Cheng Shi, Chief Economist of ICBC International and Director of China Chief Economist Forum
"We are facing a century of change in the global monetary system." Cheng Shi, Chief Economist of ICBC International, recently had an exclusive dialogue with Hong Kong 01, explaining that the so-called "change" is that globalization is moving towards "regionalization" and the monetary system is moving towards "digitalization"; under the change, the RMB has long been rapidly adjusted, combining "RMB internationalization" and regional strategy to promote regional financial integration, and accelerating the development of "Central Bank Digital Currency" (hereinafter referred to as "CBDC"), and launching "Digital RMB" as soon as possible. (e-CNY) caters to the digital economy. In this regard, Cheng Shi discussed in depth how Hong Kong, as an "offshore RMB hub" and is studying the application of "Digital Hong Kong Dollar" (e-HKD) at the retail level, should seize the opportunity of change to build a RMB-denominated securities market and upgrade from an international financial center to a digital international financial center.
Hong Kong 01: Many scholars have pointed out that the internationalization of the renminbi has opened a new stage and a new cycle. What do you think are the "characteristics" of the new stage and the new cycle? How can the internationalization of the RENMINBI focus on exploring and deepening the direction in the future? What role will Hong Kong play?
Cheng Shi: Rmb internationalization has always been in the process of rapid development, and every stage is very important. I personally believe that in the current era of the new crown epidemic and the unprecedented changes in a hundred years, the internationalization of the renminbi has indeed entered a new stage, and the characteristics of this new stage are:
On the one hand, RMB internationalization is more adapted to the new development trend of globalization, the current globalization is moving from a single-center model to a polycentric model, regionalization constitutes the basis of globalization, and the focus of RMB internationalization is more reflected in the Asia-Pacific region, especially along the Belt and Road, which adapts to the new development needs of globalization and makes important contributions to regional financial integration.
On the other hand, the internationalization of the renminbi is more suitable for the financial evolution needs of the digital economy era. The COVID-19 pandemic has accelerated the development of the global economy from offline mode to online mode, the central bank digital currencies of countries around the world have entered the climax stage of research and development and pilot, the digital yuan (e-CNY) launched by the Central Bank of China has attracted wide attention, and some academic discussions have been conducted on the future international expansion, which has created more opportunities for the reform and development of the international monetary system towards the digital economy era.
Hong Kong has always played an important supporting role in the rapid development of RMB internationalization and played an important role as an international financial center, and this role will be further strengthened and further reflected in the future.
"Globalization" Towards "Regionalization"
Borrow the Belt and Road to build a RMB securities market
Hong Kong 01: You pointed out that the investment and financing gap in the financial market along the "Belt and Road" needs to be filled urgently, and suggested that Hong Kong seize the "Belt and Road" strategy when establishing a RMB-denominated securities market. Could you please provide some simple examples and materials to briefly introduce the investment and financing situation along the "Belt and Road"?
Cheng Shi: According to the World Federation of Exchanges, the number of more mature exchanges in the "Belt and Road" countries is small and small, and the market value and turnover of listed companies on the South Korea and Saudi Arabia exchanges are relatively large.
For the more developed and perfect exchanges in the "Belt and Road" countries, such as South Korea, Saudi Arabia, etc., their high-quality listed companies are mainly listed on domestic exchanges (such as Samsung, Hyundai, LG, Aramco, Saudi Basic Industries, Saudi Telecom, etc.), which also makes global investors face certain thresholds when investing in these companies.
For the economies with smaller sizes and start-up capital markets in the "Belt and Road" countries, there is no shortage of high-quality or potential companies, but these companies are subject to the imperfection of domestic exchanges and it is difficult to obtain direct financing, thus affecting the replenishment of corporate capital and business expansion.
In terms of market size, the average market capitalization of listed companies on exchanges in The Belt and Road countries is small (about $256.4 billion by the end of 2020), and the combined market capitalization of some exchange listed companies is even only a few billion US dollars, which directly weakens the potential business scale of exchanges.
In terms of investor participation, the average turnover of exchanges in the "Belt and Road" countries is small, about US$203.7 billion, mostly below US$100 billion for the whole year, which is also largely related to the small market capitalization of listed companies on the exchange and the limited level of investor funds and cognition.
Located in the center of the "Belt and Road", Hong Kong has the status of an international financial center, the world's largest offshore RMB market, a mature and perfect Hong Kong Stock Exchange and international investor base, and its investment and financing channels include RQFII, Shanghai-Shenzhen-Hong Kong Stock Connect, direct market entry investment, bond connect, etc. If we can establish a securities trading platform denominated and settled in RMB in Hong Kong, we can further release the market dividends of the return of Chinese stocks to Hong Kong, significantly enhance the status of RMB as an investment and financing carrier in the international financial market, and help the process of RMB internationalization.
Hong Kong 01: If enterprises along the Route are attracted to Hong Kong for investment and financing activities, will they give priority to "RMB"? For example, due to the sino-US interest rate differential, the dim sum bond market has also shrunk in recent years. How can more Belt and Road enterprises choose "RMB" and use it as an investment and financing currency?
Cheng Shi: Under the turbulence of the international environment and the impact of the epidemic, rooted in the gradual improvement of the exchange rate formation mechanism and stable economic fundamentals, the endogenous stability of the RENMINBI has gradually become prominent, laying the foundation for its development as an "anchor currency" for investment and financing in the "Belt and Road" countries.
On the one hand, the effective exchange rate of the renminbi is more stable than that of most emerging market economies. Compared with the 16 Belt and Road countries with 100 billion US dollar exchanges, since 2016, the effective exchange rate of the renminbi against a basket of currencies has been more stable than that of most of these national currencies.
On the other hand, the "anchor" attribute of the renminbi for the currencies of the "Belt and Road" economies has gradually emerged. Comparing the fluctuations between the exchange rate of the major currencies of the "Belt and Road" against the US dollar and the exchange rate against the RENMINBI, we found that nearly half of the currencies have a more stable exchange rate against the RENMINBI, and the currencies with a more stable exchange rate against the US dollar are mainly commodity currencies affected by the petrodollar, such as the UAE dirham, Saudi riyal, Kuwaiti dinar, etc.).
Combined with the above two factors, if the "Belt and Road" enterprises can use the RENMINbi to carry out investment and financing business in the future, it is expected to reduce the exchange risk that investors need to bear, and attract more high-quality capital from China and the world to fill the existing investment and financing gap, which will also help the "Belt and Road" countries overcome the contradiction between the underdeveloped financial market and the urgent need for economic development.
Hong Kong 01: At present, Chinese mainland has stock exchanges in Shenzhen, Shanghai and Beijing. What products should Hong Kong start exploring to develop the RMB-denominated securities market?
Cheng Shi: At present, HKEX's RMB financial products already include bonds, exchange-traded funds (ETFs), real estate investment trusts (REITs), stocks, RMB fixed rate and currency derivatives, as well as commodity derivatives. Among them, in the securities product market, RMB ETFs are the most actively traded; in the derivatives market, RMB currency futures are the most popular.
However, due to the small number of listings, the total trading volume of securities traded in RMB is still very low compared to the total trading volume of the main board market, and the small trading volume of RMB currency products also affects the trading volume of RMB interest rate and exchange rate products. Therefore, the key is to take advantage of opportunities to promote domestic and foreign investors to increase the scale of assets and liabilities denominated in RMB, and on this basis, the demand for hedging RMB interest rates and exchange rate risks will also increase endogenously, and the types of RMB financial products will naturally be enriched.
Hong Kong 01: If a RMB-denominated securities market were established in Hong Kong, would it affect the status of the Hong Kong dollar?
Cheng Shi: From the perspective of the monetary system itself, there is no substitution or competition between the Hong Kong dollar and the offshore renminbi. From the perspective of indirect effects, if the development of Hong Kong's RMB-denominated securities market becomes an important driving force for the prosperity of the local financial market in the new era, it will enhance Hong Kong's financial center status and attractiveness, and objectively will strengthen the endogenous value of the Hong Kong dollar.
Monetary System Towards "Digitalization"
Hong Kong has the opportunity and advantage
Hong Kong 01: Can you use the digital yuan as an example to introduce the concept and overview of "central bank digital currency"?
Cheng Shi: According to the White Paper on the Research and Development Progress of China Digital Renminbi issued by the Chinese Bank of China (hereinafter referred to as the "People's Bank of China"), the digital renminbi is a legal tender in digital form issued by the People's Bank of China, which is operated by designated operating institutions, based on the generalized account system, supports the loose coupling function of bank accounts, is equivalent to physical renminbi, and has value characteristics and legal compensation.
As of June 30, 2021, there are more than 1.32 million digital yuan pilot scenarios, covering the fields of living expenses, catering services, transportation, shopping and consumption, and government services. More than 20.87 million personal wallets and more than 3.51 million public wallets have been opened, with a cumulative number of more than 70.75 million transactions and an amount of about 34.5 billion yuan.
Hong Kong 01: At present, mainstream digital currencies, such as Bitcoin and Ethereum, are more used as "investment products", even if they are exchanged with fiat currencies, they are still dominated by US dollars. How do central bank digital currencies have similarities and differences? What is the significance of the development of digital yuan for the development of the financial industry?
Cheng Shi: Although the mainstream digital currency is more regarded as an "investment product" at present, it has an important innovation in the design of the mechanism, which can adapt to the monetary needs of the digital economy era, that is, to bypass the needs of intermediaries to achieve peer-to-peer electronic payment and ensure a certain degree of anonymity. It is also inspired by this that the central bank's digital currency came into being, improving the efficiency of payment while reducing the credit risk and liquidity risk exposure of intermediaries.
According to a research report by the Bank for International Settlements, the use of central bank code currencies for cross-border payments can reduce the cost of intermediaries by at least half, and the payment time has been reduced from the original 3-5 days to 2-10 seconds, which has greatly improved the pain points of traditional cross-border payments.
Hong Kong 01: You once pointed out that "the problems of the original international monetary system are difficult to solve in the original system", and said that "digital currency" may bring hope for breaking the situation. To what extent do you think the digital yuan can challenge the "dollar system" and help the rmb internationalize?
Cheng Shi: Although the digital yuan itself cannot directly challenge the US dollar system, we are facing a century of changes in the global monetary system, and in the process of launching CBDCs in major countries around the world to adapt to this development, China's digital yuan will occupy a first-mover advantage.
According to the Bank for International Settlements research report "Multi-CBDC Arrangements and the Future of Cross-border Payments", a common standard "corridor" network is established in the Multi-CBDC Bridge (hereinafter referred to as the "m-CBDC Bridge"), in which central banks can issue depository receipts in their own digital currencies. Enables single-bill delivery in the network. For countries that have not launched a CBDC, their central bank's fiat settlement system can also be connected to the "corridor" network. This pattern bypasses the DOLLAR-based SWIFT system, protects the sovereignty of monetarily weak countries, and helps to achieve friendly international trade cooperation.
We expect that the multilateral central bank digital currency bridge will become an important form of the global digital currency system, and the Chinese central bank is expected to take this opportunity to seize the initiative in international rule-making.
Hong Kong 01: China is already the world's second largest economy, and the importance of the renminbi in the international monetary system is increasing day by day, so it is natural to study the digital renminbi. However, the status of the Hong Kong dollar seems to be far inferior to that of the renminbi, is it necessary to develop a digital Hong Kong dollar?
Cheng Shi: Compared with the size of Hong Kong's economy, the international monetary status of the Hong Kong dollar is relatively high. According to SWIFT statistics, as of August 2021, the Hong Kong dollar accounted for about 1.28% of international payments, ranking 7th, compared with August 2019, the proportion of slightly reduced (1.48%), the ranking unchanged. In addition, the Hong Kong dollar ranks 9th in foreign exchange transactions.
Hong Kong has long been a widely recognized international financial center, and in the process of entering the era of digital economy, if Hong Kong is to continue to consolidate its position, it must seize this historical opportunity and fully implement the fintech strategy. Among them, the digital Hong Kong dollar is an important digital financial infrastructure.
Hong Kong 01: How is the development of Hong Kong's "central bank digital currency", the digital Hong Kong dollar (e-HKD)?
Cheng Shi: The Hong Kong Monetary Authority recently released the "e-HKD: A technical perspective" white paper, which not only explores the thinking on the background and significance of CBDC issuance, but also compares the advantages and disadvantages of different prototype designs of CBDC systems, and proposes a more realistic design scheme, which explains in detail the mechanism design of controllable anonymity, which has high technical reference value and innovation.
The CBDC system design proposed in the white paper is basically the same as the mechanism design of the digital yuan, and both adopt a two-tier operation system. As Hong Kong itself adopts the system of banknote issuing banks, i.e. the Hong Kong dollar is issued by three issuing banks, e-HKD can still follow this system, the HKMA is responsible for the research and development of CBDCs, and the three issuing banks are open to the public as designated operating agencies to accept e-HKDs.
Hong Kong 01: What role has Hong Kong played in the exploration of the digital yuan, and what preparations should be made in the future?
Cheng Shi: At present, the People's Bank of China, the Hong Kong Monetary Authority and other central banks have cooperated in the m-CBDC Bridge project initiated by the Bank for International Settlements, and the Hong Kong Monetary Authority has launched a pilot project for cross-border payment of digital yuan in Hong Kong.
In the future, in the process of exploring digital yuan, Hong Kong will become an important window for the promotion and use of digital yuan overseas. We recommend that the Hong Kong monetary authorities seize the advantages of their professional experience in the field of CBDC research to accelerate the digital transformation of financial infrastructure, while strengthening the interconnection between e-HKD and e-CNY in technical standards. Connectivity is not only in line with the direction of the mainland and Hong Kong gradually moving closer in terms of currency, but also conducive to the overall economic construction of the Greater Bay Area. Therefore, it is necessary to consider the docking at the infrastructure level in advance.
Hong Kong 01: If the exploration of digital yuan continues to deepen in the future and opens up the cross-border payment function, will Hong Kong's clearing banking business and offshore RMB capital pool be affected? Will Hong Kong's role as an offshore RMB hub be diminished?
Cheng Shi: Although digital yuan can streamline the payment system and reduce redundant costs with point-to-point design, digital yuan adopts a two-tier operating structure, so the clearing bank business still needs to assume the key role of cross-border payment. In addition, Hong Kong is the largest and most important offshore RMB business center, and in the early stage of digital RMB exploration of cross-border business, it is likely to rely on Hong Kong's mature market experience to promote.
Therefore, Hong Kong's role as an offshore RMB hub will not only not be weakened in the short term, but will also be steadily enhanced and gain broader development opportunities.
Hong Kong 01: When you write economic analysis articles, you often quote "ancient poems" as the beginning of the article, which is very interesting. In light of the topic of today's discussion, please summarize it with an "ancient poem".
Cheng Shi: Hong Kong is near the sea, let's use such a poem to describe my feelings: "The tide is flat on both sides of the strait, and the wind is hanging on the sails." Although in the midst of uncertainties and unprecedented changes in a century, Hong Kong and the internationalization of the renminbi are both hanging high on the sails and driving fast on a smooth road, with bright prospects and a promising future!