The Economist - UK (2022-05-28)

20 BriefingChina’splaceintheworldeconomy TheEconomistMay28th 2022

pactofWesternsanctionswhilealsorais­

ingtheyuan’sinternationalprofile.

ButChina’sfinanciallinkswithitsnear

abroadremainweak.Takeitsbondmarket.

Anewpaperbyfoureconomists,Christo­

pherClayton,AmandaDosSantos,Matteo

Maggiori and Jesse Schreger, examines

private investors’ holdings of yuan­de­

nominatedbonds.In centyearsthevast

majorityofinflows theseassetshave

comefromAmerica, eurozoneandJa­

pan.Apaperpublis in 2018 byCamilo

TovarandTaniaMohd­Noroftheimfex­

aminedtheimportanceoftheyuantooth­

ercurrencies(ie,howmuchoneinfluences

theother).Theresearchersfind“noevi­

denceto suggest thatthe [yuan] is the

dominantcurrencyinAsia,byinfluencing

exchangerates intheregionorthrough

Asiansupplychains”.

China’spushfora moreself­sufficient

economy,inshort,hasnotbeenentirely

successfulinitsownterms.Whatismore,

theattempttocreateonehasthrownupa

seriesofco radictions.Thedesiretopro­

motethe f theyuanabroad,forexam­

ple,clash itheffortstoinsulateChina

fromglob ancialswings.Theresulting

muddlehasleftChinaneithermuchofa

forceinglobalfinancenorprotectedfrom

movementsinmarketsbeyonditscontrol.

TheChinesecurrency’sshareincross­bor­

derpaymentsrecordedbyswift, a finan­

cial­messaging network, is around 2%

mostmonths,asit hasbeenformostofthe

pastfive years.Even thatoverstatesthe

currency’sreach,sincemosttransactions

involving theyuanoutsideofmainland

ChinatakeplaceinHongKong,whichis

partofChinabutusesa differentcurrency.

Onaglobalscaletheyuanisan“an­

chor”forfewothercurrencies(seechart4).

The number of new yuan­denominated

swaps agreed by the central bank has

slowed sharply. Researchpublished last

yearbyMichaelPerks,YudongRao,Jong­

soonShinandKiichiTokuoka,allofthe

imf, foundthattheChinesebankingsys­

temstillplaysa tinyroleinglobalfinance

comparedwithAmerica’s(seechart5).A

newpaperbyYiFangoftheCentralUniver­

sityofFinanceandEconomics,inChina,

andcolleagues,findsthatChinesemarkets

“aremoreinfluencedbythefinancialmar­

ketsintheg7 economiesthantheother

wayaround”.WhenAmericasneezesthe

restoftheworldcatchesa cold.WhenChi­

nasneezes,mostcountriesbrushit off.

Another tensionin China’s push for

self­relianceconcernsproductivity.Total

factorproductivity(ie,theamountofout­

putperunitoflabourandcapital)hasbare­

lygrownunderMrXi,a markeddecelera­

tionfrombeforethefinancialcrisis(see

chart 6). The government believes that

aimingforself­sufficiencyinhigh­techin­

dustrieswillencourageinnovationandso

boostproductivity.Infact,theoppositeis

morelikely.Initseffortstoboostdomestic

championsandspurtrade withfriendly

countries,thegovernment willprobably

end up conferring advantageson firms

thatarenotthemos fficientorcapable

suppliersofa givenp uct,therebydent­

ingproductivity.Be eliftingproduc­

tivityistheonlylasti aytoraiseliving

standards,thatisa worryingprospect.

Taken alone,either ofMrXi’s ambi­

tions—whether fortifying China against

economicandtechnological vulnerabili­

tiesorfindinga morereliablesetofpart­

nersfortradeandinvestment—wouldbea

massiveundertaking.Takentogether,they

arealreadygeneratingcontradictions,and

morearelikelytoemerge.Tradeandin­

vestmentcreatemutualbenefitandthere­

foremutualvulnerabilitybytheirveryna­

ture.China’sleadersarerightthatdepen­

denceonWesterntechnology,marketsand

financialplumbingleavesthemexposed,

butwrongiftheyimaginetheycanescape

thispredicament.Theonlyalternativeto

interdependenceisimmiseration,whatev­

erMrXitellsChina’srocketscientists.n

...but also less influential

Sources:“Reservecurrencyblocs:a changinginternationalmonetarysystem?”,IMFworking

paper, 201;“Evolutionofbilateralswaplines”,IMFworkingpaper,2021;PennWorldTable

*Basedoncurrency co-movements, relative measure

†Higherscoresillustratea bankingsystemmore closely connected to others globally

80

60

40

20

0

19171513110907052003

Reserve-currencyblocs*

Number of members

Chineseyuan

USdollar

Japaneseyen

British pound

Euro

0.

0.

0.

0.

0.

0

1915100520009590851980

Banking-systemcentrality†

UnitedStates

Britain

China

Japan

4 5 

6

3

0

• 
  


• 
  

  2000 05 10 1915

  
  

China, total factor productivity

% change on a year earlier