Eddie Yue: Keynote speech - 2023 Bund Summit
Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary
Authority, at the 2023 Bund Summit, Hong Kong, 22 September 2023.
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Distinguished guests, ladies and gentlemen,
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Good morning. It is an honour and a pleasure to join you today at the 5 Bund
Summit. With globalisation now at a crossroads amid increasing risk of geo-economic
fragmentation, this Session "What's Next for Globalisation" could not be more timely.
Globalisation has brought enormous benefits to emerging markets and helped keep
global inflation in check. The golden era of globalisation, however, has given way to a
gradual slowdown in global trade in goods after the 2008 financial crisis. In certain parts
of the world, public support for globalisation has also waned for various reasons,
notwithstanding the obvious benefits of better, more affordable products delivered by
globalised value chains. It appears that this slowing down in global goods trade is likely
to continue, leaving trade in services and other flows to pick up the baton in sustaining
globalisation.
As economic efficiency becomes less of a priority, the global economy risks being
fragmented into different blocs. Such setbacks to globalisation are unfortunate,
particularly for Asia, given the region's relatively open economies. According to the IMF,
if the world were to segregate into two distinct blocs with little or no trade between
them, Asia Pacific's GDP could be reduced by over 3% annually.
Such a dismal outcome seems unlikely, as no economy can be fully self-sufficient. A
fullblown financial decoupling is also unlikely, given how highly interconnected the global
financial system is. Even so, we now seem to be moving down the path towards
fragmentation, as practical and pragmatic economic considerations are giving way to
protectionism and cross-border restrictions.
Our recent joint study with the Bank for International Settlements (BIS) finds that the
total number of global value chain network linkages dropped by some 30% between
February 2020 and the end of 2021. Of course, part of these changes may reflect
pandemic disruptions, and efforts by businesses to shorten and regionalise supply
chains. Unfortunately, geopolitics has also played a part.
With all these developments, one question often asked is about the role of China in this
"new normal" environment. How will China's trade and investment relationship with
some of its major trading partners evolve?
Some might be worried that these changes could have a negative impact on China's
external trade. But let me offer a different proposition: while some shifts in supply
chains are likely to happen over time, a large-scale relocation of complex supply chain
networks is less likely. We recently did a research on the global organisation structures
of major industries that are important to Asia, which finds that the production networks
of industries such as the automotive and IT sectors are highly complex and intertwined
across regions. Coupled with the capital-intensive nature of these industries, and the
fact that most economies in Asia are unlikely to have the necessary scale and capacity
to host these complex and large-scale supply chains, it would be difficult for any
wholesale relocation of these more sophisticated supply chain networks.
More importantly, China is likely to play an even more significant role in shaping
regional supply chains. This is based on two considerations. First, China has the
comparative advantages of a large domestic market and ample supply capacity.
Second, Chinese manufacturing industries have made efforts to move up the value
chain. Even as Chinese exports might take up a smaller share of some markets, China
continues to account for a significant and stable share of world imports, by exporting
more intermediate goods and capturing a larger share of imports in regional economies.
In fact, China's role in the high-value-added segment of the global export market is
bound to increase further going forward. Another recent HKMA study finds that, based
on international experience, the global export share of a country tends to rise in tandem
with its domestic consumption, particularly for countries specialising in more
sophisticated products. There is strong evidence that China is following this pattern,
with the mix of domestic consumption and exports all shifting from basic to
sophisticated products over time.
Hopefully, by now you will feel less pessimistic about the prospect of globalisation. But
this doesn't mean we can be complacent, and Asia still has much to do to overcome the
headwinds of de-globalisation. Yet, no challenges are too difficult to be surmounted. In
my view, there are four principles that could help Asia capture new opportunities from
the reshuffling of global value chains.
First, stay resilient. In the face of changing investment flows, it is important for regional
economies to maintain ample buffers and ensure that their financial systems are
resilient against shocks. Further development of FX derivatives markets and expansion
of the domestic investor base would help. Both help support market stability at times of
stress.
Second, diversify trade. Trade diversification to regions with high growth potential, such
as Africa and the Middle East is important. By connecting with more economies, Asia
can help sustain globalisation. Trade in services is another promising area for
diversification, not only because of the relatively low levels of trade openness in
services regionally, but also because the burgeoning digital economy offers exciting
opportunities to export a wide range of digitally-deliverable services.
Third, develop capacity. Grooming talent and developing infrastructure, both physical
and digital, are essential if we are to attract foreign investment. And investment in digital
infrastructure will allow regional economies to harness emerging trends, such as
generative AI, to enhance productivity, increase connectivity to the global economy, and
make supply chains more sustainable by allowing firms to monitor the ESG
performance of their supply chain partners more easily.
And finally, deepen regional collaboration. The regionalisation of supply chains offers
unique opportunities for greater collaboration, in terms of promoting sustainability and
enhancing the architecture for cross-border payments. Regarding sustainability, firms
have stepped up efforts to enhance the ESG performance of their supply chains after
the pandemic. Our research finds that firms that upgrade their ESG performance tend
to improve their suppliers' ESG performance as well. I believe this means there is
considerable scope for cooperation in green technologies and enhancing the
ecosystem of sustainable finance in the region.
Meanwhile, as trade and supply chain linkages in Asia become more integrated, there
is greater scope to use local currencies in regional trade settlement and beyond.
Indeed, an increasing number of economies, including those in the ASEAN, want to use
the RMB to settle their trade with China. To facilitate this, the cross-border payments
infrastructure needs to become more efficient to keep up with demand.
And of course it would be remiss of me not to talk about Hong Kong's unique
advantages and how it can help meet the challenges ahead. As well as building on our
traditional role as a gateway between the East and West, if we are to capture growth
opportunities offered by markets such as the ASEAN, the Middle East and Africa, we
need to expand trade networks and improve logistic infrastructure. To this end, Hong
Kong's active participation in the Belt and Road Initiative, and application for accession
to the Regional Comprehensive Economic Partnership, represent new avenues of
longterm growth for Hong Kong.
In financial services, Hong Kong has long been the largest offshore RMB centre and
this role will continue to grow as the RMB is used more widely in international trade and
investment. To develop capacity and maintain its position as the leading offshore RMB
business hub, Hong Kong is working hard on three fronts: liquidity, products, and
infrastructure.
Hong Kong already hosts the biggest offshore RMB liquidity pool. The enhanced
Currency Swap Agreement with the People's Bank of China provides further liquidity
support to the offshore market through the RMB liquidity facilities set up by the HKMA,
to meet the growing business demand.
As regards products, Hong Kong will continue to upgrade and expand the family of
Connect Schemes between Mainland China and Hong Kong. Our unique advantages of
physical proximity to the Mainland, the common law system and world-class
infrastructure make us the perfect "testing ground" for China's journey towards capital
account liberalisation. At the same time, we are constantly working to widen the
spectrum of RMB products and tools for cross-boundary investment, asset allocation
and risk management.
On infrastructure, the Central Moneymarkets Unit, which is Hong Kong's central
securities depository, is undergoing a major overhaul to upgrade its operational
capacity and product offerings, to better support the growth of RMB bond issuance and
associated custodian services. Our mBridge project, which is a collaboration with the
BIS and a number of central banks including the People's Bank of China is also
pressing ahead. Our latest pilot test has demonstrated that this wholesale central bank
digital currency platform can speed up cross-border payments at reduced cost and with
better transparency. We are expecting to welcome more fellow central banks to join this
open platform. And very soon we will launch what we call a minimum viable product,
with the aim of paving the way for the gradual commercialisation of mBridge. Hopefully
this new innovative platform will help resolve longstanding pain points in cross-border
payments and enhance the efficiency of the global value chain.
Meanwhile, Hong Kong will stay at the forefront of the latest global trends such as
digitalisation, innovation and ESG. As examples, we recently published our new Fintech
Promotion Roadmap to accelerate fintech adoption in the financial services industry.
Hong Kong's green financing platform also offers an excellent way for Asian corporates
to tap sustainable financing and enhance their ESG performance. Hong Kong recently
issued the world's first tokenised government green bond. Our experience in tokenising
green bonds offers a glimpse of the power of digitalisation as an enabler of a greener,
more inclusive and more connected future.
To conclude, globalisation is now at a crossroads. But with good preparation, the Asia
region is well positioned to adapt to changes in the global trade landscape. I hope that
today's conference will give us further insights on how to manage the risks and seize
the opportunities ahead. Thank you.