Sheng Songcheng, a professor at China Europe International Business School, former director of the Central Bank’s Investigation and Statistics Department, and executive vice president of the CEIBS Jiazui International Finance Research Institute, said in an interview with reporters that the US dollar may still be under pressure in the short term. However, the current global epidemic situation and the recovery of major foreign economies still have great uncertainties, so the hedging properties of US dollar assets are still outstanding. At the same time, there is a good time to continue to promote the two-way opening of the capital account. China should steadily promote the two-way opening of the capital account to lay the monetary and financial foundation for the new dual-cycle development pattern.

He believes that no matter how the digital currency develops, it is not a factor affecting the international monetary system. Compared with the United States, China has more policy reserves, which can restore normal monetary policy.

The dollar is still under pressure in the short term

China Securities Journal: The U.S. dollar index has recently seen a downward trend. Has the U.S. dollar entered a bear market?

Sheng Songcheng: The recent decline in the US dollar index is related to the current severe situation in the United States and the large amount of liquidity that was previously used to hedge against the economic recession. Under the impact of the epidemic, the Fed has restarted quantitative easing since March 2020. When the Fed expanded its balance sheet aggressively, the U.S. dollar index rose instead of falling, breaking through the 100 mark for the first time since April 2017. From March to May of this year, the US dollar index has remained at a relatively high position around 100. As the "dollar shortage" subsides, it is normal for the dollar to pull back from high.

At the same time, market concerns about excess liquidity in the US dollar have also followed. In addition, in recent times, as the EU summit that has been deadlocked for several times finally negotiated a fiscal stimulus plan, many countries reached a consensus to jointly rescue the market and the economy, and agreed to create a recovery fund of up to 750 billion euros to boost the hard-hit by the epidemic. In the European economy, the euro is strong, which also makes the US dollar exchange rate relatively weak.

The U.S. dollar may still have depreciation pressure in the short term, but it must be noted that the current global epidemic situation and the recovery of major foreign economies still have great uncertainties, and the hedging properties of U.S. dollar assets are still outstanding. In the medium to long term, the US economy still has a lot of room for maneuver. It is worth noting that the U.S. dollar can be a strong currency for a long time and maintain its dominant position in the international monetary system. In addition to its strong economic, technological, and military strength, an important reason is that the U.S. dollar has been constantly making institutional innovations. For example, although the Bretton Woods system collapsed and the U.S. dollar was decoupled from gold, it was later linked to oil. The United States has also always played an important role in international policy coordination, supporting the U.S. dollar's dominant position in the international monetary system. Facing the impact of the epidemic this time, the Fed has played the role of the global central bank through currency swaps with central banks and temporary repurchase agreements (FIMA) for foreign and international monetary authorities. As long as the U.S. dollar continues to maintain institutional innovation and maintain its central position in the international monetary system, there are reasons to be optimistic about the future of the U.S. dollar.

China Securities Journal: Now that the epidemic in China is under effective control and the economy is recovering steadily, what opportunities will the internationalization of the RMB usher in?

Sheng Songcheng: RMB internationalization will promote the formation of a new dual-cycle development pattern. Steadily advancing the two-way opening of the capital account will help China continue to integrate into the world economy and lay the monetary and financial foundation for the new dual-cycle development pattern.

First, highlight the characteristics of renminbi-denominated assets and upgrade Shanghai's international financial center. The internationalization of RMB requires the cooperation of world-class financial centers. In addition to Hong Kong, China should also have an international financial center that radiates the world. It is necessary to encourage overseas residents to increase their holdings of financial assets denominated in renminbi to realize the "dual cycle" of renminbi domestically and overseas. This will enable the internationalization of the RMB to have broad connotations and development prospects.

Second, steadily promote the two-way opening of the capital account. For example, actively carry out pilot trials of finance in the free trade zone, pilot the establishment of a domestic and foreign currency integrated account system, unify the management policies of domestic and foreign currency cross-border capital pools, implement a more convenient cross-border capital management system; further support the healthy development of the science and technology board, In Shanghai, we will pilot the qualified domestic limited partner (QDLP) system, etc.

These measures will not only contribute to the circulation of the renminbi inside and outside the country, but will also promote the formation of a dual-cycle pattern in the Chinese economy.

China has sufficient policy reserves

China Securities Journal: During the epidemic, the Federal Reserve used a large-scale expansion of its balance sheet to ease market liquidity tensions. China’s central bank has also stepped up efforts to maintain a reasonable abundance of market liquidity, but the People's Bank of China's balance sheet has not changed significantly. How to understand the differences in monetary policies between China and the United States? How to look at the follow-up development of China-US monetary policy?

Sheng Songcheng: In response to the impact of the epidemic on the economy, both China and the United States have adopted greater monetary control measures to relieve market players such as enterprises and prevent short-term shocks from evolving into long-term recessions. This is also the responsibility of the central bank.

As of the end of June, China's broad money supply (M2) had a year-on-year growth rate of 11.1%, an increase of 2.6 percentage points over the same period last year, while China's GDP growth rates in the first half of this year and the same period last year were -1.6% and 6.3%, respectively. From the comparison of M2 growth rate and GDP growth rate, China's monetary policy has greatly relieved the real economy.

The Fed has adopted quantitative easing on an unprecedented scale. At the end of June, the US M2 growth rate was as high as 22.9% year-on-year, compared with 4.7% in the same period last year. In the first half of 2019, the US GDP growth rate was 2.0%. In the first half of this year, the US GDP growth rate was -9.5%, the lowest since World War II. Judging from this round of the Fed’s balance sheet expansion, in just a few months, the Fed’s total assets have rapidly expanded from US$4.2 trillion to about US$7 trillion. The scale of the balance sheet expansion has been equivalent to the first round and the first round of the 2008 international financial crisis. The total of the second round of QE.

Why is the liquidity investment of China's central bank not clearly reflected in the balance sheet, and even the total assets of the central bank (currently 3.6 trillion yuan) are slightly reduced from the beginning of the year (3.7 trillion yuan)? The main reason is that China and the United States have different financial systems and currency control methods. The Fed mainly cuts interest rates and expands its balance sheet, while China’s central bank cuts interest rates and RRR, and cooperates with a series of precisely-oriented structural monetary policy operations. The Fed’s asset purchases greatly expanded its balance sheet, while China’s central bank lowered the deposit reserve ratio, which changed the currency multiplier.

At present, China has taken the lead in successfully controlling the epidemic, and its prudent monetary policy is more flexible and appropriate, which is in sharp contrast with the United States and other Western countries. At present, the monetary policy of major economies in the world is still far from turning, but it is foreseeable that the different monetary policy measures of China and the United States will bring different models of monetary policy back to normal in the future.

Compared with the United States, whose monetary policy is easier to return to normal? In addition to raising interest rates, the Fed can only shrink its balance sheet, but it is difficult to increase the reserve requirement ratio because it will be strongly opposed by more than 20,000 commercial banks. If the Fed implements a large-scale radical contraction of the balance sheet, it will have a huge impact on financial and economic stability, and will be subject to political and business constraints. China's central bank can increase the deposit reserve ratio and guide market interest rates upward, so China has more policy reserves to restore monetary policy to normal.

Source: China Securities Journal, China Securities Network