Source of this article: Times Finance Author: Li Yiwen
The Federal Reserve began aggressively raising interest rates in 2022 to combat inflation, bringing serious negative spillover effects to the world economy. The Fed's recent "hawkishness" and rising interest rate hike expectations have caused many national currencies to encounter headwinds.
Among them, the sharp depreciation of many Asian currencies has attracted widespread attention: the yen exchange rate once fell below the 160 yen to 1 dollar mark, refreshing a new low since 1990; Currencies such as the South Korean won are also trading in a bad mood, depreciating by a margin close to or greater than during the 2008 financial crisis.
In fact, 16 years ago, the Federal Reserve's monetary policy, which was also heavily relaxed, became one of the triggers of the subprime mortgage crisis in the United States, which in turn triggered a global financial tsunami. However, although the financial crisis was triggered by the United States, the exchange rate of the US dollar against other currencies, especially Asian currencies, has risen sharply.
"Our currency, your troubles. Former U.S. Treasury Secretary John Connally's arrogant rhetoric has been proven for decades.
What determines the extensive influence of the US dollar? Under the collective pressure of Asian currencies, how can the mainland maintain the stability of the RMB exchange rate? At the time of the change of the times, with the help of the booming digital currency technology, will there be an opportunity for the internationalization of the RMB to overtake in a corner?
In this regard, Wang Yongli, former deputy governor of Bank of China and the first director of Swift in Chinese mainland, analyzed the essence of money and finance from a global perspective in his latest book "Currency Fission: Credit Money Subverting Cognition".
"The Great Fission of Currency: Credit Currency Subverting Cognition" Author: Wang Yongli, Publisher: Chinese Translation Press
Wang Yongli believes that in the current global monetary and financial environment, it is difficult to make breakthroughs in the digitalization and internationalization of the RMB in the short term. During the year, it was difficult for the RMB exchange rate against the US dollar to return to the "7" level. At present, China should pay more attention to its own economic development and maintain a certain economic growth rate.
Wang Yongli also reminded that the current re-expansion of the high public debt in the United States and the sticky inflation index have made the US monetary policy in a dilemma, and the market should be alert to a possible credit crisis in the United States, and China, which holds huge US dollar foreign exchange reserves, should be more prepared.
China still needs to cut interest rates
Times Finance: At present, the currencies of many Asian countries are under collective pressure, but the euro, British pound, Canadian dollar and other European and American currencies are relatively stable, why is there a contrast? Wang Yongli:The exchange rate of a country's currency is the result of the comparison of its purchasing power with that of other countries, and its changes are affected by many factors such as economic fundamentals, interest rate trends, and changes in the international situation, which are very complex.
After the rapid rate hike in March 2022, the benchmark interest rate in the United States has remained at a high level, and although some major economies have followed the US interest rate hike, the benchmark interest rate level after the rate hike has not been significantly different from that of the United States.
From the perspective of economic development momentum, although the inflation in the United States has a relatively strong stickiness, the employment data can still remain relatively stable, and the GDP has also increased to a certain extent, combined with its original economic volume, which provides a certain underlying foundation for the strength of the US dollar exchange rate.
At present, the benchmark interest rates of Asian countries under collective pressure are far behind those of European and American countries such as the United Kingdom and Canada. In addition, the current international situation is turbulent and the hot wars between regions are continuous, and the situation of cold war, economic encirclement, and military confrontation is increasing day by day. In particular, some European and American countries, led by the United States, have created inter-regional tensions in the Asia-Pacific region, which has also led to a surge in the demand for foreign evasion of funds in many Asian countries.
In addition, it should also be noted that the euro, the British pound and the Canadian dollar have fallen sharply before, but because of their relatively good economic foundation in the past, the decline in the currency exchange rate is relatively limited compared with that of Asian countries.
Times Finance: At present, the domestic economic environment in mainland China is relatively complex, and while M2 (broad money) is high, CPI and other data are sluggish. In the context of the pressure on the currencies of many Asian countries, What is the future trend of the RMB? How can the mainland's monetary policy play a role in the future? Wang Yongli:Personally, I believe that under the credit monetary system, the traditional "monetary quantity theory" (MV=PT, M is the money supply, V is the velocity of money, P is the price level, and T is the social transaction volume) is no longer applicable. The total amount of money in a society depends more on the value of the tradable wealth of the society.
The expansion of the mainland's monetary aggregate M2 does not mean that the amount of money that has really entered the circulation field and is used for exchange transactions will also inevitably expand, and some of the money may withdraw from the circulation field and enter a state of precipitation or sleep, so the CPI or inflation rate may remain low. The reasons behind this situation reflect the weakening expectations of economic growth and income enhancement are very complex.
At present, there is a big difference in the direction of monetary policy between China and the United States. The inflation rate in the United States is still high, and there is resistance to interest rate cuts during the year, while China still needs to cut interest rates, and it is difficult for the RMB to return to below "7" against the US dollar this year due to the gap between the benchmark interest rate levels of China and the United States.
In this situation, in order to promote economic growth and maintain social employment, China should pay more attention to its own economic development, and macroeconomic policies need to be counter-cyclical and increase economic stimulus. Among them, there are still many tools, methods and space for monetary policy to cut interest rates and reserve requirements, reduce social financing costs, and even assist the fiscal sector in expanding bond issuance and public spending.
Wang Yongli (Source: provided by the interviewee)
Historical inertia drives a "gold buying rush"
Times Finance: Out of concern about economic and financial risks and other factors, the current gold buying boom has set off around the world, and some voices believe that we should return to the gold standard and enhance the society's ability to resist risks. But there are also those who believe that gold is a "chicken that doesn't lay eggs" and cannot resist risks at all. What do you think of this phenomenon? Wang Yongli:First of all, gold is the material that has been used as a currency for the longest time and has the widest coverage in the world. Whether it is the direct use of gold as a currency, or the paper money under the "gold standard" based on gold, the Bretton Woods system is also largely a global gold standard. So the impression that gold might act as a currency, or something like it, is still very entrenched.
But the essence of money is a measure of value, and its core function is a medium of exchange.
In terms of value scale, any naturally occurring physical currency, including gold, will eventually have limited reserves on the earth, and its supply as money will be even more limited. However, the value of global tradable wealth can theoretically grow indefinitely, and it does not make logical sense to use limited reserves as currency, corresponding to the infinite growth of the value of global tradable wealth.
Second, the dollar is the central currency of the world, on the one hand, the United States has a lot of political disputes, the size of the national debt has approached 35 trillion US dollars, and the ratio of interest expenses to US GDP has reached 2.45%. On the other hand, the U.S. employment data is still relatively good, the economy has also grown to a certain extent, and its economic, cultural, and military strength is still not surpassing in the short term. Therefore, different market players will make different judgments based on the information and positions they have obtained.
It should be pointed out that when the market does not trust the existing sovereign credit currency, out of historical inertia, market players will choose to buy gold as a value reserve to hedge the corresponding risks. This has happened many times in history, and at present, this historical inertia shows no signs of being broken.
In addition, although gold does not generate interest and will bring a certain opportunity cost to holders, for individuals, no asset allocation can be 100% guaranteed to resist risks. For the central bank, the large-scale purchase of gold also has considerations such as increasing foreign exchange disposal and controlling monetary aggregates through large-scale gold transactions.
However, it needs to be stressed that there is much to be gained in the current role of gold as a special commodity, but there is no way for the world monetary system to return to the "gold standard".
Source: Picture Worm Creative
Times Finance: At present, in addition to the soaring price of physical gold, Bitcoin, known as "digital gold", has also risen and fallen sharply recently. How do you see the future of cryptocurrencies like Bitcoin? Wang Yongli:From the perspective of the historical evolution stage of money, the world currency has developed from the initial "natural physical currency" such as shells and feathers, to the "regulated metal currency" such as gold and silver, and then to the gold standard currency supported by physical metal currencies such as gold and silver, and finally to completely detach from physical money to credit money. In the process of evolution, money constantly removes its unnecessary physical carriers and external forms, and breaks through the self-shackles of money supply, operational efficiency, cost risk and other aspects brought about by it.
Compared with the current credit currency, electronic money and digital currency can give full play to the core function of money as a "value scale" and "medium of exchange", which is the direction of further development of money in the future. However, it is important to note that decentralized digital crypto "currencies" such as Bitcoin will not become real money.
Bitcoin is supplied in a total-locked, phased and halved supply every four years. Theoretically, by 2140, all 21 million bitcoins will be distributed. Therefore, as with gold, the use of limited reserves as currency is destined to be unable to cope with the infinite growth of the value of global tradable wealth.
Other cryptocurrencies that envision a "denationalization" of money, decentralization, and hyper-sovereignty that detach from national sovereignty are also unlikely to succeed. In fact, without the highest level of adequate protection and supervision of money and wealth by national sovereignty and law, relying solely on the credit protection provided by cryptographic algorithms and distributed technologies will inevitably lead to the formation of a variety of forks and altcoins.
Therefore, decentralized cryptocurrencies such as Bitcoin are more based on the investment beliefs of some people.
The digital yuan is still controversial
Times Finance: The popularity of Bitcoin has led to the development of blockchain, digital currency and other technologies. In March this year, SWIFT (Society for Worldwide Interbank Financial Telecommunication), which has been used as a weapon of financial sanctions by Europe and the United States, said that it would launch a global central bank digital currency interconnection platform in the next 1-2 years. As the first director of Swift in Chinese mainland, what impact do you think this move will have on mainland China's monetary and financial services? Wang Yongli:This move is more of an advance layout of SWIFT to maintain its leading position, and it is not appropriate to over-interpret it.
SWIFT is the world's most important international payment communication channel and the most important financial infrastructure for cross-border trade, but it is not the only one in the world. At present, the central banks of the world have "turned around" to develop digital and intelligent digital currencies, and SWIFT must also keep up with the times and transform rapidly, otherwise it will be replaced by other new digital currency international payment communication platforms.
In terms of technology alone, the mainland has already mastered the relevant technology similar to SWIFT, and is fully confident that it will be able to build a feasible set of international payment communication channels in a short period of time. However, the focus is on how to gain the trust of foreign financial institutions, and it is widely used in the region. Moreover, transaction costs and efficiency are also important competitive items.
In addition, given the mainland's current huge economy and frequent foreign monetary and financial exchanges, if SWIFT strips the mainland, it will be self-defeating. In fact, SWIFT's so-called kicking out of Russia is only kicking out some of Russia's financial institutions, not excluding Russia as a whole. However, at a time when SWIFT is relatively neutral to the mainland, the mainland still needs to pay attention to the reserve of the latest technology and corresponding talents.
Source: Picture Worm Creative
Times Finance: You mentioned that the central banks of various countries have "turned around" to develop digital and intelligent digital currencies, and the mainland digital yuan has also been piloted for a long time, can you introduce the latest progress of the mainland digital yuan, and what is the impact of the digital yuan on the internationalization of the mainland currency? Wang Yongli:Although the digital yuan has been launched for four years, it is still in the pilot stage. Changes in a country's monetary system are related to all aspects of the operation of the whole society, and a small change can also have a huge impact, so there is no room for mistakes. Caution at the relevant level should also be understood.
However, judging from the previous pilot situation, there is still a discussion in the academic community about the internal logic and positioning of the digital yuan.
The current digital yuan is set at M0 (cash in circulation), but I personally believe that this positioning is still up for debate. At present, with the widespread use of bookkeeping and clearing and mobile payment, the proportion of cash in circulation in the total amount of money has been decreasing, and it has been below 4% after the Spring Festival in 2019. Cash payments are even lower as a percentage of the total disbursements.
Therefore, if the digital yuan created by investing huge resources can only be used to replace cash (in fact, it is difficult to replace all of it in the short term) and is used on a small scale, its scale and role will be very limited, and it will be even more difficult to meet the needs of international payment circulation, and its actual value and vitality may be problematic.
As for the impact of the digital yuan on the internationalization of the RMB, in my opinion, it is difficult for the digital yuan to quickly promote the internationalization of the RMB. In fact, the degree of internationalization of any form of currency depends on the country's comprehensive national strength and international influence. At present, China is different from the United States, the world's largest power, in terms of economy, culture, and military. The internationalization of the renminbi is urgent, and it needs to be carried out prudently and steadily.