Summer 2020 Vol.11 Ed.3

Uncharted waters Navigating the post-Covid recovery

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Untitled-2AS_0319_3793_print.indd 1 1 29/03/20193/28/19 2:34 09:20 PM Contents

Summer 2020 Vol.11 Ed.3

4 ABOUT OMFIF 5 LEADER 6 REVIEW / AGENDA

Cover: Uncharted waters Worldview 10 10 EUROPE'S USEFUL CRISIS 20 IN LOVE WITH THE LEV Danae Kyriakopoulou Steve Hanke

13 FOUR THEMES OF THE POST-VIRUS 21 CHINA OPENS ITS DOORS ECONOMY Rohan Singh Nathan Sheets 22 CHINA PREFERS GOLD OVER TREASURIES 14 CHINA’S POST-COVID RECOVERY Willem Middelkoop CONTINUES Andy Rothman 15 ESG STRATEGIES WITHSTANDING CORONAVIRUS 22 Dijana Bogdanovic and Dieter Konrad 16 RACE TO DIGITALISATION Gary Hwa and Andrew Gilder 17 LOW OIL PRICES TEST GCC EXCHANGE 6 RATE PEGS Krisjanis Krustins Inquiry 23 REVISITING CENTRAL Money matters BANKING HISTORY John Nugée 18 US MONEY GROWTH REACHES Summer 2020 Vol.11 Ed.3 RECORD HIGH 26 OMFIF ADVISERS Juan Castañeda and Tim Congdon NETWORK POLL

Uncharted New world order waters Navigating the post-Covid recovery

BTN_Q3.20_001_cover.indd 1 23/06/2020 13:23 Cover illustration by Darrel Rees 26

OMFIF.ORG SUMMER 2020 BULLETIN 3

BTN_Q3.20_003_Contents.indd 3 03/07/2020 15:13:50 About OMFIF

Dialogue on world finance and economic policy

THE Offi cial Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, The OMFIF Digital Monetary sovereign funds and public pension funds – with investable assets of $36tn, equivalent to 45% of Institute is a high-level world GDP. community which convenes key With offi ces in London and Singapore, OMFIF focuses on global policy and investment themes – policy-makers, technologists, particularly in asset management, capital markets and fi nancial supervision/regulation – relating to fi nanciers and regulators central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher to explore the challenges, standards, performance-enhancing public-private sector exchanges and a better understanding of opportunities and implications of the world economy, in an atmosphere of mutual trust. digital fi nance in the 2020s

Visit omfi f.org/dmi to explore forthcoming meetings, Membership membership benefi ts, and to Membership offers insight through two complementary channels – Analysis download your complimentary and Meetings – where members play a prominent role in shaping the copy of the journal agenda. For more information about OMFIF membership, advertising or subscriptions contact membership@omfi f.org

Analysis OMFIF Analysis includes commentaries, charts, reports, summaries of meetings and The Bulletin. Contributors include in-house experts, advisers network members and representatives of member institutions and academic and offi cial bodies. To submit an article for consideration contact the editorial team at analysis@omfi f.org

Meetings OMFIF Meetings take place within central banks and other offi cial institutions and are held under OMFIF Rules. A full list of past and forthcoming meetings is available on www.omfi f.org/meetings. For more information contact meetings@omfi f.org

OMFIF Advisers Network The 173-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: monetary policy; political economy; capital markets; and industry and investment. They support the work of OMFIF in a variety of ways, including contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation.

OMFIF.ORG

BTN_Q3.20_004-005_About_Leader.indd 4 07/07/2020 10:50:15 Leader

Official Monetary and Financial Institutions Forum Uncharted waters 30 Crown Place, London, EC2A 4EB United Kingdom T: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489 www.omfif.org @OMFIF s lockdowns ease and the world enters the mysterious, daunting A‘post-Covid era’, Robinson Crusoe comes to mind. Like Daniel Defoe’s BOARD shipwrecked explorer, the world is learning to adapt to life after a David Marsh, Chairman disastrous storm. Governments and central bankers took extraordinary John Orchard, Chief Executive Officer Phil Middleton, Deputy Chairman measures to salvage what they could of the global economy. OMFIF Maggie Mills provides a detailed looked at monetary policy actions in our central bank Jai Arya Mark Burgess policy tracker, updated weekly. It is difficult to know what shape the recovery will take. But not every part ADVISORY COUNCIL of our pre-pandemic lives will make it safely back to shore. Meghnad Desai, Chairman Mark Sobel, US Chairman As OMFIF Chief Economist and Director of Research Danae Louis de Montpellier, Deputy Chairman Kyriakopoulou writes, for the euro area the health crisis hit the economy Frank Scheidig, Deputy Chairman Xiang Songzuo, Deputy Chairman at a particularly vulnerable time. The Hani Kablawi, Deputy Chairman bloc was still reeling from the European Gary Smith, Deputy Chairman Otaviano Canuto, Aslihan Gedik, debt crisis, and new leadership at the Robert Johnson,William Keegan, European Commission and European John Kornblum, Norman Lamont, Kingsley Moghalu, Fabrizio Saccomanni, Central Bank was finding its feet. Niels Thygesen, Ted Truman, Policy-makers have averted a financial Marsha Vande Berg, Ben Shenglin, Chair, OMFIF Economists Network crisis, but must now avoid exacerbating divergencies between core and EDITORIAL TEAM Danae Kyriakopoulou, Chief Economist & periphery economies which threaten Director, Research the single market. Simon Hadley, Director, Production Julie Levy-Abegnoli, Subeditor Nathan Sheets, chief economist and Fergus McKeown, Subeditor head of global macroeconomic research Kat Usita, Deputy Head of Research Bhavin Patel, Senior Economist & Head of at PGIM, believes the post-virus Fintech Research economy will bring winners and losers. William Coningsby-Brown, Assistant Production Editor He outlines four ‘shifting rapids’ the Pierre Ortlieb, Economist world will need to navigate carefully Chris Papadopoullos, Economist Darrell Delamaide, US Editor in the months and years to come. He notes the disproportionate impact of

MARKETING Covid-19 in poorer communities, which has highlighted the inequality so Chris Ostrowski, Director, Memberships and many are protesting across the US. Commercial Partnerships Stefan Berci, Communications Manager On a more positive note, Union Investment’s Dijana Bogdanovic and James Fitzgerald, Marketing Manager Dieter Konrad report that socially responsible portfolios were better able

Strictly no photocopying is permitted. It is illegal to to withstand the pandemic shock. Perhaps this will inspire a boost in reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this environmental, social and governance investing, amid mounting calls publication without the prior consent of the publisher. for the recovery to be a green one. In steering the world through the While every care is taken to provide accurate information, the publisher cannot accept liability for any errors or pandemic, policy-makers must not lose sight of another titanic challenge, omissions. No responsibility will be accepted for any loss occurred by any individual acting or not acting as a result the climate crisis. OMFIF plans to facilitate important conversations on of any content in this publication. On any specific matter reference should be made to an appropriate adviser. this topic with the forthcoming launch of our Sustainable Policy Institute.

Company Number: 7032533. ISSN: 2398-4236 More on that soon.

OMFIF.ORG SUMMER 2020 BULLETIN 5

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»3 April »24 April Coping with crisis: Long-term growth View from Asia prospects post-pandemic OMFIF convened a panel of in-house experts As the economic fallout from to discuss the responses and measures taken the global spread of Covid-19 by central banks and governments to safeguard increased, OMFIF convened the economy and the financial system. a panel of experts to discuss Speakers included Mangal Goswami, executive the expected economic director of the South East Asian Central Banks impact, responses taken Research and Training Centre, Mark Burgess, by key central banks and OMFIF Asia chairman, and Grant Spencer, governments to safeguard the former governor of the Reserve Bank of New economy and the financial Zealand and OMFIF Advisory Board member. system, as well as potential scenarios for a recovery.

»9 April »7 April Covid-19 policy response G20 response to Ludger Schuknecht, who is responsible for promoting the Organisation for Economic Co-operation and Development’s efforts coronavirus on sustainable development, growth, and ‘better policies for better lives’, discussed the policies in place and the OECD’s role in tackling OMFIF convened a panel of in-house the short-term health crisis and the longer term economic fallout. experts to discuss the expected economic impact of the Covid-19 pandemic, responses taken by key central banks and »20 April governments to safeguard the economy Brazil in the global economy and the financial system, as well as potential scenarios for a recovery. Fernanda Nechio, deputy governor of the Banco Central do Brasil, discussed Brazil’s economic situation, the central bank’s policy responses and its assessment of global developments.

»24 April »7 April Global financial stability The economic overview impact of Covid-19 Fabio Natalucci, deputy As uncertainty continued over the economic director of the IMF’s impact of coronavirus on the global economy, monetary and capital the National Institute of Economic and markets department, Social Research examined the potential discussed the Fund’s ramifications, using stylised scenarios based Global Financial Stability on the National Institute’s Global Econometric Report and its outlook Model. Two architects of NIESR’s report for the global economy. presented their findings.

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»7 May »14 May CBDC and maintaining the Japan’s response to public role of money Covid-19 In April, De Nederlandsche Bank announced it was ready to play The Bank of Japan has pledged to buy an unlimited amount of a leading role in a Eurosystem central bank digital currency government bonds and quadruple its purchases of corporate debt. experiment. Peter Wierts elaborated on the role CBDC could play Hirsohi Nakaso, former deputy governor of the Bank of Japan (2013- amid declining cash use, possible objectives – and which are the 18) discussed the economic outlook for Japan and the impact of most important – as well as design choices. Covid-19 on foreign investors.

»27 May Future of the euro area Looking at how the external shock has highlighted structural issues at European level, this seminar discussed solidarity and Eurogroup response compared with the role of national governments. It considered the role of fi scal response alongside monetary policy and the European Central Bank bond-buying package.

»12 May Economic shutdown has ‘90-day shelf life’

In response to the Covid-19 health crisis, the Federal Reserve has taken a number of policy actions »18 May to help steady both the US economy and global dollar Prospects for a digital euro liquidity. James Bullard, president and chief Discussions on central bank digital currencies have moved from executive offi cer of the purely theoretical examinations to practical experimentation, Federal Reserve Bank of St Louis, joined David Marsh, chairman including at the European Central Bank. Ulrich Bindseil outlined of OMFIF, to discuss the Federal Reserve’s policies, the outlook the ECB’s CBDC agenda, honing in on its current priorities and for the US economy, and global consequences of the pandemic. collaboration with member states.

»27 May Banque de France’s wholesale CBDC experiment Digital currency solutions for interbank settlement has the potential to transform current systems’ speed, resilience and cost effi ciency. Valérie Fasquelle and Christian Pfi ster outlined the Banque de France’s latest work on a wholesale digital euro.

OMFIF.ORG SUMMER 2020 BULLETIN 7

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Elvira Eurlings, who is responsible for »12 June managing the fi nancing conditions on the debt side at the Dutch Covid-19 recovery: View state treasury agency, discussed the Netherlands’ response to the from the Netherlands Covid-19 crisis and how the country will manage its recovery.

»18 June »23 June The bumpy road to recovery CBDC and the future Olivier Blanchard, former chief economist at the International Monetary Fund, and Prakash Kannan, chief of payments economist and head of total portfolio management at GIC, discussed the shape of the recovery, changes in the nature of Jochen Metzger discussed monetary policy and the European recovery fund. the impact of the CBDC agenda on payments and banking operations at large, »18 June considering the perspectives from a national, European Demystifying central and global level. bank fi nancing Ministries, treasuries and central »12 June banks around the world are funding large amounts of stimulus to combat the effects of the Covid-19 pandemic. The role of the dollar and OMFIF convened a panel to discuss the tensions with China real-world operations of central banks and treasuries and a deep dive into This panel discussed government defi cits and public debt. some of the major themes facing the global economy, in particular the »23 June international role of the Federal Reserve, US-China In Conversation with relations and the future of William Dudley the dollar. William Dudley, former president »3 June and chief executive offi cer of the Federal Reserve Bank of New York, joined Mark Sobel for a Economic and fi nancial conversation about the US trends in Latin America economy and his outlook on the years ahead. This panel convened experts from fi nancial institutions in Mexico, Brazil and Central America to discuss key trends in the Latin American economies and ways ahead through the downturn.

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BTN_Q3.20_006-009_Review.indd 8 03/07/2020 15:16:13 Agenda

»Monday 6 July, Virtual Covid-19 response and recovery: Perspective from Germany A roundtable with Jörg Kukies, German state secretary in the ministry of finance. Kukies discusses the German response to Covid-19 and the European Commission proposal for a recovery fund.

»Tuesday 7 July, Virtual »Wednesday 29 July, Virtual From protest to lockdown: Chile’s Launch of Global Public Investor 2020 economy in 2020 Launch of the seventh edition of Global Public Investor. The launch, taking place virtually from London and Singapore, focuses on how A roundtable with Joaquín Vial, deputy governor of the Banco key European, American and Asian institutions have managed the Central de Chile, to discuss how Chile has been coping with the economic and financial fallout from Covid-19. challenges of social unrest and protests at the start of the year, followed by the economic impact of the Covid-19 pandemic. »Friday 25 September, Virtual »»Wednesday 8 July, Virtual Navigating the digitalisation CBDC and its potential impact on transformation monetary policy A seminar on what central banks are doing to respond to the challenges and risks of artificial intelligence, blockchain and A roundtable with Scott Hendry, senior director, financial digital currencies, and how they are preparing for potential cyber technology at the Bank of Canada. Hendry will discuss CBDC attacks and establishing regulations on cryptocurrencies. and its various design choices, and what they could mean for the future of monetary policy. »Tuesday 29 September, Virtual »»Wednesday 22 July, Virtual The economics of artificial intelligence Bank of Thailand’s wholesale CBDC and machine learning A roundtable with leaders of Bank of Thailand’s Project Inthanon A joint seminar with OMFIF and the Federal Reserve Bank of to discuss how distributed ledger technology could enhance the Philadelphia on the economics of artificial intelligence. Topics of country’s fi nancial infrastructure and pave the way to a decentralised discussion include macroeconomic developments, transforming real-time gross settlement system. financial systems, the future of work and consumer finance.

For details visit omfif.org/meetings

BTN_Q3.20_006-009_Review.indd 9 03/07/2020 15:16:29 Cover: Post-Covid-19

Uncharted waters

10 BULLETIN SUMMER 2020 OMFIF.ORG

BTN_Q3.20_010-017_Cover_section.indd 10 03/07/2020 15:17:32 Europe’s useful crisis

here is never a ‘good time’ for a negative Teconomic shock. But for the euro area, the Covid-19 health crisis hit the economy at a particularly vulnerable moment. Countries across the monetary union were Danae still recovering from the euro area crisis, with Kyriakopoulou OMFIF some economic indicators stuck below their pre-2009 levels. In financial institutions, pre-pandemic debates focused on whether policy-makers would have enough ammunition to face the overdue market correction, irrespective of what may cause it. The European Central Bank, under new leadership, Uncharted was slowly healing from the Draghi era divisions in the governing council on the level of accommodation of monetary policy. Politically, the freshly-appointed European Commission was finding its feet while preparing to face new rounds of Brexit negotiations, competition disputes with tech giants, and the climate crisis.

waters Dual challenge The pandemic is a classic exogenous shock; the virus is not linked to misguided economic policy choices. By some unfortunate coincidence, it hit hardest in Italy, the union’s ‘weak link’ and with limited fiscal and institutional capacity to respond. The under-preparedness is partly the result of a decade of austerity, when periphery countries were directed to focus on building primary surpluses to improve debt sustainability. Investments in health were among the first to go. In 2017, per capita spending on health in Italy and in Spain was 15% below the EU average. For economic policy-makers, the pandemic challenge was dual. First, how to prevent a crisis in the real economy from morphing into a financial one. Second, how to avoid this turning into Europe’s ‘great fragmentation’, exacerbating divergencies between core and periphery, undermining the functioning of the single market, and feeding euroscepticism. The first challenge has been largely addressed – for now. Decisive action by the European Central Bank has shielded financial markets from the scale of destruction in the real economy; the health crisis has not coincided with a financial heart attack. But it has come at a price. Political opposition to the ECB – usually from eurosceptic groups – has motivated legal action. This culminated with the

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BTN_Q3.20_010-017_Cover_section.indd 11 03/07/2020 15:17:33 Cover: Post-Covid-19

German constitutional court’s ruling against But there is a problem with fiscal action. No time for fiscal distancing the legality of the ECB’s asset purchase Not everyone can act at the same scale. Thankfully, Jean Monnet’s quip that ‘Europe programme. The Alternative for Germany, Between March and June, Germany approved will be forged in crisis, and will be the Germany’s far-right official opposition party, €994bn in state aid, compared with €209bn sum of the solutions adopted for these’ is has already begun the process to legally in Italy and €20bn in Spain (Figure 1). proving prophetic. Europe is coming up challenge the ECB’s pandemic emergency French President Emmanuel Macron and with solutions. The pandemic laid bare purchase programme, alleging it amounts to Fabio Panetta, ECB executive board member, gaps in the design of the monetary union illegal monetary financing. have bemoaned EU countries’ differing and is accelerating progress on the old and But there is a more practical reason capabilities to provide fiscal support and well-known debates on risk sharing versus not to over-rely on central bank action in state guarantees. They have warned this risk reduction, enhancing crisis response responding to the pandemic. This is primarily would compromise what is intended to be mechanisms, and strengthening the a supply side shock and the public policies put a level playing field. In a single market, the institutional architecture underpinning the in place to curtail the spread of the virus are location of a corporate should not be the common currency. designed specifically to suppress economic decisive factor in determining its prospects The Commission’s proposal for a €750bn activity. Trying to boost demand with one for survival and success. ‘next generation’ fund has been hailed as hand while trying to suppress it with the Differing levels of state aid could Europe’s Hamiltonian moment, referring other makes little sense. This time, the undermine the competitiveness of the union to the 1790 US agreement under which the economy needs a different kind of medicine. as a whole given deeply interconnected federal government assumed states’ debts supply chains. A German company may be following the war of independence. It is a Another game in town hurt if its suppliers in Italy go under because step in the right direction. But it suffers Fiscal policy is particularly well-suited to of the Italian government’s inability to from shortcomings of scale and limits to respond to a supply side shock and propel provide state aid to the same extent that its ability to channel funds to those most the recovery once lockdowns ease. Direct, Germany does. However, interconnected in need. Crucially, the plan still needs to be targeted investment can focus on the supply chains could in theory mean that unanimously approved, with some states still sectors most hit and rebuilding economies German stimulus trickles down to support in opposition. sustainably. the broader European economy as it A more apt analogy to where Europe finds Encouragingly, national governments have translates into demand for imports from itself would be a Marshall plan to kick-start begun to execute fiscal stimulus. This has its trading partners. In practice, most of the recovery after winning the virus war. been much to Frankfurt’s delight, following Germany’s stimulus package has been And as the world emerges from lockdown, worries that the ECB would once again turn in credit guarantees, rather than actual policy-makers should prepare to face the out to be the only game in town, let alone a investment with a more direct transmission climate emergency. So far, the pandemic has legally challenged and a relatively ineffective to the real economy. had a mixed effect on the climate agenda. one. Some institutions have postponed or relaxed climate-related regulations, citing the need for immediate support to facilitate a broader revival. Others have intensified efforts, Differing ability attaching sustainability strings to stimulus for economic Approved state-aid, % GDP packages and corporate bailouts. support 30 Germany Average budget In fighting the virus war, Europe defi cit 25 should not lose sight of the next battle. of ais Sustainability should be the guiding pproed state 20 aid in of principle behind strengthening the union’s yais euro 15 France institutional architecture. The long-term area economies Italy Belgium 10 challenge for the continent will be to Slovenia Slovakia Malta Estonia implement crisis measures in a way that they Austria 5 Lithuania Finland Luxembourg can help us return to more normal times, and ource uropean Spain Greece Ireland Cyprus Netherlands0 Portugal Latvia remain useful when we do.  ommission -7 -6 -5 -4 -3 -2 -1 0 1 2 urostat FT OMFIF Danae Kyriakopoulou is Chief Economist analysis and Director of Research at OMFIF.

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BTN_Q3.20_010-017_Cover_section.indd 12 03/07/2020 15:17:33 Four themes of the post-virus economy Evolving circumstances will bring winners and losers

Nathan Sheets interact and conduct business that poorer communities low volatility macro-financial PGIM Fixed that require less physical have borne the brunt of the environment, with many of the Income contact. Brick-and-mortar retail virus, reflecting that these key uncertainties emanating will continue to lose ground to populations faced greater health from political developments. ecommerce, as consumers are challenges and sickness before Each of these four big themes he great American increasingly attracted by the the pandemic and, in many is powerful individually. Tphilosopher Yogi Berra convenience. cases, lived in dense households Occurring together, they promise once said, ‘It’s tough to make or communities that aided the to create a global economy predictions, especially about Productivity, politics virus’ spread. Moreover, lower that differs in important ways the future.’ If anything, Berra’s and aging paid workers have been more from before the pandemic. quip understates the challenges Second, this sectoral likely to lose their jobs or hold Navigating these shifting rapids of fi guring out where the global rebalancing could bring a positions that were deemed will require us to remain alert economy is headed. Taking a resurgence in productivity ‘essential’ and, thus, were more and respond adroitly to evolving stand on such issues, however, growth. Recent years have exposed to the risk of infection. circumstances.  is the unavoidable task of brought a proliferation of These realities are amplifying Nathan Sheets is Chief economists. impressive technologies, such the frustrations expressed in the Economist and Head of Global In that spirit, we turn to the as smartphones and artificial recent demonstrations across Macroeconomic Research at question of how global economic intelligence. Nevertheless, the US. PGIM Fixed Income. conditions – after Covid-19 has productivity growth over Fourth, aging populations receded – will differ from those the past decade has been the will continue to shape global that previously prevailed. While slowest of the post-war era. The economic performance. Our our crystal ball is cloudy, we see current situation may drive a previous research shows that four big themes that are likely transition to a more productive greying demographics are to characterise the post-virus economy. While working from associated with weaker real GDP economy and markets. home during lockdowns, people growth, slower inflation and First, the post-virus economy have paid the fixed costs of lower nominal interest rates. will bring winners and losers. learning and applying new Thus, as aging demographics The rebalancing will create a technologies to work. Although proliferate, the post-virus massive ‘relative value’ trade these technologies will not fully economy seems poised to for investors. The winners will replace face-to-face contact, they carry forward many of the probably include producers will remain in use once the virus themes that have characterised of virtual technologies that has passed. They will allow jobs the past decade – restrained bring people together, provide to be done more efficiently and growth, low inflation and low entertainment, or that offer will raise productivity levels. The long-term rates. We expect information, education, or exigencies of the outbreak may that these will translate into a services. Even more than before have created massive network the pandemic, the tech sector externalities by coordinating will be central to the economy. adoption of key technologies The losers will be service across the economy. providers that depend on face- Third, at least in the US, the to-face contact. This will reflect unequal incidence of Covid-19 both lingering health concerns across economic cohorts is and, more fundamentally, that likely to stoke frustrations people are finding ways to about inequality. Data indicate

OMFIF.ORG SUMMER 2020 BULLETIN 13

BTN_Q3.20_010-017_Cover_section.indd 13 03/07/2020 15:17:34 Cover: Post-Covid-19

China’s post-Covid recovery continues ecent Beiing outbreak shows virus eradication will be diffi cult

Andy Rothman not been a spike in cases. shuttered most shops, factories, offices and Matthews Asia But that picture changed over the weekend restaurants. It did not reflect structurally of 13-14 June, when there was a total of 72 weak supply or demand, or a financial new cases in Beijing within two days. This system crisis. Now that the virus has been is not a huge number, in the context of 395 brought under control, those businesses hina’s recovery continued in May, with new cases in New York on 14 June, as well as have gradually been reopening, and life is Cconsumer spending, manufacturing and 302 in Dallas and 995 in Los Angeles on that starting to return to normal, as are many key investment all bouncing back strongly. With same day. economic indicators. the virus largely under control three months For Beijing, however, which prior to the China is a domestic-demand driven after the lockdown was eased, further weekend had gone almost two months economy, so the recovery in consumer progress is probable, although a return to without a new case, it is a worrying sign. spending is critical. Last year was the eighth normal may not happen until next year. The government responded with widespread consecutive year in which the consumer and When thinking about prospects for the testing and contact tracing, closing schools services (tertiary) part of China’s GDP was Chinese economy, the most important near the outbreak, and sacking some local the largest, and consumption accounted for factor is whether coronavirus remains under officials. almost 60% of GDP growth. control. China appears to have wrestled As in other countries, the potential for a Real retail sales growth fell 23.7% year-on- Covid-19 into submission, but a new outbreak rebound in coronavirus cases is the biggest year in January-February but bounced back in Beijing provides a cautionary tale for all risk to a post-lockdown economic recovery to be only down 3.7% in May. Auto sales were nations, suggesting that eradicating the in China. down 79.1% year-on-year in February, but virus will be extremely difficult. At the moment, a combination of testing, rose 14.5% in May, the first month of double- On 14 June, only 177 coronavirus patients contact tracing and social distancing, as well digit year-on-year auto sales growth since were in hospital, down from the 17 February as a strict quarantine of all international April 2018. Residential property sales rose peak of 58,016. The recovery rate for arrivals, seems to be keeping the virus 9.3% year-on-year in May (in square metre hospitalised patients is now 94% across largely at bay. terms), after being down 39.2% year-on-year China, up from 17% on 17 February. It was in January-February. also encouraging that six weeks after a five- A V-shaped recovery Online sales of goods rose 22% year-on- day national holiday in China, when over China’s first quarter economic data was year in May, up from 16.2% in April and 100m people traveled for leisure, there had dismal, but that was the result of a virus that 10.7% in March, and faster than the 19.9% pace a year ago. During the first five months of the year, online sales accounted for one- quarter of total retail sales. China’s 35 It is worth noting that this healthy economy 30 May 2020 Apr 2020 economic recovery has come without a bouncing back 25 Mar 2020 after Covid drop 20 Jan-Feb 2020 dramatic stimulus. Credit growth, for ey macro data 15 example, has only accelerated modestly. recoering year 10 Unemployment remains a concern, but the onyear increase 5 absence of social unrest and the rebound % 0 -5 in consumer spending suggests that the -10 government’s support for workers and -15 -20 businesses has provided a cushion for many -25 who lost their jobs, laying the foundation for 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 an economic recovery.  ource I Real retail sales Value-added of Industry Andy Rothman is Investment Strategist at Fixed asset investment Matthews Asia.

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BTN_Q3.20_010-017_Cover_section.indd 14 03/07/2020 15:17:34 ESG strategies withstanding coronavirus Sustainably managed companies tend to be more robust during crises

Dijana Bogdanovic and Dieter Konrad Covid-19 crisis, a strategy focusing purely on made a constant positive contribution to Union Investment such shares would have mitigated the impact performance, which for a time suggested of the downturn at the very least. that the crisis was not pushing environment One reason for this is that ESG and climate issues aside. However, this strategies benefited from their considerable trend was reversed in April. The corporate ompanies that excel in the underweight in certain energy stocks and governance score proved similarly volatile. Its Cenvironmental, social, and corporate thus the drop in crude oil prices, particularly performance contribution slumped from the governance spheres stand to gain more than up to mid-March, was (partly) avoided. The start of March onwards but rallied strongly ‘just’ money. But it can be complex to link environmental impact of the exploration in April. This underlines the influence of the these soft factors to the hard data of share and extraction of oil – especially shale oil, regional allocation; one of the reasons for this price performance. Although it is still too which accounts for a large share of the US trend was the underweighting of Japanese early to make conclusive statements, an production – is significant. Companies companies in the top ESG basket, which tend initial analysis provides interesting results operating in this sector, therefore, are not to have a poorer corporate governance score. regarding ESG performance during the usually part of ESG portfolios. Despite So far, the study only covers a limited coronavirus crisis. the challenging market conditions, rising period and the collation of relevant Union Investment grouped the companies inflows during the market turmoil supported information is ongoing. Nevertheless, it is listed in the MSCI World index by sector and sustainable investments. ESG inflows grew clear ESG strategies are delivering a more ranked them according to their ESG score. To at a higher rate than flows into broader and robust performance in the Covid-19 crisis focus on pure ESG factors and minimise risks unspecific equity investments in the first than the overall market. The underlying related to sector allocation, the sectors are quarter of 2020. causes of this phenomenon are not weighted equally. Companies with a high social score exclusively related to sustainability factors. Our results were divided into two baskets, recorded a particularly strong share price Still, there are many indications that representing the top and bottom 20% of the performance in March. This could be because companies with particularly sustainable ESG score ranking. European companies are, firms with satisfied employees were able to business models could act as a safety cushion on average, more advanced in the field of adapt better and more quickly to lockdown for portfolios.  sustainability than their peers from the US or measures. Dijana Bogdanovic is ESG Analyst and Japan. As such, European stocks dominate the The environmental score reveals Dieter Konrad is Head of Quant and Smart top basket. Investment styles follow a similar mixed results. These companies initially Data at Union Investment. pattern. Momentum and growth stocks are more likely to feature among the top ESG strategies. Value stocks, from sectors such as energy, banking or automotive, are less Top 110 represented in ESG portfolios. sustainability stocks have advantage in 100 Success of sustainability stocks 2020 Securities with poorer sustainability Indeed 90 credentials were still on a par with the top performance of the ranked Top 20% ESG stocks while the market was treading stock baskets 80 ESG stocks water at the start of the year. However, they fell more sharply during the collapse that Bottom 20% 70 began in late February. At times, the top ESG Stocks sustainability stocks had an advantage of as ource loomberg period under reiew 60 much as five percentage points (see figure 1). ecember to pril 12/1901/20 02/20 03/20 04/20 Although they too suffered losses during the

OMFIF.ORG SUMMER 2020 BULLETIN 15

BTN_Q3.20_010-017_Cover_section.indd 15 03/07/2020 15:17:35 Cover: Post-Covid-19

Race to digitalisation Banks must act fast to maintain competitive edge

Gary Hwa and Information Services found that people to keep using digital – developing new digital tools Andrew Gilder mobile banking registrations channels requires banks to that enable relationship managers EY jumped 200% in early April and continue adapting them to to support customers remotely, mobile banking traffic rose 85%. meet changing needs, to drive while delivering a better, more The rush to online banking awareness of these channels and personalised experience. For n the economic pressure test revealed that some banks’ digital support vulnerable customers example, digitalisation supports Iof Covid-19, the world’s banks capabilities were not as advanced that struggle to use them. rapid customer onboarding by have performed remarkably well. as they may have thought. A 2019 extracting relevant data from Even as lockdowns forced them EY survey of banks in Asia Pacific Strategic investment client information files and to shut their doors and send showed that just 50% had begun In China, where post-pandemic automating credit approvals workers home, most continued digital transformation of their recovery is further along, but still for low value loans. The use to operate, responding rapidly main bank’s business. Yet many volatile, established banks are of advanced analytics enables to unprecedented conditions banks in the region fared better moving fast to do this, realising banks to better assess the impact and offering payment relief as than those in other parts of the that creating better digital of changing market conditions economic hardship set in. Banks’ world, due to higher levels of customer experiences is critical on customers’ credit risks and operational resilience is largely digital banking among customers. to competing with digitally-based provide more accurate insights due to the implementation of In China, for example, fintech companies. But the country’s into which sectors may be most digital channels. As the initial adoption is the world’s highest, traditional banks know that impacted by the economic crisis eases and banks consider and most consumers opt to bank their physical branches are a downturn. how to adapt for what comes via mobile channels. The impact competitive advantage, and plan Mature banks may have been next, they have an opportunity to of branch closures on consumers to adopt a dual online-offline slow off the blocks in the race to maintain and sustain this digital was much less severe than that customer service strategy. build the best digitised customer shift, leveraging strengthened experienced in some other This strategic investment in experience, but unprecedented relationships with customers to markets. In contrast, the rate of digitising the customer journey conditions have delivered an build a competitive advantage fintech adoption is much lower can help mature banks build unexpected opportunity – and against fintech and ‘big tech’ in some European countries. In a winning proposition that a burning platform for change. firms. France, the rate is 35%, and the leverages technology and trust. To sustain this position, and Harnessing change will also reap leverage it for greater competitive bottom line benefits from a more advantage, they’ll need to move ‘Encouraging people to keep using digital efficient, digital organisation at a fast. The window is closing. channels requires banks to continue adapting time when cost pressures are top Within just months, nimble them to meet changing needs.’ of the board’s agenda. competitors will be back at their Getting businesses to adopt heels.  online banking has always Gary Hwa is Regional The shift to digital banking figure for Italy is 51%. been more difficult. However, Managing Partner for Asia- was already well underway As lockdown measures ease, once Covid-19 forced business Pacifi c Financial Services, and before the pandemic, but the more people may prefer to customers online, many adapted Andrew Gilder is Asia-Pacifi c virus accelerated the switch. EY continue banking online, but quickly and discovered the Banking and Capital Markets Future Consumer Index research banks cannot assume this new advantages of being able to Leader at EY. The views found that 59% of people were behaviour will stick. Just 16% of transact 24/7. Banks have a refl ected in this article are the using contactless payments more respondents to an EY consumer rare opportunity to make the views of the authors and do not during the crisis, while 54% survey said Covid-19 would shift more permanent. But necessarily refl ect those of the were using smartphone apps change the way they bank over doing so will require completely global EY organisation or its to transact. Fidelity National the longer term. Encouraging rethinking the relationship model member fi rms.

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BTN_Q3.20_010-017_Cover_section.indd 16 03/07/2020 15:17:35 Low oil prices test GCC exchange rate pegs Smaller GCC nations may need external support

Krisjanis of their local-currency bond cover near-term financing needs. was a key channel for the Krustins markets. However, broader loss Countries can still abandon relatively successful external Fitch Ratings of confidence in the financial exchange rate pegs even when adjustments achieved by stability of weaker sovereigns they have the resources to defend Kazakhstan, Azerbaijan and could make their currency pegs them, as happened in Azerbaijan Russia, despite all of them being his year’s oil price crash untenable, given their large and Kazakhstan in 2014-15. The more diversified than the GCC. Thas opened double-digit external financing needs. GCC’s commitment to its pegs They combined exchange rate fi scal and external defi cits rests in the recognition that the adjustments with a degree of for most Gulf Co-operation External support potential benefits of devaluation fiscal reform. Council economies. While this In Bahrain and Oman, reserves can be achieved through fiscal Fiscal consolidation would has prompted some market and sovereign net foreign assets austerity, with less economic and work through many of the same participants to question the are much lower. Bahrain’s dollar social upheaval. channels as devaluation but sustainability of the GCC’s peg has, however, survived In the GCC, external demand would be easier to fine-tune to pegged exchange rate regimes, periods of exceptionally low changes to GCC pegs are reserve coverage, helped by unlikely in the short-term. This the expectation that it would ‘Currency pegs have been a feature of GCC re ects sovereigns’ fi nancial receive support from the GCC. economies for over 30 years, during which time ability to defend their pegs and Support for Bahrain reflects fi scal policy has gone through several cycles of their preference for a policy of its close ties with the rest of austerity.’ fi scal consolidation, as a way the GCC, its small size and of rebalancing their fi scal and strategic importance. Regional external accounts. policy-makers may also be wary and import substitution distribute the pain of adjustment The sovereign net foreign of the contagion effects of a would contribute little in a politically acceptable way. assets of Abu Dhabi, Kuwait, devaluation or financial crisis, to the rebalancing of the Currency pegs have been a Saudi Arabia and Qatar would be even in a smaller member of the current account, given the feature of GCC economies for sufficient to cover their entire GCC. bloc’s continued reliance on more than 30 years, during stock of broad money. They An assumption about external hydrocarbons for external which time fiscal policy has could, in principle, withstand support may also be supporting receipts and government gone through several cycles a complete loss of confidence Oman’s peg. The share of spending. Devaluation could of austerity. The potential leading to a flight out of their foreign currency deposits in still foster external adjustment social reaction to a breaking currencies. In practice, full total bank deposits, which by reducing the real value of of those pegs is unpredictable. coverage of broad money by can indicate concern about incomes and wealth of most Soaring costs of living have reserves is not necessary. For imminent devaluation, remains domestic sectors, such as for been a factor in political unrest example, Saudi Arabia’s reserves low, at about 10%. Support for households dependent on across the region, including are larger than required by the Oman would be available if it government wages. Despite some in the Arab Spring protests in International Monetary Fund’s is unable to return to external wage and cost inflation, the Tunisia, Jordan and Oman in reserve adequacy metric. debt markets. Nevertheless, this local currency value of oil export 2011 and smaller scale protests Loss of external confidence assumption remains untested revenue would probably rise by in Azerbaijan and Kazakhstan centred specifically on currency and is more tenuous than in more than government spending, in the wake of their currency pegs is not a significant short- Bahrain. Meanwhile, Oman narrowing the fiscal deficit. devaluations.  term risk factor for GCC central benefits from having gross Compression of imports Krisjanis Krustins is Director banks, given the limited offshore foreign assets (despite net and domestic demand, rather and Gulf Co-operation Council availability of GCC currencies sovereign foreign assets being than significant pick-up in Sovereigns Analyst at Fitch and the underdevelopment negative) that are sufficient to non-hydrocarbon exports, Ratings.

OMFIF.ORG SUMMER 2020 BULLETIN 17

BTN_Q3.20_010-017_Cover_section.indd 17 03/07/2020 15:17:36 Money Matters

US money growth reaches record high Prices could be heading for double-digit increase

Juan Castañeda and Tim Congdon losses to output and employment, as if it early 2021, we expect annual rates of money Institute of International Monetary Research were a demand-deficiency phenomenon. growth to be 20%-25% in the US, 7.5%-12.5% Unprecedented spending programmes are in the euro area, 4.5%-7% in Japan and 7.5%- causing budget deficits to reach record 15% in the UK. These rates are incompatible conomies all over the world are levels. In the US, the federal deficit could with low inflation macroeconomic stability Esuffering severe falls in output due to reach at least 15% in fiscal year 2020. The over the medium term. In times of crisis, government-imposed lockdowns. According Federal Reserve is likely to finance most households and companies increase their to the Office for National Statistics, the UK of this directly. Massive monetisation of demand for money. But once the economy economy shrank around 20% in April, three the deficit is one reason why the annual reopens, an inflationary boom will follow times the contraction suffered during the increase in M3 broad money has exceeded the excess in money balances, particularly 2008 financial crisis. However, the nature 25% and is the highest in modern peacetime in the US. The American data show that in of the Covid-19 crisis is so different from history. In addition, the Fed and other major the next two to three years, double-digit that of 2008 that they are not comparable. central banks have reactivated large-scale annual increases in nominal GDP and prices More important, the response to the crisis asset purchase programmes. Unlike the are possible, even probable. Analysts must will result in contrasting macroeconomic deflationary imposition of higher bank be concerned that the Fed is not paying outcomes in the next few years. capital-asset ratios in the aftermath of the attention to the monetary signals.  This is largely a supply-side crisis. People 2008 crisis, this time regulators have eased Juan Castañeda is Director and Tim have been prevented from going to work and banks’ capital requirements to make it easier Congdon is Chairman of the Institute of mixing with others. It is not a traditional for them to expand lending. International Monetary Research. Further demand-deficiency recession. Nevertheless, Money growth trends in other leading details on the IIMR’s latest money update governments and central banks have taken economies are following similar, but less can be found at https:// mv-pt.org/ drastic stimulus measures to mitigate the extreme, patterns. By the end of the year or monthly-monetary-update/.

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18 BULLETIN SUMMER 2020 OMFIF.ORG

BTN_Q3.20_018_MoneyMatters.indd 18 03/07/2020 15:19:29 Worldview This season’s expert analysis

Rohan Singh on China opening its 21 doors

Willem Middelkoop on China prefering 22 gold over treasuries Steve Hanke on the wariness of Bulgarians 20 abandoning the Euro

OMFIF.ORG SUMMER 2020 BULLETIN 19

BTN_Q3.20_019_Worldview.indd 19 03/07/2020 15:20:16 Europe

In love with the lev Bulgarians are wary of abandoning a currency that has done so much for them

Steve Hanke the Bulgarian National Bank, KTB catastrophe was not caused the North Atlantic Treaty Johns Hopkins specifically its issue department, by the currency board system, Organisation in 2004 and the University began to operate under currency but by the failure of the banking EU in 2007 if it were not for the board rules. These required the and supervision departments confidence and stability created lev to be fully backed by Deutsche of the BNB to properly regulate by Bulgaria’s currency board. arlier this year, we witnessed Mark reserves, now euro reserves, and monitor the KTB. Unlike Perhaps that is why more Ea dramatic dialing back of and to trade at a fixed exchange most cases in which banking and than 50% of Bulgarians support Bulgaria’s headlong rush to rate with the German currency. currency crisis are joined at the the currency board and the lev, abandon its lev and adopt the With that, the lev became a clone hip, the KTB crisis did not disturb while only around 25% favour the euro. Prime Minister Boyko of the Deutsche Mark, and good Bulgaria’s currency. Thanks adoption of the euro. Borisov felt that the Bulgarian news followed. to the currency board system, The Bulgarian public is smart public was in no mood to be The currency board results the country did not witness a enough to know that you never dragged into the European were immediate and dramatic. typical banking-currency crisis. should try to ‘fix’ things that are Exchange Rate Mechanism. The annual inflation rate The crisis was restricted to the not broken. But, with the onset 1997 was both one of the worst collapsed to 13% by mid-1998. banking sector. So, Bulgaria’s of the coronavirus pandemic and and best years for Bulgaria. Interest rates slumped, too, with currency board mitigated the while the Bulgarian public was It started badly. In February, the BNB basic rate falling to 5.3% damage that accompanied the looking the other way, Prime Bulgaria’s hyperinflation peaked in October 1998 from more than collapse of the KTB. Minister Borisov changed course. at the astronomical rate of 242% 200% in early 1997. That was not Importantly, the currency He falsely argued that Bulgaria per month. Then, things got all. The demand for the currency board has imposed fiscal was missing out on EU funding better. On 1 July, a currency board’s remodeled lev soared. discipline on Bulgaria’s because Sofia was not a member board law was adopted, and Foreign reserves at the BNB were politicians and fiscal authorities. of the euro area. Then, in a boosted as well. After all, the The government cannot borrow desperate attempt to recapitalise only way lev could be obtained from the currency board. the First Investment Bank, which was by exchanging Deutsche In consequence, since the is a precondition for Bulgaria’s Marks for lev at the fixed rate installation of the currency board possible entry into the ERM II, of exchange. The BNB’s foreign in 1997, fiscal deficits have been the Bulgarian Development Bank, reserves rocketed to $2.5bn by tightly controlled, and the level a state-owned bank, purchased the close of 1997 from $864m at of Bulgaria’s debt relative to its rights to FIB shares at double the end of 1996. GDP has plunged. It was 96.2% their market price. In addition to these immediate, in 1997 and has fallen to 18.6% Only time will tell how positive results, the currency in the most recent accounts. the European Commission’s board allowed Bulgaria to Bulgaria’s fiscal discipline and directorate-general for weather all post-1997 external debt reduction have made it a star competition will view this financial crises – including the fiscal performer in the European questionable manoeuvre and collapse of the Russian ruble Union. whether Bulgaria’s government in 1998 and the 2008 financial The geopolitical aspects of will move a step closer to what crisis. Bulgaria’s currency board should most Bulgarians fear: the loss of not be allowed to pass without their beloved lev.  Discipline and resilience mention. Former President Petar Steve Hanke is Professor of The currency board also allowed Stoyanov confided to me, while Applied Economics at the Bulgaria to weather the 2014 I was his chief economic adviser, Johns Hopkins University and a collapse of the Corporate that Bulgaria would have had Member of the OMFIF Advisory Commercial Bank (KTB). The much more difficulty entering Board.

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BTN_Q3.20_020_Hanke.indd 20 03/07/2020 15:28:47 China

China opens its doors Accelerating market liberalisation brings untapped opportunities

Rohan Singh – such as the removal of the foreign institutional investors to investors are calling for BNY Mellon Qualified Foreign Institutional trade renminbi without the need regulators to introduce hedging Investor and Renminbi Qualified to open accounts in Hong Kong tools as they scale their Foreign Institutional Investor and remit the dollar equivalent portfolios in China and seek to investment quotas, ease of profit into China. We expect to see manage more complex risks. The hina’s continuing repatriation, simplification of greater cross-border transactions country’s regulators are heeding Cliberalisation of its capital registration process, shorter and renminbi advancements these calls and expanding markets is opening the doors approval timeframe, and further from its role as a trade settlement their investment scope to align for global investors in search of foreign exchange liberalisation currency to an investment with the government’s plan higher returns. No institutional for QFII, RQFII and China currency and potentially a to integrate China’s capital investor can afford to ignore the Interbank Bond Market Direct reserve currency. markets with those of the rest world’s second-largest equities schemes. of the world. New investment and bonds market as China There is increased focus Diverse investors products that will emerge this shifts into the global investment from market participants, Fourth, with the recent year include: shares traded on mainstream. collaborating to advocate for inclusion of China’s securities the National Equities Exchange In recent years, the country change to allow China bonds in global indexes, we have seen and Quotations market, futures, has accelerated the pace of to be used as collateral within a greater diversity of investors options, repo, margin trading, market liberalisation, relaxing global transactions. Although with differing risk appetites securities lending and private its capital market regulatory a number of hurdles remain to increasing their allocations to investment funds. framework to ease access be overcome, clear progress has China. From the traditional US While an expansion of and promote capital mobility been made and will continue in and European pension funds investment products is aimed at increasing foreign 2020 and beyond. and sovereign wealth funds, the welcome, immediate attention participation. We see five trends Third, China’s economic investor type broadens to hedge is needed regarding the ability emerging in the next five to performance in recent decades funds and insurance companies. to efficiently trade in these 10 years. First, the inclusion has been exceptional. But its This is more likely to create instruments in organised of China’s securities in global growing economic clout on the market depth, promote price markets, market regulations, and indexes will bring an estimated international stage as the world’s discovery and make markets less whether they are comparable annual foreign inflow into largest trading nation has not susceptible to extreme volatility. to International Organisation China’s capital markets of been matched by the adoption of Although the opening up of of Securities Commissions $150bn in the medium term. the renminbi as a global payment China’s capital markets presents standards are all important Market reforms are essential currency. burgeoning opportunities, considerations before the new impetus. Ease of market entry, The gap between China’s existing market challenges investment products see growth new investment products and trading power and its currency and new policy reforms being in demand. Ultimately, however foreign exchange liberalisation share of world payments introduced at a rapid pace speedy China’s growth, the main are attractive factors for foreign suggests there is huge potential are making it challenging for focus for global institutional investors. for growth in the use of the institutional investors, especially investors is to continue charting Second, we expect the renminbi. China has been those who are new to the market. the right path into unfamiliar harmonisation of access schemes making rapid progress in Before these players enter the territory.  will continue, alongside the internationalising its currency, market, key factors to consider Rohan Singh is Head of Asset further relaxation of regulations with trading in the onshore will be the choice of access Servicing, Asia Pacific at BNY that allow foreign institutional market now available in Hong schemes, foreign exchange Mellon. The views expressed investors to invest in onshore Kong through People’s Bank of optionality and counterparty in this article are those of the securities. Clear moves towards China-licensed foreign exchange risks. author and not necessarily harmonisation are evident settlement banks. This allows Fifth, global institutional those of BNY Mellon.

OMFIF.ORG SUMMER 2020 BULLETIN 21 Gold and commodities

China prefers gold over treasuries Central bank gold reserves and private holdings have grown

Willem During the annual Federal the Chinese on a par with the PBoC Governor Zhou Zhaoxue Middelkoop Reserve symposium in Jackson US and Europe on a gold-to- said, ‘After the disintegration of Commodity Hole in July 2019, Mark Carney GPD ratio. This would open the the Bretton Woods system in the Discovery Fund remarked that the time had way for a possible US-EU-China 1970s, the gold standard, which come to work on a ‘successor to gold revaluation to support the had been in use for a century, ntil 1927, China had a free the dollar’, within a ‘completely financial system when needed. collapsed. Under the influence Ubanking system based on renewed monetary system’. A Unlike the dollar, gold of the US dollar hegemony the a silver standard. When Chiang few weeks earlier, Ray Dalio, doesn’t have any counterparty stabilising effect of gold was Kai-shek’s Nationalist Party chief investment officer risks. When the US started questioned; the ‘gold is useless’ came to power in 1927, he wanted at Bridgewater, published quantitative easing in 2009, discussion began to spread to eliminate free banking in ‘Paradigm Shift’, an article China felt trapped by the size around the globe. Many people China. The nationalists used suggesting that the era of of its dollar holdings. China has thought that gold is no longer bank loans instead of taxation ever-increasing fiat money, in been looking for an exit strategy the monetary base, that storing to fi nance their policies. hen which assets rise in value by ever since. That same year, Yu gold will only increase the cost of Manchuria was lost to the default, was ending. According Yonding, a leading official of reserves. Therefore, some central Japanese in 1931, the Japanese to Dalio, gold could again the People’s Bank of China, banks began to sell gold reserves invaders robbed some 6,600 become a permanent part of warned that China could turn and gold prices continued to tons of gold from Nanking, then many portfolios. Soon after, away from the dollar, ‘I wish to slump. Currently, there are more China’s capital. Rebuilding gold CitiBank and Bank of America tell the US government: Don’t be and more people recognizing reserves clearly has been one of advised customers to add gold complacent and think there isn’t that the ‘gold is useless’ story the key components of China’s to their portfolios. BlackRock’s any alternative for China to buy contains too many lies. Gold now monetary policy. CIO even told investors to turn your bills and bonds.’ suffers from a ‘smokescreen’ to ‘everything the government In 2012, the main academic designed by the US, which can’t print’. journal of the Chinese stores 74% of global official Many Eastern countries Communist Party’s Central gold reserves, to put down other have been accumulating gold, Committee published an article currencies and maintain the US especially since the start of the explaining China’s strategy dollar hegemony.’ global financial crisis. Officially, of hoarding gold in order to An ancient geo-political Chinese central bank gold safeguard economic stability and expression, ‘He who has the gold reserves are just shy of 2,000 to strengthen its defense against makes the rules’, is well known to tons, but experts estimate total ‘external risks’. Private holding the Chinese. Now that they have Chinese gold holdings, including of gold was an important part stopped buying US treasuries the private holdings, to be around of this strategy: ‘Practice shows pressure on the dollar-system is 25,000 tons. Furthermore, some that gold possession by citizens increasing fast. This makes the Chinese companies closely is an effective supplement to growth of the balance sheet of aligned with the government, national reserves and is very the Fed necessary to support the have been buying some of the important to national financial successful ‘sales’ of treasuries.  largest available gold projects security.’ Willem Middelkoop is a worldwide. The Chinese have also Member of the OMFIF pointed to the fact the US has Advisory Board, founder of the Building reserves promoted selling gold holdings Netherlands-based Commodity China worked hard to increase by (Western) central banks, while Discovery Fund and author of its gold reserves to at least 8,000 keeping their own 8,000 tons The Big Reset: War on Gold and tons. This amount would put safely stored in Fort Knox. the Financial Endgame.

22 BULLETIN SUMMER 2020 OMFIF.ORG

BTN_Q3.20_022_Middelkoop.indd 22 03/07/2020 15:30:49 Inquiry

Revisiting central banking history

here has always been much is unequivocally that if an institution thinks ‘Bindseil has discovered Tto debate in central banking. like a central bank, and operates like a central institutions operating But in its history, and particularly bank, then it is correct for us to consider it as 500 years ago that were its early history, there has up a central bank, even if contemporaries had to now been a broad consensus. another name for it. beyond doubt providing The received wisdom is that with And what is the key function that Bindseil central banking services.’ the exception of Sveriges Riksbank (almost develops and uses as his touchstone to identify universally recognised as the oldest central a de facto, even if not de jure, central bank? bank), and the Bank of England (widely thought Interestingly, it is not the commonly thought with a successful final payment money will of as the main developer of much of early one of ‘banker to the government’. For Bindseil, have no need to create a second. central banking practice), central banking this can be done by almost any banking This enables him to explore two more largely dates from the start of the 19th century institution. It is not even a monopoly function, characteristics of early central banking: at the earliest. as there is nothing to stop the authorities right from the earliest examples he can find Until today, and a new book by Ulrich maintaining multiple accounts with many (and they go back into the 15th century), Bindseil, Central Banking before 1800. Bindseil different banks. the institutions set up to provide this final is the director general of market infrastructure Nor does Bindseil use a second commonly settlement facility were based on public and payments at the European Central Bank. considered function, that of the ‘lender of last charters, and also from very early on there was He has worked in central banking, at the ECB resort’, or final backstop for the banking system. an active debate about their independence. and before that at the European Monetary Rather, the author puts forward a more Without doubt, in undertaking this wholesale Institute and the Deutsche Bundesbank, since technical function, that of providing the revision of our understanding of central 1994. He is steeped in central banking both ultimate final settlement in a banking system. banking, Bindseil has with this book made theory and practice. And when he gives his He argues that central banking should be an important contribution to the study of book the subtitle ‘A Rehabilitation’, his readers defined as concerned with the issuance of the subject. By delving deep into history, he are warned that a serious revision of history is ‘central bank money’ or financial money (that has rethought what the essential features of in store. is, money in the form of an asset that is a central banking are, and discovered institutions For Bindseil’s main argument is that central financial claim on someone else, rather than for operating 500 years ago that were beyond doubt banking has a much older and richer history example commodity money or specie, bullion, providing central banking services. Bindseil’s than is widely thought, and that instances of and the like) that is universally considered work enables us not only to look at past central banking operations in the 18th, 17th to have the highest possible credit quality institutions with renewed interest, but reassess and even earlier centuries are widespread. He within its economy and which is accepted for their modern day successors as well. spends the great majority of this excellent and settlement of any other financial claim. Given the power that central banks have, impressively researched book not only detailing with their extended balance sheets through early examples of central banking, but quoting Debating independence quantitative easing and monetary financing, copious papers, books and other references to Such financial money will, if it is successful and their interaction with finance ministries show it. and widely accepted, quickly establish a central and ever-deeper involvement in our economies Bindseil’s contends that although the title of position in an economy’s payment system. It as the world struggles to emerge from ‘central bank’ may be a post-1800 innovation, will acquire two other features that Bindseil recession, this is not just an important book, the operations of central banking, the main notes as important elements of central banking: but a hugely timely one as well.  facilities and services they provide, have been that it forms both a public good and a natural John Nugée, a former Chief Manager of commonplace for much longer. His position monopoly. An economy or financial system Reserves at the Bank of England, is Senior

OMFIF.ORG SUMMER 2020 BULLETIN 23

BTN_Q3.20_023_Bookreview.indd 23 03/07/2020 15:31:28 OMFIF Advisers Network

COUNCIL CAPITAL MARKETS MONETARY POLICY

Meghnad Desai George John Adams House of Lords; Louis de Hoguet Iain Begg China Financial chairman, OMFIF Montpellier CFA Research London School of Services Advisers MontRoz Foundation Economics

Otaviano Frank Yaseen Anwar Marek Belka Industrial & Soh Kian Canuto Scheidig Tiong former prime World Bank Group DZ BANK Commercial Bank minister of Poland of China DBS Bank

Aslihan Ben Shenglin Irena Gedik Zhejiang University Asmundson OYAK Anker Academy of Internet Stuart Harald California Bank Finance Mackintosh Benink Department Group of Thirty Tilburg University of Finance Robert Johnson Gary Smith Georgina Institute for New Sovereign Focus Baker Paul Newton Economic Thinking International London & Oxford Mario Blejer Finance Capital Markets Banco Hipotecario Corporation Xiang Hani Kablawi Songzuo BNY Mellon International Saker Stewart Monetary Institute Stefan Fleming Bielmeier Nusseibeh Hermes Fund St Antony’s DZ BANK Managers College, University of Oxford William Keegan Niels Thygesen The Observer University of Copenhagen José Manuel Hans Jukka Blommestein González- Pihlman Páramo Vivid Economics Standard BBVA John Kornblum Ted Truman Chartered Bank Peterson Institute for Noerr International Economics Brigitte Mark Burgess Colin Granville Jamieson Coote Robertson Queen Mary, Norman Marsha Bonds SW1 Consulting University of Lamont Vande Berg London House of Lords Stanford University Michael Cole-Fontayn Fabio Graham Association for Scacciavillani Hacche Oman Investment Kingsley Financial Markets NIESR Moghalu in Europe Fund Tufts University

Lutfey Siddiqi Akinari Horii Thomas Finke National The Canon Barings University of Institute for Global Singapore Studies NETWORK Volker Gao Haihong Bahar Alsharif Frederick Hopson Janusz Reiter Wieland Harold James Institute of World German Council David Badham Matthew Hurn Anthony Robinson Princeton Economics and of Economic University Franco Bassanini Korkmaz Ilkorur Philippe Sachs Politics Experts Eduardo Borensztein Karl Kaiser Nasser Saidi Consuelo Brooke David Kihangire Pedro Schwartz Katarzyna Hemraz Colin Budd Ben Knapen Vilem Semerak Christian Zajdel- Gärtner Kurowska Jankee Michael Burda Ludger Kühnhardt Song Shanshan DZ BANK World Bank formerly Central Shiyin Cai Celeste Cecilia Lo Turco Marina Shargorodska Group Bank of Mauritius David Cameron Bo Lundgren Paola Subacchi Forrest Capie Mariela Mendez David Suratgar Trevor Stefano Carcascio Murade Miguigy José Alberto Tavares Greetham Pawel Desmond Cecil Murargy Moreira Royal London Kowalewski Narodowy Bank Efraim Chalamish George Milling-Stanley Jens Thomsen Asset Management Polski Moorad Choudhry Winston Moore David Tonge John Chown José Roberto Novaes Jorge Vasconcelos Vladimir Dlouhy de Almeida Gottfried von Bismarck Daniel Hanna Philippe Michael Oliver Jack Wigglesworth Obindah Gershon Standard Lagayette formerly Banque Jonathan Grant Francesco Papadia Paul Wilson Chartered Bank de France Peter Gray Robin Poynder John Nugée François Heisbourg Poul Nyrup Rasmussen

24 BULLETIN SUMMER 2020 OMFIF.ORG

BTN_Q3.20_024-025_AdvisoryBoard_SH updated Dec 5th.indd 28 06/07/2020 14:19:53 OMFIF Advisers Network

MONETARY POLICY INDUSTRY & INVESTMENT POLITICAL ECONOMY

Andrew Antonio Large Andrew Oscar Armellini Denis Hedge Fund Adonis Lewisohn former MacShane Standards Board House of Lords Soditic ambassador, Avisa Partners OSCE

Kishore Robert Boyd Frits Gerard Lyons Mahbubani McCleary Bank of China Bischof Bolkestein National 39 Essex formerly European (UK) German-British University of Forum Chambers Commission Singapore

Luiz Eduardo Albert Laurens Jan Rakesh Melin Brinkhorst David Owen Mohan Bressand International University of House of Lords Yale University European Economic Leiden Commission Synergies

Willem Vicky Pryce Athanasios Caroline Peter Bruce Centre for Orphanides Middelkoop Business Day Economics MIT Sloan School Butler Commodity Walcot Partners & Business of Management Discovery Fund Research

Célestin Nagpurnanand Jenny Corbett Brian Reading Prabhala Nick Butler Monga King’s College African Australia National independent University of London Development University economist Maryland Bank

Maria Edoardo Danny Quah John Antonieta Del Robert Reviglio Lee Kuan Yew Skidelsky Cassa Depositi e Campbell School of Public Tedesco Lins House of Lords Prestiti Campbell Lutyens Policy University of São Paulo

Olivier Mark Crosby Takuji Tanaka Hans Eichel Michael Rousseau former German Monash Japan Finance Fonds de réserve minister of Stürmer University Ministry pour les retraites fi nance WELT-Gruppe

Miroslav Hans Genberg Daniel Jonathan Christopher Singer The Seacen Generali CEE Titelman Fenby Tugendhat Centre ECLAC TS Lombard Holding House of Lords

Steve Hanke Jeffry Shumpei Pasquale John West The Johns Frieden Takemori Urselli Asian Century Hopkins Harvard University Keio University University Mazars Institute

Hans-Olaf Makoto Paul van Elliot Hentov Utsumi Henkel William White State Street formerly Japan University of Seters OECD Tilburg University Global Advisors Finance Ministry Mannheim

Tarisa Mumtaz Khan Juliusz Watanagase Middle East & Roel Janssen Jabłecki formerly Bank of Asia Capital NRC Handelsblad Nardowy Bank Thailand Partners Polski

Yosuke Ernst Welteke formerly Joel Kibazo Kawakami Deutsche JK Associates formerly Bundesbank Japanese Ministry of Finance

Jürgen Thomas Krönig Kielinger Die Zeit Die Welt

OMFIF.ORG SUMMER 2020 BULLETIN 25

BTN_Q3.20_024-025_AdvisoryBoard_SH updated Dec 5th.indd 29 06/07/2020 14:21:43 Inquiry

There are marked di erences in how eastern and western governments have handled the crisis, and the pandemic has heightened tensions between The new two of the world’s superpowers, the US and China. With no single entity so far willing - or able - to 57% lead a global response to the pandemic, is this world the end of multilateralism, and the start of a new 43% world order?

Poll of OMFIF website users, OMFIF advisory order board and Twitter users Yes No

For years, our multipolar world has been full of regional con icts. n this Multilateralism and global political stability are built on the intrinsic instance, the lack of a leader guarantees multilateralism. The emergence stability of their member parts. The post-1945 period enjoyed high of a leader would end it. The pandemic has made it even clearer that the stability among western democracies as well as newly Communist world has two competing superpowers, China and the US. states under the auspices of their respective superpowers. The Miroslav Singer, Generali Group decline in the standing and power of global institutions is partially re ective of the failure of the social contracts within western democracies, thus undermining the strongest supporters of global This exceptionally severe global crisis, with an adverse impact order. It doesn’t help that the dominant emerging challenger is on both the demand and supply side, does not mean the end composed of a political system consistently worried about its of multilateralism. However, a pandemic of this nature forces own legitimacy and social stability. This leaves little room for the governments, as well as local institutions, to co-operate more restoration of world order, instead creating power vacuums across the effectively. This, in turn, may trigger the start of a new world order globe, with regional initiatives of varying success to manage them. because the current multilateral institutional set-up fails to address Elliot Hentov, State Street Global Advisors the underlying weaknesses for addressing this crisis. Hans Blommestein, Vivid Economics Yes, this is the end of the multilateralism to which we have become accustomed. This is due to the nature of the leadership in both the US and China as much as it is to the pandemic. In countries such as I am still hopeful that the US will reinvest in multilateralism under the US and UK, the same mentality has prevented the main political new leadership. The alternative is constant jockeying between global parties from coming together to address Covid-19 as might have been powers – a dynamic that has led to wars in the past. expected in the past. Irena Asmundson, California Department of Finance Colin Robertson, SW1 Consulting

26 BULLETIN SUMMER 2020 OMFIF.ORG

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