines everything else.
In Europe, the left, in particular, argues that China has only one military base abroad and should not be demonized as a threat. Is that naive?
No country develops military power with the express purpose of conquering other nations. All states, including China, only want to defend their supposed national interests. But the question is: is it really legitimate to defend those interests by military means? For example, if a country has a territorial dispute, is it justified to simply use its military might? Or shouldn’t international law play a role?
Let’s return to China. Beijing perceives a possible US military intervention as the greatest threat. This is why the government believes it needs to build a military force equal in power to Washington and all its allies in the region. While the goal might be self-defense, China’s approach may be seen as ambitious by other countries, as Beijing needs to build some kind of military superiority in the region to achieve this defensive goal.
And what happens when China achieves this goal?
Then, China’s military superiority will de facto prevent the U.S. and its allies from intervening when China asserts its national interests. Take Taiwan, for example. The demand for national unification with Taiwan is an important goal of the current political leadership. However, I do not believe that there is any desire to instigate a premature conflict. As long as doubts about a potential U.S. intervention remain, China’s military is not yet strong enough. However, when China has achieved obvious military superiority, the US will know that it cannot prevail in this conflict. At that point, China can achieve its goal without firing a shot. And recent developments have confirmed China’s thinking: Having already secured some military power, it did not need to worry about violent foreign intervention when it took steps to deal with the Hong Kong situation.
Do you think a military conflict between the US and China is a realistic scenario?
I do not believe that China intends to provoke a conflict. Its leaders’ priority is clear: it needs time to build extensive national power. And as soon as China’s power is strong enough, it can defend its perceived interests without having to fight.
Could bilateral disarmament negotiations help to curb the arms race between both superpowers?
I am very pessimistic about this. Both sides can no longer come to an agreement even on basic factual issues, for example, Xinjiang. The West sincerely believes that a terrible humanitarian crisis is taking place there. In China, on the other hand, most experts believe that it is entirely fabricated by Western media and that actions by the government in the region do not violate any legal or moral standards.
Instead, they believe that the West is deliberately demonizing China – over Hong Kong, Xinjiang, or Taiwan, for example – not because it cares about democracy or human rights, but out of concern that China might replace the West as the dominant power in the international system. If the two sides can’t even agree on such substantive issues: how can they possibly find common ground on disarmament?
What path will China choose instead, regarding the West?
The trend is concerning: China sees efforts of talking to the West and convincing it through dialogue as futile. Instead, the nation’s leadership is convinced that the only way to change the opinion of Western countries is by building up its power. Because power is the only thing the West respects. This also means that there is no internal Chinese consensus on disarmament controls that would limit China’s military development.
Tong Zhao was born in the central Chinese province of Henan. He completed his master’s degree in international relations at the renowned Tsinghua University before earning his doctorate at the Georgia Institute of Technology. The military expert is currently conducting research on disarmament and nuclear weapons policy at the Carnegie-Tsinghua Center for Global Policy.
The great powers in history have tended to have one thing in common: size matters. While a large market does not guarantee dominance in other realms, it certainly helps, perhaps more than any other single factor. This was true of the United States, and now it applies to China. Beyond being a leading economic and trading power, China is increasingly – and inexorably – becoming a global financial power.
Somehow, too many economists in the West did not see this coming. Even a decade ago, few were bullish about the growth of China’s external financial strength, with skeptics highlighting the country’s vulnerabilities.
A rare exception is Brown University’s Arvind Subramanian. In his 2011 book Eclipse: Living in the Shadow of China’s Economic Dominance, Subramanian argued that China’s dominance was not only more imminent, but would also be broader than virtually anyone expected, involving huge financial influence among the domains that China would reshape. Given his prescience, the title of the Chinese translation of his book – The Big Forecast – might have been more apt.
Why did Subramanian see so clearly what most economists didn’t? His model, unlike the standard analytical framework of economics, included the variable of size.
A decade later, China’s financial influence is becoming impossible to ignore. In the 20 months beginning on April 1, 2019, 364 renminbi-denominated onshore Chinese bonds – issued by China’s government and “policy banks” – were added to the Bloomberg Barclays Global Aggregate Index.
The first time domestic Chinese bonds were included in a major global index was a milestone in the opening up of China’s financial markets. And it was followed by more progress, with JP Morgan adding Chinese government bonds to its flagship index in the first quarter of 2020. FTSE Russell will follow suit, beginning later this year.
With that, Chinese bonds will be included in all three of the major bond indices tracked by global investors. It should not be surprising, then, that the RMB Globalization Index, which measures growth in offshore renminbi usage, reached new highs this year, following three years of 40% annual growth.
The rapid internationalization of China’s bond market has accelerated the internationalization of the renminbi – a process the government has long sought to facilitate. In 2010, China allowed central banks, renminbi offshore clearing banks, and offshore participating banks to invest in China’s interbank bond market.
China launched the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect two years later. Both use a two-way renminbi-settlement system. The People’s Bank of China (PBOC) has also allowed eligible foreign institutional investors to access the China Interbank Bond Market directly, without quotas or restrictions, since 2016. And in 2017, it established China Bond Connect, which gives overseas investors access to fixed-income markets in mainland China via trading infrastructure in Hong Kong.
These efforts are bearing fruit. According to the Financial Times, overseas investors have bought a net $35.3 billion worth of Chinese stocks through the Shanghai- and Shenzhen-Hong Kong Stock Connects so far this year, an annual increase of about 49%. As of July, they held more than $228 billion in renminbi-denominated A-shares of China-based firms through these channels.
Moreover, overseas investors have purchased more than $75 billion worth of Chinese government bonds this year, up 50% year on year, and about $578 billion in Chinese bonds through the China Bond Connect channel. Foreign investors now hold a total of $806 billion in Chinese stocks and bonds, up 40% from a year ago.
Ultra-loose monetary policy in the US and the European Union during the COVID-19 pandemic has undoubtedly helped to fuel this surge in purchases of Chinese assets. A huge amount of money is flowing out of the US and the EU, and China is a safer destination for it than other emerging-market economies.
But that does not mean this is a short-term trend. The annual Global Public Investor Survey, published by the Official Monetary and Financial Institutions Forum, shows that 30% of central banks plan to increase their renminbi holdings in the next 12-24 months, compared to 10% last year. In Africa, almost half of central banks plan to increase their renminbi reserves.
As a result, the renminbi’s share of global foreign-exchange reserves is on track to rise at an average annual rate of roughly one percentage point for the next five years. Research by Goldman Sachs and Citi predicts that the renminbi will be among the world’s top three currencies within a decade.
As China opens its capital markets, it is also quietly pushing forward the development of its central bank digital currency (CBDC), the e-CNY. The CBDC is currently being tested in a representative sample of ten key cities, placing China well ahead of the vast majority of other central banks: while 80% have begun to design a digital-currency system, only 16% of them have reached the pilot stage.
China has also been developing a digital cross-border payment system. Now, the PBOC has joined with the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the United Arab Emirates to launch a multilateral research project, Multiple CBDC Bridge, which will explore ways to incorporate digital currencies into cross-border payment systems.
While the e-CNY is currently being positioned as a cash-payment voucher, its potential is huge. As China’s Belt and Road Initiative facilitates an increase in trade and investment flows, the e-CNY will expand the renminbi’s use in settling cross-border transactions, reduce dependence on the US-led SWIFT network, and lay the groundwork for the establishment of a more convenient regional digital-currency payment network led by China. Most importantly, the e-CNY will certainly help China to internationalize its multi-trillion-dollar domestic debt, thereby creating a huge market to turn the renminbi into an internationalization currency.
Whatever challenges China faces, its financial rise can no longer be ignored. And Subramanian’s decade-old prediction remains valid: It will happen faster and more comprehensively than most observers expect.
Zhang Jun, Dean of the School of Economics at Fudan University, is Director of the China Center for Economic Studies, a Shanghai-based think tank.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
After around 17 months, a herd of Asian elephants after gaining international notoriety for their unusual wanderings appears to be on its way back home again to Yunnan. The 14 animals were led across the River Yuanjiang. From here, a path should lead them back to the nature reserve in Xishuangbanna Dai, near the border to Myanmar. But it is still a long way to go: Earlier this week, the herd was still some 200 kilometers from its reserve. The wild herd made headlines around the world for seemingly roaming haphazardly through Yunnan, causing extensive damage to property. Aerial photographs showing the animals taking a nap went around the world. Experts continue to puzzle over what might have caused the elephants to leave the nature reserve.
