Global markets distorted amid the trade war

Source:Global Times Published: 2019/8/13 19:13:40

Illustration: Xia Qing/GT

We have been continuously improving our efforts to open up to the outside world, and I believe that we are succeeding. However, we also see that some marked distortions have appeared in the global markets.

The first distortion is brought by the trade war. The US has adopted tariffs and other barriers in the trade war, which now seems not limited to trade, but has broadened to many other aspects including politics, military, core values and technology. In this case, China should prepare for a long-term fight. From a global perspective, there will be huge distortions in resource distribution, so it may be necessary to consider our countermeasures, including our opening-up plan, under such distorted conditions.

We don't want to see the trade war, but if someone raises tariff barriers or takes other measures targeting us, we should fight back. It is inevitable, although we are on the passive side. But the move will also have a major impact on our opening-up progress and the role of the market in resource allocation.

The emergence of the secondary market distortion is related to the development of modern science and technology. During the development process of IT technology and networks, we found that many aspects of the economy started to show the network effect, which saw winners take the leading position, thus bringing changes to competition. In the past, traditional market competition mainly worked on the assumption of decreasing returns to scale, except a few industries were characterized with increasing returns to scale. Nowadays, it seems that more and more industries have been characterized with increasing returns to scale, which has resulted from the network effect. Thus, during the competition process, some companies try to occupy market shares and expand user traffic by burning money. I don't think there is much to be criticized about these practices, which are just a type of reaction to market phenomena based on the network effect. But they will inevitably pose an important challenge to economics and economic analysis.

We are not only concerned about how these phenomena are handled in the domestic market, but also care about the new challenges these phenomena have brought to our opening-up strategy. Many of the world's largest internet companies are based in the US, and they will continue to bring changes in the future, thus posing new challenges to our opening-up process.

The third distortion is brought by the US-led, currency-based economic sanctions against countries like Russia, Iran and Venezuela. These economic sanctions have seemingly created obvious non-linearity, bringing significant distortions to the efficient measurement of resource allocation in the global market. The US has the ability to do this based on their control of the reserve currency: the currency of global trade and investment, namely, the US dollar. It is possible that they will adopt new practices to control the global trading currency in the future. For transactions using the dollar, whether it's for trade or investment, the liquidation process eventually takes place in the US. This implies the US can use this advantage to monitor all transactions and impose sanctions on other economies. In addition, the US is also using other means to monitor global trading information systems.

All these issues have had major impacts on globalization, global resource distribution, global supply chains and the optimized efficiency allocation. Therefore, we cannot naively use the traditional hypothesis of the so-called "global market economy" to study all problems, and we need to introduce some new methods of economic analysis.

As for how to deal with the distortions, China should pay close attention to the internationalization of the yuan. I would like to emphasize three issues regarding our countermeasures. First, China needs to prepare to cope with the trade war.

Second, we need to study and research how to maintain a more competitive market order. In the face of increasing market distortions, we need to reduce such distortions through focusing more on fair competition.

Third, under the current circumstances, we need to pay great attention to the internationalization of the yuan. Only the global usage of the yuan could allow us to effectively defend the global resource distortions as a result of the US dollar-centered international reserve currency, to maintain our claims on globalization, trade liberalization, investment facilitation and multilateralism.

The article was compiled based on a speech made by Zhou Xiaochuan, chairman of the China Institute of Finance and former governor of the People's Bank of China, at the China Finance 40 Forum in Yichun, Northeast China's Heilongjiang Province on Saturday.

Posted in: INSIDER'S EYE

blog comments powered by Disqus