Twenty Giants, One Superbourse

Despite much fanfare, Brisbane’s G-20 (15-16 November) has not delivered significant results. After all, the G-20 is an attempt to bypass the United Nations but does not enjoy any democratic legitimacy. In addition, the G-20 summit took place few days after the APEC one (Beijing, 10-12 November), which in many respects has become a mini G-20.

The Asia-Pacific region has by now replaced the Atlantic as the core of the global economy. It represents 54% of the world Gdp and 44% of world trade. Nine APEC countries are G-20 members as well, in addition to India, which enjoys APEC Observer Status. Australia’s choice for the summit is itself a symbol of the centrality of the Pacific economy, and its standing in the world. So far the Asia Pacific region has thrived in the real economy, that is, production and trade; after the events of the last couple of weeks, it has become a world financial hub, too.

China has just concluded a free trade agreement with Australia. The latter can continue supplying Beijing with minerals, resources, food, crops, vegetables, and some high-tech products; let us not forget that China already is Australia’s number one trade partner, with a bilateral exchange of 151 billion A$ (2013). Yet this agreement has been dubbed a real ‘game changer’ because it also has political connotations. After all, one of the world’s wealthiest English-speaking countries has fully accepted economic integration with China, and in spite of its current conservative (‘Liberal’ is the official name) leadership. It is an important act of recognition. President Xi has given a speech in Australia’s Parliament (17 November), an event of incredible significance if we consider how deeply Australia’s political system is linked to the model of ‘Westminster democracy’. Similar considerations apply to the Free Trade Agreement between China and South Korea, which has been practically finalised and in spite of historical and mutual tensions between the two countries.

Meanwhile, China has also launched the AIIB (Asian Infrastructure Investment Bank), which has an initial capital of 50 billion$, focuses on infrastructure building, and has already been joined by other twenty countries. Among them we find states in Southeast Asia (Singapore, Thailand, Vietnam), the whole of South Asia (with both India and Pakistan), Central Asian countries (Kazakhstan and Uzbekistan), and even some in the Middle East (Kuwait, Oman and Qatar). China’s economic influence is expanding tremendously. This change is not limited to the real economy, though.

In less than a week in fact the Chinese government has launched the Shanghai-Hong Kong Stock Connect (also dubbed ‘through train’) and subsequently lowered interest rates, with the aim of attracting investment. The Connect is the first step towards the creation of a China-driven Superbourse, a ‘Wall Street of the Pacific’ which is already the first stock market in Asia (ahead of Tokyo) and the third in the world (after Wall Street and the NASDAQ). These authors have long highlighted the importance of an Asian Superbourse (see https://www.opendemocracy.net/ernesto-gallo-giovanni-biava/americas-chimerical-pivot and https://www.opendemocracy.net/ernesto-gallo-giovanni-biava/europe-freezes-eurasia-pivots) which would provide the region with the liquidity to boost investment and propel the real economy. In less than a week, China’s dreams have come true.

In technical terms, foreigners will have the possibility to buy Chinese ‘A’ shares (those of the major Chinese companies, some 5-600 altogether) through the Hong Kong Stock Exchange, while Chinese investors will be able to buy (within some limits) Hong Kong shares through the Shanghai Stock Exchange. In the future, even the Shenzhen Stock Exchange might join (see http://www.asianews.it/news-en/Markets-celebrate-merger-of-Shanghai-and-Hong-Kong-stock-exchanges-32662.html).

In broader terms, the Connect gives shape to a large capital market, in which Chinese companies can benefit from foreign investment and at the same time Chinese investors can diversify their portfolio and buy equities abroad. China’s capital market can thus become truly global and support its real economy with a strong financial arm. An important consequence is then related to the Yuan Renminbi. China’s currency will become more and more central to the world economy. At the moment there are already 28 Bilateral Swap Agreements between Beijing and other states; the latest have been with Qatar (3 November) and Canada (8 November); in other words, China has put a foot in the Middle East (in a gas-rich state) and in North America (in its second wealthiest country). Negotiations are then ongoing with the aim of creating offshore clearing hubs in markets like Dubai and San Francisco.

In addition, the emerging Superbourse has the potential to grow even outside China; how would Singapore react? How will the markets in the other BRICS be affected? Beijing is in fact trying to create a world financial system alternative to that dominated by the USA, Wall Street, and the IMF. In principle, the two systems can co-exist, but will the USA accept its diminished role in a world where China will become the leading player in both the real and financial economy? What will the consequences be to China’s political system and global international relations? How will countries like Japan (still the world’s third biggest economy) react? Australia and South Korea, two historical allies of the West, are demonstrating that politics often follows business and have engaged with China beyond any American expectation. Will Tokyo follow them?

While it is hard to evaluate the effects in the medium and long term, we can for now agree with the words of Edmund Harriss, a fund manager in the UK: ‘In China, nothing happens, then nothing happens, and then everything happens’ (see Rapoza, online, 24 November 2014, http://www.forbes.com/sites/kenrapoza/2014/11/24/the-globalization-of-chinas-stock-market/). In a couple of weeks, Beijing has changed the landscape of international finance. The other players now have to react.