The recent geopolitical and financial fallout over the war in Ukraine, has understandably left many alarmed at the prospects for financial de-globalisation – more specifically, that cascades of decoupling following on from exogenously imposed sanctions and other miscellaneous shocks, shall come to characterize the relations between stock and capital markets worldwide. China, as the second largest economy in the world and the possessor of $3.25trn foreign reserves, has every right to be concerned. We live in an era where financial transactions and economic relations are no longer separable from geopolitical considerations – indeed, many view the sanctions and counter-sanctions introduced against Russia, as the precursor of worse predicaments to come.
In face of the tumultuous external environs and broader escalation in tensions over China’s economic ascent, officials in Beijing have taken to preparing themselves for potential fallout (worst-case scenario planning) resulting from sanctions unilaterally imposed by the West. At the end of April, a high-level meeting between Chinese banking officials and representatives of all major banks, foreign and domestic, saw senior finance bureaucrats broach the subject of how China could potentially indemnify itself against freezes of the country’s overseas assets, in the off-chance of a Russia-style sanctions campaign being mounted against it.
It is thus no wonder, then, that the term financial security has come to the forefront of the Chinese political lexicon. What, however, does this entail? A Qiushi article cited President Xi Jinping in declaring, “Financial Security is an integral aspect of national security.” (金融安全是国家安全的重要组成部分。) Official party rhetoric seems to suggest that financial security concerns the extent to which a financial system remains independent from external threats and possible subjugation, and by which it could operate functionally and thrive even amidst adverse market circumstances. In light of the recent developments in international politics, one could interpret this as effectively the ability on part of financial systems to withstand external pressure and potential coercion (e.g. sanctions, asset freezes, blockades, and divestment), whilst delivering substantive outcomes for people on the ground.
Financial security is pivotal to China, yet so is its continued opening-up and reform. In the same article was an adamant call for “adhering to the basic national principle of reform and opening-up, increasing the volume of coordination and synergy in international financial institutions, and pressing for more multilateral/bilateral regulatory regimes” (坚持改革开放基本国策，加强国际金融治理协调，积极推动多边和双边监管合作). China could ill-afford being isolated from the deep and vast global capital markets, as the country seeks to double down on its poverty alleviation efforts and progress towards the establishment of a flourishing and vibrant “middle-class society.”
On surface, the two goals seem tense – the more open an economy is, the more vulnerable to external shocks and fluctuations it would be; in contrast, the more secure an economy is, the lesser the room for individual investors to deploy risk-centered investment strategies (e.g. shorting, beta-based pricing strategies, or high-risk leverage) to reap significant profits. Indeed, the more closed-off an investment market is, the higher the individualized risk for investors when it comes to potential endogenous shocks within the system. In short, one may think that the economy cannot have its cake and eat it at once.
There are several ways as to how China can mitigate this tradeoff, however – it need not be the case that financial openness and security are indeed mutually exclusive. First off, China would benefit from expediting its construction of a parallel yet globally adopted currency of common exchange, with the aim of ensuring that by the mid-2030s, the Yuan becomes the most prominent Fiat currency in the world. RMB internationalization is easier said than done – RMB currently accounts for less than 3% of foreign-exchange reserves held by central banks across the world. The digitalisation of the RMB must go hand-in-hand with technology that screens for offshore/onshore distinctions in the currency, in order to prevent capital flight; yet what would be even more fundamentally important, is that the People’s Bank of China (PBOC) must provide demonstrable proof that the RMB is backed by a strong, stable, and consistent economy – one that is commercially integrated with not just supply chain networks, but technological and innovation chains that straddle continents. Without policy predictability and flexibility, it would be difficult to get the RMB off the ground as an alternative to the USD and the Euro.
The second, is for China to double down on fostering a nascent financial-capital circuit – one that is neither as large as the global waixunhuan （全球外循环）, nor limited to purely the national neixunhuan (全国内循环). If you will, one can term this a partial external circuit (局部性外循环). China should seize upon the recent geopolitical volatility and seismic shifts, to develop a financial and stock market system for firms and start-ups from predominantly Southeast Asian, Central Asian, Latin American, and African states: parties that have conventionally been neglected by the proverbial Global North due to their seeming dearth of market potential. Through tapping into the vastly unchanneled productivity surplus in these countries, China can come to stabilise its own financial system without succumbing to politically and ideologically informed pressures by parties that are opposed to its rise. That is to say, what political scientist Zheng Yongnian terms as “partial globalization” （有限全球化）could very well offer China the middle path needed for appropriate balance.
Finally, we must push back against the view that financial decoupling in any shape or form would be in the interest of China, as espoused by a few select, extreme voices that are nevertheless gradually gaining traction. The more integrated and indispensable China is to financial systems around the world, the less incentive and willingness there is for countries to adopt mutually destructive sanctions and punitive measures against the country. We must not throw the baby out with the bathwater – there needs to be cognizance and reckoning with the fact that the more closed-off China is from the rest of the world, the less the world needs China, and the greater likelihood there is for rifts in interests to escalate into confrontation, direct or indirect. None of that would be in the interest of the Chinese people, or, indeed, the rest of the global population. Beware the ides of isolationism.