by Elliot Campbelton
Aug 2020
America has dominated global finance since the end of the World War II, but the economic disaster caused by the coronavirus pandemic could signal a new chapter in financial history, with America’s leadership called into question.
Covid-19 has shown that America is failing to sort out its own affairs at home, let alone provide global leadership. Issuing an secondary $484bn stimulus to quell markets and recapitalise corporations, another huge spike in unemployment claims followed.
With a vacuum emerging at the top of the financial order China is vying to compete for greater control. While this is not a case of China becoming Wall Street overnight, the crisis has provided China with an opportunity to show what it’s capable of doing, which in the long run will tip the balance of power.
The role of America in the global financial system
In global finance America is king, It controls the world’s financial plumbing and accounts for almost a quarter of the world economy. The dollar makes up most central-bank reserves and is the currency of international trade (80% of global supply chains use dollars which gives America significant power).
Whoever controls the flows of money controls the economy and affords the mantle the role of puppet master of the world.
China
China hopes to correct this imbalance, there is a growing call from the international community for reforming the global-economic-governance system.
China already has the world’s second-largest economy. The banking sector has been growing fairly steadily for the past ten years, while in America, bank assets have remained relatively stable and with European banks’ assets falling Chinese banks now have more assets than those in Europe or America, but most of their business remains domiestically focused within China.
Chinese banks account for only 7% of cross-border lending, so these banks vast size has not translated into influence within the world’s financial system, yet this may soon change as a result of the belt and road initiative.
Chinese banks are lending companies that have globalising ambitions that favour China. China is also giving its own currency a more prominent role In commodities markets, it has convinced a few companies to use the currency. Rio Tinto, one of the largest iron-ore miners in the world issued its first contracts in yuan last year.
The COVID affect.
The covid-19 pandemic could increase China’s financial influence. China is now sharing its experience with the rest of the world providing much-needed supplies and vast amounts of PPE. Following the outbreak in Wuhan, China has positioned itself as a global leader, containing the outbreak, agreeing to deals to suspend repayment on some of its loans and charging ahead with vaccine development.
The covid crisis, at least so far, has cast a negative shadow on the capacity for leadership by America. It did not try or even show interest in marshalling a global response to the crisis. This could offer an opportunity for China as it looks to fill the vacuum in global leadership that America has left. China’s tough response to the crisis and the growing size and depth of its financial markets have helped convince investors it’s a safe bet even as covid sent other markets crashing.
While emerging markets saw the value of bonds plummet earlier this year, China’s government bonds remained stable which is a good gauge of trust in a country’s economy. China has the second-biggest bond market in the world, where Covid provided the first tests that this bond market could resist a crisis in a way that typically emerging-market bond markets do not.
It shows investors trust China as an economy, which has the derived benefit of increasing its hold over how money moves around the world.
America's influence pervades.
America has huge influence over the current system, thanks to SWIFT, which wile being supposedly geopolitically neutral, (because a majority of SWIFT transactions are in dollars and these are routed through New York), America has used the system to choke its adversaries.
As an example, Russia in 2014 feared being excluded after its invasion of Crimea and some Iranian banks were blocked from using the system in 2018 to enforce US sanctions. America can also threaten SWIFT with sanctions if SWIFT does not do what America wants, which is evidently not democratic.
For now China can’t hope to challenge America’s dominance of SWIFT, instead, Chinese companies are targeting a different part of the financial system, the way in which consumers spend their money.
Most consumer payments rely on American giants Visa and Mastercard, but Chinese tech companies have developed a series of apps that disrupt this system. Rather than using bank accounts or credit cards for transactions, consumers load money into “digital wallets”, consumers can then do almost anything from paying parking fines to making investments. Without any of this money flowing through the banks, a parallel financial ecosystem is created. This is potentially very disruptive to the financial system as It changes the way the money moves around the world.
Last year Chinese customers made mobile payments worth a total of $49trn with the two main Chinese companies offering this tech Tencent and Ant Financial, hosting a billion users each.
Covid-19 may increase their reach, people are doing more shopping online trying to stay away from cash, which is seen as a potential contaminant, this is all to the benefit of electronic-payment firms.
Ant Financial and Tencent are already expanding overseas. Ant Financial’s app Alipay, is accepted in 56 countries and regions and other digital-wallet firms are buying into their tech with Alipay’s QR format already adopted by six European mobile wallets.
America has reasons to be worried about the Chinese giants, they are getting bigger in the region because they are investing in promoting their wallets in South-East Asia and beyond, and in effect it creates a system that is not reliant on American companies, American standards, American norms.
Chinas' PR
But China faces a major obstacle, much of the world distrusts its intentions with top Chinese officials keeping quiet and initially denying the extent of the spread of covid-19.
This lack of trust and transparency, both at home and abroad may be the factor separating China from its ultimate assent to the top of the world order.
The plausible results
As China’s financial sphere of influence grows it is unclear whether it will complement America’s by creating more competition, or undermine it. In the end, what we could see is the fragmentation of the global financial system into a America-dominated sphere, and a China-dominated sphere. These two systems don’t have to be mutually exclusive, but If they don’t, then it will be harder to move money around the world, and a costlier, more dangerous financial system at that.