Will financial conditions be increasingly influenced by the news in Shanghai and Shenzhen alongside New York and London?

Nicole Adams, David Jacobs, Stephen Kenny, Serena Russell and Maxwell Sutton in this Reserve Bank of Australia Bulletin article reviews the developments in Chinese financial system.

They point how the Chinese financial system is gradually becoming larger and more open to foreign competition. In near future, news in Shanghai and  Shenzen will influence global financial markets:

Risks in China’s financial system remain elevated despite its economy’s strong recovery from the COVID-19 pandemic and the modest and targeted use of monetary stimulus. These risks will continue to shape its economic management in the years ahead, with implications for growth and, in turn, financial conditions in the global economy.

While China has become heavily integrated with the global trading system, its integration with global capital markets is still at a formative stage. It is unclear just how far and how quickly China will open further to international capital flows. The history of other economies suggests that there is merit in proceeding carefully. But China’s large size means that any progress will make it much more important for the global financial system. While the scale and nature of this shift is difficult to predict, its importance can be illustrated by looking at what would happen if China’s stock of portfolio positions (both inward and outward investments) were to reach 70 per cent of GDP – half that of the United States or Australia, but similar to South Korea. In that case, China would account for around 8 per cent of global portfolio investment, third behind the euro area and the United States (and compared with 1 per cent currently) (Graph 24).[10]

Graph 24
Graph 24: Gross Portfolio Position

More generally, further opening would mean increased holdings of foreign assets by Chinese residents and increased holdings of Chinese assets by the rest of the world. That large rebalancing could affect asset prices and financial conditions differently across regions and markets. If this is a gradual process, it may prove relatively manageable. The renminbi could become a more widely used international currency, especially within Asia. Over time, financial conditions in Australia are likely to be increasingly influenced by the news in Shanghai and Shenzhen alongside New York and London.


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