By Wei Hongxu*
The COVID-19 pandemic has not only caused great disruption to economic and social activities, but also promoted changes in the international monetary system and monetary policies. The international monetary environment dominated by the U.S. dollar, and the economic environment in the post-COVID-19 era will all undergo changes. These changes will usher in a new geo-monetary evolution. From the current trend of the development and change of the international monetary system, especially the escalation of the conflict between Russia and Ukraine and the financial sanctions imposed on Russia by the Western world, the future change of the international monetary system is worrisome. ANBOUND has pointed out in the past that the international monetary system is evolving from a currency system dominated by the U.S. dollar to one that is more geopolitical and diversified.
In the wake of the 2008 financial crisis and the COVID-19 pandemic, central banks around the world have significantly increased their involvement in national economic development. On the one hand, this is crucial for stabilizing their respective economies, but on the other hand, this inward-facing monetary policy model is troubling for other economies. The major economies led by the United States have launched a new monetary policy model and continuously promoted monetary easing. Although these policies helped the United States quickly get rid of the impact of the financial crisis, they also led to the continuous decline in the value of the U.S. dollar currency.
After the COVID-19 outbreak in 2020, the scale of quantitative easing reached an unprecedented level and central banks’ influence on financial markets through asset purchases became significant. This policy of prioritizing domestic needs and sustaining domestic asset prices will make currencies increasingly a “necessity” for economies of all kinds. The internalization of the Federal Reserve’s monetary policy has caused considerable trouble for the euro, Japanese yen, Chinese renminbi, and other major currencies. On the one hand, the increased volatility of the U.S. dollar and the increase of international capital flows have brought a lot of interference to the trade and investment of other countries, which has affected the “globalization” of capital. On the other hand, countries have to cater to the Fed in their monetary policies, thus bringing constraints to the domestic monetary environment and economic operation. This obviously affects the stability of the international monetary system.
In particular, the post-pandemic era has seen a marked increase in the volatility of the U.S. dollar index, which has forced investors and traders to seek various ways to hedge currency risks. The distortions in the supply of energy and commodities brought about by the uneven economic growth have also led to constant price adjustments in related commodities, bringing about impacts on international trade. At the same time, policy changes and the fluctuation of the U.S. dollar exchange rate have also brought a huge impact on the international capital market. Such policy risk not only causes volatility in developed markets, but also has a severe impact on the emerging ones. Economies have had to try to diversify their exposure to dollar volatility by holding gold, bitcoin, and digital assets.
At the same time, the aggravation of geopolitical risks has made the post-World War II international monetary system more politicized. Among the financial sanctions imposed on Russia, Europe, and the United States not only excluded Russia from the SWIFT system, but also restricted its transactions in the international capital market. International financial organizations such as IMF and World Bank also participated in the relevant sanctions. This will not only severely damage Russia’s economy and finance, but also inevitably affect the independence of the current dollar-based international financial and trade settlement and clearing system in the long run. Under the circumstance of increasing politicization tendency, the values-oriented international financial system is bound to be further dependent on the changes in the geopolitical landscape. Based on this change, the dollar-based international monetary system will be increasingly transformed into a multi-currency-dominated geo-monetary system.
Under such development, ANBOUND has also proposed that RMB, as a kind of geo-currency, does have room for internationalization. In the context of policy changes in the United States, the rising fluctuations in the dollar, and the intensification of international geopolitical risks, the internationalization of the RMB has become more and more important for China’s opening-up and development. At the same time, as one of the major reserve and payment currencies, RMB will inevitably face competition with the USD, EUR, and JPY. This kind of competition is actually similar to China’s competition for geopolitical and economic influence. Therefore, China needs to anticipate and study this trend of currency geo-orientation in establishing its monetary policy framework as well as in promoting its market-opening policy. In the process of promoting the internationalization of the RMB, it is necessary to adhere to a broad, inclusive, and open attitude. China should neither intervene in the market too much because of exchange rate fluctuations, nor should it engage in “cliquing”. It should truly realize the interconnection between the RMB and other international currencies and enhance the status of RMB in the international monetary system with its own strength.
*Wei Hongxu, A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK