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Leading economic experts meet annually at the Jackson Hole Economic Symposium in the US state of Wyoming. Photo: Bloomberg

Jackson Hole summit has market holding its breath, and China has financial war with US on its mind

  • Before the widely watched Jackson Hole summit of central bankers in the US, China’s economic experts held their own meeting in Beijing, with an abundance of risk warnings
  • ‘Fast expanding’ global financial shock waves from the US Fed’s aggressive interest rate hikes force China’s central bank to walk a tightrope in trying to curb financial risks

As the market sniffs for any clues about what sort of rate decisions the US Federal Reserve is favouring at the Jackson Hole summit of central bankers, Beijing’s policymakers and advisers are reviewing their own playbook, with geopolitical tensions and financial war on their minds.

Some of the more circulated hawkish views have already made it clear – there’s a massive divergence in the economy-management practices of China and the United States. St. Louis Federal Reserve president James Bullard has stated that interest rates will continue to rise as inflation continues, and that officials should lift their policy benchmark interest rate to a range of between 3.75 and 4 per cent by year’s end.

So, while the Jackson Hole Economic Symposium – one of the longest-held central banking conferences in the world – is being watched closely by investors interested in monetary policy, China’s economic experts have also been meeting and discussing what could be long-term ramifications of the decisions that emerge from the summit in the US state of Wyoming.

At a closed-door session in Beijing last week – according to a transcript released this week – there were growing worries of a potential global recession, financial shocks and worsening China-US relations.

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“Global financial risks fuelled by the United States are fast expanding,” Dai Xianglong, who was at the helm of the People’s Bank of China from 1995-2002, warned at the gathering.

The event, hosted by the China Development Research Foundation to mark the 25th anniversary of the 1997 Asian financial crisis, offered evidence of how the world’s second-largest economy is essentially walking a tightrope in terms of trying to mitigate and prevent financial risks.

Meanwhile, international financial weapons wielded against Russia – including the freezing of central bank assets, and kicking it out of the Swift financial messaging system – could have a catastrophic impact in terms of panic sentiment and speculative capital flows, the event was told.

The world’s second-largest economy has been following – perhaps anxiously – the US Federal Reserve’s rate increases, which have amounted to 225 basis points in the past five months, triggering a portfolio-investment outflow from China and fuelling concerns about greater negative spillover effects.
[China] should also make powerful preparations to counter a potential US finance war
Dai Xianglong, former head of People’s Bank of China
And in addition to worrying about the threat of global inflation, US dollar hegemony or even another monetary-policy-shift-induced Nixon Shock to the international monetary system, Chinese authorities are haunted by potential decoupling attempts, and they have slashed holdings of US Treasury securities for seven months in a row, and by a total of US$113 billion.

Foreign investors are reducing their holding of Chinese securities likewise, with the net financial outflow estimated by S&P Global Ratings to reach US$108 billion in the second quarter – almost US$38 billion more than a year prior.

Dai, like many government officials, is urging Beijing to increase its capability to address a global financial crisis, and to have a greater say in international economic governance.

Pointing to the impact of Washington’s financial sanctions, such as on Afghanistan and Russia, he said: “Such extreme measures have greatly hurt the international finance community’s trust of the US government, undermined international financial rules and posed a new threat to the global financial system.”

“[And], we should also make powerful preparations to counter a potential US finance war.”

Relations between Beijing and Washington have hit new lows in the wake of the heightened tensions over Taiwan and attempts to build industrial relationships and supply chains that exclude China.

The recent delisting decisions of five state-owned firms – including Sinopec, China Life and Chalco – from the New York Stock Exchange also showed how financial decoupling is unfolding.

The 1997 Asian financial crisis was a shocking lesson for Chinese Communist cadres, as export orders plunged and Beijing was directly involved in the defence of the Hong Kong-US dollar peg.

Concerns of a finance war with the US have emerged as bilateral relations could largely reshape the landscape of the Chinese economy, its exports, outbound investment and technological advancements.

At last week’s gathering in Beijing, Zhu Min, former deputy managing director of the International Monetary Fund, warned of a potential global crisis, and of the powerful impact of speculative capital.

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“We were there on the day of the decisive battle, August 28, 1998, when the turnover of the Hong Kong stock market grew 20 times from a day earlier. We saw how big the shocks were. They were barely seen in the past, and the attacks unfolded in both spot and futures markets, stock and money markets, Hong Kong and New York markets,” he recalled.

In recent months, the Hong Kong Monetary Authority has already been forced to raise interest rates, and buy the Hong Kong dollar at a record pace to defend its 39-year peg to the US dollar.

Wang Yiming, a central bank policy adviser and deputy chairman of the China Centre for International Economic Exchanges, said China’s reform approach in handling the challenges of the 1997 Asian financial crisis laid the foundation for its economic take-off years later – including the bankruptcies of loss-making state-owned enterprises; the restructuring of the bad-loan-ridden state banking system; and the introduction of home privatisation to expand domestic demand.

“Many reforms we see today were forcibly made because of the crisis,” he said at the symposium. “Deepening reform remains the fundamental solution to countering future crises.”