How covid-19 could change the financial world order

The Economist

12 May 202009:58

Summary

TLDRThe video discusses the impact of COVID-19 on the global financial system, highlighting America's dominance since World War II and how China's growing economic power is challenging it. The pandemic exposed America's weaknesses, while China took the opportunity to expand its influence. Despite China's rapid growth in finance and technology, including digital payments, it still faces distrust from the international community. The future of global finance may see the emergence of two spheres of influence: one led by America and another by China, which could either compete or collaborate.

Takeaways

🌍 America has dominated global finance since the end of World War II, creating a system based on international cooperation.
😷 The coronavirus pandemic has exposed America's struggles with leadership, both domestically and globally, questioning its dominance.
💸 China is using the crisis to expand its financial influence, although it is not yet a rival to America in global finance.
🏦 Chinese banks have grown in size, now holding more assets than American or European banks, but most of their business remains within China.
🧳 China's banks are increasingly active overseas, especially in lending to Chinese companies that are globalizing.
💱 China is also promoting its currency, the yuan, in global trade and commodities markets, particularly through deals like Rio Tinto’s yuan contracts.
📉 America’s control of SWIFT and global financial flows has allowed it to enforce economic sanctions, but China is creating alternative systems for financial transactions.
💻 Chinese tech companies like Tencent and Ant Financial are building a parallel financial ecosystem through mobile payments, potentially disrupting the global financial system.
📲 With the rise of digital wallets, companies like Alipay and WeChat Pay are growing their influence, expanding across multiple regions and markets.
🤔 China still faces global mistrust due to concerns over transparency, which could hinder its ability to fully challenge America’s financial leadership.

Q & A

What historical event led to America's dominance in global finance?
-America's dominance in global finance began after the end of World War II, when the current financial system was built, designed to establish the economic foundations of peace and international cooperation.
How did the COVID-19 pandemic impact America's role in global finance?
-The COVID-19 pandemic exposed America's failure to manage its internal affairs, raising questions about its ability to lead on the global stage. This has created uncertainty around its leadership in global finance.
What is China's current standing in the global financial system?
-China has the world’s second-largest economy, and its banking sector has grown significantly over the past decade. However, Chinese banks account for only 7% of cross-border lending, meaning their global financial influence is still limited.
How is China attempting to increase its global financial influence?
-China is increasing its financial influence by becoming more active in overseas lending, promoting the use of its currency in international markets, and expanding its digital payment systems globally.
What role does the SWIFT system play in America's financial dominance?
-SWIFT, the largest global messaging system for transferring money, is dominated by transactions in dollars, giving America significant control over the global financial system and the ability to enforce sanctions.
What alternative financial systems is China developing to challenge America?
-China is developing alternative financial systems, particularly through digital wallets and payment apps like Alipay and Tencent's payment platforms, which allow consumers to bypass traditional banking systems.
How has the COVID-19 crisis benefited China in terms of global leadership?
-China has used the COVID-19 crisis to enhance its global leadership by providing medical supplies, sharing its pandemic response experience, and showing stability in its financial markets, which attracted international investors.
What are the potential risks of a fragmented global financial system?
-A fragmented global financial system, with one sphere dominated by America and another by China, could make it harder to move money around the world, increase costs, and create a more dangerous financial environment.
What obstacles does China face in challenging America's financial dominance?
-China faces distrust from the global community due to concerns about transparency and its political intentions. This distrust could hinder its efforts to gain greater control in global finance.
How could China and America collaborate in global finance despite their rivalry?
-If China and America collaborate, they could create a more competitive and efficient global financial system. However, if they fail to work together, it could lead to fragmentation, making global finance more costly and difficult to navigate.

Outlines

00:00

📉 America’s Declining Financial Leadership

Since the end of World War II, America has been the dominant force in global finance, controlling the world’s financial systems and currency reserves. However, the economic fallout from the Covid-19 pandemic has revealed cracks in America’s leadership, with domestic issues undermining its global influence. As America struggles with economic challenges, China is stepping up, aiming to increase its control and influence in global finance. While the U.S. still holds significant power, particularly through its control over the global use of the dollar, China is making strategic moves to shift the balance, though it has not yet achieved dominance.

05:01

🔄 China's Strategy to Challenge SWIFT

The SWIFT system, crucial for global financial transactions, is heavily influenced by America due to its dominance in dollar-based transactions. Despite being based in Belgium and intended to be neutral, SWIFT has been used by America to enforce its geopolitical agenda, such as sanctioning Russia and Iran. While China cannot yet challenge SWIFT directly, it is targeting consumer payment systems to disrupt the financial order. Chinese tech companies like Tencent and Ant Financial are creating digital wallets that bypass traditional banks and financial systems, establishing a parallel financial ecosystem. This shift could weaken the reliance on American financial systems, though global distrust in China’s intentions remains a significant barrier.

Mindmap

Keywords

💡Global finance

Global finance refers to the worldwide framework of financial systems that include trade, investment, and currency flows between countries. In the video, it emphasizes the dominance of the U.S. in managing these systems since World War II. The script discusses how the COVID-19 pandemic has shifted this dynamic, with China seeking to increase its role in global finance.

💡American leadership

American leadership in the context of this video refers to the United States' long-standing role in steering the global financial system. This leadership is now under question, especially after its handling of the COVID-19 crisis, which has exposed weaknesses in the U.S.'s ability to manage both its domestic economy and global financial affairs.

💡China's financial influence

China's financial influence relates to its growing role in the global economy, particularly as the second-largest economy in the world. The video highlights how China's banks are expanding overseas, its currency is gaining prominence in commodities markets, and its digital payment systems are creating an alternative financial infrastructure.

💡COVID-19 pandemic

The COVID-19 pandemic, which caused a global economic shock, is central to the video's theme. It has acted as a catalyst for questioning America's global leadership while offering China opportunities to expand its financial and geopolitical influence. For example, China provided supplies and shared its crisis management experience with other nations.

💡SWIFT system

SWIFT is a global messaging network used for transferring money between financial institutions. Although it is supposed to be geopolitically neutral, the video explains how the U.S. has leveraged its influence over SWIFT to enforce sanctions, illustrating America's power over the global financial system. China, on the other hand, has not yet developed an alternative to SWIFT.

💡Digital wallets

Digital wallets are mobile applications that allow consumers to load money and make payments without relying on traditional banks or credit cards. In the video, China's tech giants, Tencent and Ant Financial, have developed these apps, creating a parallel financial ecosystem that could challenge U.S. dominance in consumer payments.

💡Cross-border lending

Cross-border lending refers to loans provided by financial institutions in one country to borrowers in another. The video mentions that although Chinese banks are massive in size, they account for only 7% of cross-border lending, which limits their influence in global finance. However, this is expected to change as China’s financial presence grows internationally.

💡Bond market

The bond market is where investors buy and sell debt securities, typically issued by governments or corporations. The video notes that China has the second-largest bond market in the world, and its stability during the COVID-19 pandemic helped it gain trust among international investors, even as other emerging markets saw their bonds plummet in value.

💡Transparency

Transparency in the context of global finance refers to the openness and reliability of information shared by financial institutions and governments. The video highlights concerns about China's lack of transparency, particularly during the early stages of the COVID-19 outbreak. This lack of trust could hinder China’s efforts to increase its financial influence.

💡Economic governance reform

Economic governance reform refers to the restructuring of international financial systems to make them more fair or effective. The video points out growing calls for reform, particularly from China, which argues that the current system is imbalanced in favor of the U.S. China is positioning itself as a leader advocating for changes in how global financial governance is structured.

Highlights

America has dominated global finance since the end of World War II, establishing the economic foundations of peace through international cooperation.

The coronavirus pandemic could signal a new chapter in financial history, questioning America’s leadership in global finance.

America struggled to manage its own affairs during the pandemic, leaving a vacuum in global leadership, which China is attempting to fill.

China is now the world's second-largest economy, with banks that hold more assets than those in Europe or America.

Chinese banks account for only 7% of cross-border lending, meaning their large size has not yet translated into significant global financial influence.

China is promoting its currency, the yuan, in global trade, with companies like Rio Tinto using it for contracts, potentially increasing its global financial influence.

While the pandemic destabilized many markets, China's government bonds remained stable, enhancing investor trust in the country’s financial stability.

China's massive tech companies, Tencent and Ant Financial, have developed digital wallets that bypass traditional banking systems, creating a parallel financial ecosystem.

These digital payment systems are expanding globally, with Alipay now accepted in 56 countries and regions, challenging American financial dominance.

America controls much of the global financial system through SWIFT, which it has used to enforce sanctions, but China seeks to challenge this control.

China's efforts in vaccine development and crisis management during COVID-19 have helped bolster its image as a global leader.

China's digital payments market is booming, with mobile payments reaching $49 trillion in 2019, demonstrating the scale of its technological influence.

China’s rising financial influence has led to concerns about transparency and its ultimate intentions in the global economic system.

The global financial system may fragment into two spheres of influence, one dominated by America and another by China, creating potential challenges for global trade.

While China may not dominate global finance soon, the COVID-19 pandemic has accelerated its financial progress, positioning it for significant future gains.