In the post-epidemic era, China and the global economy are once again at a crossroads.
On the one hand, with the support of many factors such as policies, China’s economy is showing signs of recovery. In September, China’s official manufacturing purchasing managers’ index rose above the 50 line for the first time since March. Not only that, the incremental growth of social financing, the narrowing of export decline, and the stabilization of the consumer price index – many data also confirm the stabilization of China’s economy.
On the other hand, there are also hidden worries in the global economy. The latest “World Economic Outlook” of the International Monetary Fund (IMF) shows that global economic growth is expected to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024. These forecasts are below the historical average of 3.8% from 2000 to 2019.
Looking to the future, where will China and the global economy go? At the fifth Bund Summit (Bund Summit) co-sponsored by the China Finance Forty Forum (CF40) and the China Center for International Economic Exchanges (CCIEE), many guests expressed their views. Tu Guangshao, executive chairman of the Bund Financial Summit Organizing Committee and chairman of the Shanghai New Finance Institute, said in his opening speech that multiple factors have led to the world facing economic recovery and growth challenges, and the global economic landscape is also facing major adjustments and changes. “The world still has tasks and demands that need to be faced together, which requires promoting consensus through dialogue and strengthening cooperation through consensus,” he said.
How to promote economic growth, Nomura Research Institute chief economist Gu Chaoming said that “balance sheet recession” is the explanation for the “liquidity trap”. When everyone repairs their balance sheets at the same time, even if interest rates fall to zero, everyone will still choose to continue paying down debt and no one will borrow money, which will lead to severe deflation.
Yu Yongding, president of Shanghai Pushan New Financial Development Foundation and member of the Chinese Academy of Social Sciences, said: “So far, it cannot be considered that China is experiencing a ‘balance sheet recession.'” But he also said that the government needs to do the most at this stage. The purpose is to create a good environment through expansionary fiscal and monetary policies, encourage business investment, and encourage consumer spending.
From a micro perspective, new energy and technology are the driving forces that countries hope to promote economic development. In recent years, countries and regions such as China, the United States and Europe have successively issued dual-carbon policies to promote the development of renewable energy and other fields, and provide financial assistance through ESG (environmental, social and corporate governance) investments. In addition, the above-mentioned countries and regions are also promoting the development and breakthroughs of digital economy and financial technology.
Ma Jun, director of the Green Finance Professional Committee of the China Society for Finance and Banking, believes that promoting green transformation requires balancing energy security and the implementation of dual carbon goals, making good use of the carbon market, and strengthening the interconnection of green financial markets on a global scale.
Former US Secretary of State Henry Alfred KISSINGER believes that artificial intelligence is a brand-new element created through individual wisdom. However, he also said that it is difficult to predict the development direction of artificial intelligence. Every country must ensure one thing in the process of developing artificial intelligence to prevent artificial intelligence from doing dangerous things.
The Fed will maintain a high interest rate environment
Whether it is the current economic cycle or the currency cycle, people can’t help but take three years ago as the starting point – when the COVID-19 epidemic was fermenting around the world. To stimulate the economy, the Federal Reserve cut interest rates by 150 basis points during the epidemic. But this resulted in soaring inflation, and central banks in many countries started a cycle of interest rate hikes. Currently, the 10-year U.S. bond interest rate has risen to the highest level in 16 years, and the U.S. dollar index has recorded its longest weekly rise in 18 years.
The market generally expects that the Fed’s interest rate hike cycle is coming to an end, but everyone still needs a magician to open the “crystal ball” of global monetary policy – when will the Fed stop raising interest rates, how long will the high interest rate environment last, and when will it cut interest rates? ?
Nathan SHEETS, global chief economist at Citibank and former undersecretary for international affairs at the U.S. Treasury Department, predicts that the Federal Reserve’s interest rates will remain at around 5% in 2023 and will cut interest rates in 2024.
Jason FURMAN, a professor at Harvard University and former chairman of the White House Council of Economic Advisers, believes that if the high inflation environment in the United States continues, the Federal Reserve may continue to adjust the interest rate environment. Otherwise, the Fed may take no further action. “Under normal circumstances, there may be one or two interest rate hikes in the future.”
Economic data is an important clue for predicting monetary policy and opening the “crystal ball.” After all, market traders still regard the creed that “the market understands the central bank and the central bank understands the economy” as a norm. For the central banks of developed countries in Europe and the United States, the main factor affecting current economic policies is whether U.S. inflation will peak and the economy will fall into recession.
In developed markets in Europe and the United States, inflation in commodity items is currently slowing slightly, but wage inflation remains stubborn. Under the influence of geopolitics, energy prices have risen again.
Jason FURMAN believes that there are still unfavorable factors for U.S. inflation: the U.S. labor market is still very tight, and labor wages are still 1.5%-2% higher than the inflation target level that the Federal Reserve wants to control. In addition, Brent crude oil once again reached a high of $90/barrel in mid-October.
Jean-Claude Trichet, chairman of the International Advisory Committee of the Bund Summit and former President of the European Central Bank, believes that the current inflation in the euro area has medium- and long-term structural problems, which makes it difficult for inflation to disappear easily. First, global trade frictions are increasing and supply chain issues are disrupted, driving inflation under commodity items. Second, labor costs have increased, pushing up inflation under services. Third, climate change and energy transition are driving up energy prices.
The market predicted in early 2023 that the U.S. economy might have a “hard landing” amid the wave of interest rate hikes. But 10 months later, this worry has not appeared.
”The latest forecast shows that by the end of the third quarter, the actual growth rate of the U.S. economy may reach 4%. If this goal can be achieved, this will be a very high economic growth rate in the United States.” Jason FURMAN said , “What particularly surprises us is that the decline in inflation did not lead to an increase in unemployment, and the supply side of the entire economy is very good.” But if the U.S. economy has escaped the risk of a “hard landing,” that is still not fashionable
. Early, because the occurrence of a “soft landing” is never easy. Antulio Bomfim, former adviser to Federal Reserve Chairman Powell, said: “You have to be super lucky.”
Jason FURMAN also admitted that a U.S. economic recession is certainly possible, and there are a series of triggering factors behind it, such as commercial real estate. Exposure to risk widens, consumers struggle to make ends meet, debt piles up, and ripple effects are felt across the global economy.
It is worth noting that under the current dollar system, every move by the Federal Reserve will have a butterfly effect on other markets, especially emerging markets including China. In 2022, during the Federal Reserve’s aggressive interest rate hike, Asian currencies represented by the RMB and the Japanese yen suffered significant depreciation.
Wang Yiming, member of the Monetary Policy Committee of the People’s Bank of China and vice chairman of the China Center for International Economic Exchanges, believes that the global effects of the Fed’s interest rate hikes are: first, a large amount of capital will flow back to the United States, emerging markets will face capital outflow pressure, and the exchange rate will depreciate. Second, in order to prevent capital outflows, emerging markets have adopted relatively aggressive interest rate hike policies, which has increased pressure on emerging market economies. Third, the appreciation of the US dollar has pushed up the cost of debt in emerging markets. “Compared with other countries, China’s monetary policy is more autonomous and generally sound. This is based on China’s macroeconomic and inflationary situation.” He said.
A two-pronged approach to promote green transformation
After the outbreak of the epidemic, green economy and green finance have become the development direction of major economies around the world. Judging from various green financial instruments such as bonds, carbon markets, and bank credits, the global market’s enthusiasm for new energy is still in the ascendant.
A World Bank report shows that global carbon pricing revenue will reach nearly US$100 billion in 2022, a record high. According to Bloomberg data, in the first half of 2023, global sustainable bond issuance exceeded US$500 billion, and sustainable bond issuance by companies and governments increased by 18.6% year-on-year.
Behind green transformation and ESG investment, the government and the market are two driving forces that cannot be ignored, which have also formed two mainstream transformation models in the world. Represented by the European Union, the “carrot and stick” approach is used to guide the “top-down” transformation of energy, transportation and other industries and ESG investment. Represented by the United States, it promotes “bottom-up” transformation of industries and investments through price signals in the market and sustainable development goals.
On the one hand, this is about the boundary between the government and the market, and on the other hand, it is also about how to set monetary policy goals.
Federal Reserve Chairman Powell has stated on many occasions that U.S. monetary policy will not be used to address climate change. Nathan SHEETS believes that the central bank should focus on a single goal or dual goals, and the central bank is not obliged to solve all problems. Jason FURMAN said that although the green transition may affect inflation, these problems will only penetrate into the real economy. In the medium to long term, the central bank should not consider more tasks besides controlling inflation.
However, according to Zhu Jun, chairman of the Silk Road Fund, there are certain problems with the ESG investment model that is purely market-led. Due to issues such as relatively long ESG investment cycles, relatively high risks, unstable returns, and immature technology, some companies may lack motivation. There is also an over-concentration of funds in ESG investment. Funds are willing to enter fields such as new energy infrastructure and transportation, but are slightly hesitant in other fields.
Wang Yiming believes that the central bank of China is formulating green credit standards and green bond standards and conducting sufficient information disclosure, which will force market entities to transform in this direction. China’s central bank has played a very important role in green transformation, and green credit and green bonds are large in scale.
Data show that in 2022, China will be the world’s largest green bond issuance market based on the scale of green bond issuance that meets the CBI definition, with Chinese green bonds included in the CBI green bond database reaching US$85.4 billion.
In Zhu Jun’s view, the future ESG investment model can take a bottom-up approach and proactively treat traditional energy and new energy as an overall asset portfolio in target selection and management, and seek balance in a complementary manner. For policymakers, a top-down approach can be used to prudently advance emission reduction targets, establish and improve market mechanisms for energy cleanliness, incorporate greenhouse gas emission costs into market prices, and promote reliance on market forces to achieve balanced allocation.
In addition to government and market forces, promoting green transformation also requires international cooperation. In the financial field, the most typical example is that China and Europe have formed the “China-EU Sustainable Finance Common Catalog.” Based on this catalog, China has many institutions issuing green bonds in the international market. After labeling with a common catalog, these financial products can be sold to international investors more smoothly.
Jean-Claude Trichet believes that strengthening green financial cooperation and establishing a global carbon market are important methods, which can avoid the problem of different ESG investment standards in many countries. At present, the EU carbon border adjustment mechanism has been passed by the European Parliament. The relevant regulations on product carbon intensity and carbon price difference are promoting the connection between international carbon trading and the carbon market. Article 6 of the Paris Agreement also advocates international cooperation in carbon emission reduction, making it possible to establish a global climate framework.
Hong Pizheng, CEO of Standard Chartered Bank Asia, also called for China to further integrate with international standards in terms of transformation of financial classification standards, information disclosure mechanisms, and regulatory frameworks. At the same time, we can continue to strengthen domestic and overseas green financial cooperation, enrich the green assets of the two places, introduce international capital, and meet the growing demand for sustainable development.
Fintech should adopt neutral regulation
Digital economy and financial technology are also driving forces for economic development. In the continuous innovation of technology, one application case has been implemented.
Liu Weiguang, President of Alibaba Cloud Internet and New Finance Industry, was deeply impressed by a story: In the late summer and early autumn of 2023, extreme weather hit a bank in southern China. The computer room was flooded and the system failed. Under the deployment of multi-center unit architecture in multiple places, the computer room in another city “emergency replacement”. Using underlying technology, the system switches all traffic in the failed city to this point, ensuring business continuity.
”This kind of change was unimaginable and almost impossible to achieve in the past. This kind of disaster recovery breaks the single data disaster recovery and application disaster recovery in the past and realizes full-stack switching. This is the new cloud and distribution we see Model, unitization, these multi-location and multi-activity architecture bring high-availability value to finance.” Liu Weiguang said.
This is just a microcosm of the disruptive changes that cutting-edge technology has brought to the financial industry. Every technological advancement injects new vitality into the development of the financial industry. The latest example is Chat-GPT, which has greatly improved the ability of artificial intelligence (AI), especially natural language processing technology, to solve practical problems.
In Liu Weiguang’s view, large models have very certain implementation scenarios in the main fields of the financial industry, scattered in financial management, wealth management, insurance claims and other fields, improving customer experience.
This has driven the financial industry’s investment in technology. Data show that technology investment in China’s banking, securities and insurance industries is continuing to grow. Taking the banking industry as an example, the IT solution market size of China’s banking industry will grow from 12.17 billion yuan to 64.88 billion yuan from 2012 to 2022, with a 10-year CAGR (compound annual growth rate) of 18.2%.
New technologies that are constantly emerging are also favored by capital. KPMG’s “Fintech Trends in the First Half of 2023” report shows that in the first half of 2023, the number of global fintech investment transactions was 2,153, with a total investment of US$52.4 billion. Among them, payment technology attracted more than US$16 billion in investment in the first half of the year, accounting for the largest share of investment in the first half of the year. Artificial intelligence and generative artificial intelligence became the focus of investment in the first half of the year.
As technology continues to change, where will the final service direction be? From an international perspective, Sopnendu MOHANTY, chief financial technology officer of the Monetary Authority of Singapore, believes that we should pay attention to the impact of AI on consumer expectations: we must make good use of data sets and seamlessly implement them in a way that can protect and grant credit. Interact with customers in a constructive, conversational and socially responsible way.
In his view, Singapore’s overall financial technology industry continues to develop with continuous breakthroughs in technology and business. From a financial practical perspective, blockchain is the use of technology to drive “decentralization” of transactions and can help retail investors purchase bonds in the financial market. From a financial infrastructure construction perspective, Singapore has also expanded its payment system globally, establishing connections with countries such as Malaysia, Thailand and India.
While cutting-edge technology has brought profound changes to the financial industry, it also poses challenges to regulatory and legal frameworks. Liu Yan, deputy general counsel of the International Monetary Fund, believes that in many fields, financial innovation will affect the development of financial business to a certain extent. Taking tokenization as an example, in terms of supervision and regulations, related products and services may not meet the current definition and have exceeded the scope of current supervision. Regulators need to adopt appropriate, adaptive technology-neutral regulation.
Sopnendu MOHANTY believes that in Singapore, the open ecosystem is highly respected, so the country will not prejudge what technology is good and what technology is bad, and allows the technology to be fully developed.