Hello, welcome to visit Shanghai Forum
Yves Mersch Interviewer: Xu Xian
Executive Board Member, Director, China Insurance and
European Central Bank Social Security Research Center,
Fudan University
“We should also not expect that there would not be increased volatility, and have again a sense that it would not be a one-way direction with the currency, but it would really be a two-way risk, and I think this is part of the intention: You want to internationalize, you expose yourself to more volatility.”
Xu Xian: I would like to thank you for coming to Fudan to attend Shanghai Forum. Today, most of my questions would be regarding the internationalization of the Chinese currency. So, I would like to know at the beginning, which role do you think the Chinese currency plays in the international currency system?
Yves Mersch: It can only be a growing road, and that is also why I have also been keen to come to the Shanghai Forum, and why I am also keen to come back to Shanghai to see the possibilities and development because Shanghai plays an outstanding role in this development of the internationalization of its currency. And we have most recently seen the opening of direct trading in Shanghai between the euro and RMB, and I think this is very important development since it is a development that is in the dream of opening up the Chinese currency. Let me say why I believe that the Chinese currency is asked to play a growing role internationally. China represents 9 percent of global trade, second only to the US. And there have been already expectations that by next year one third of the trade will be done in its own currency.
Xu Xian: Yeah. Okay. We all know that the EU is very successful to launch the euro currency. Do you think there is any experience China can learn from the EU experience?
Yves Mersch: I think there is one area where I think euro’s successful experience can assist the drive for opening up the Chinese currency, and that is the experience in deepening and integrating markets. You know that euro authorities wanted to diversify the products which are denominated in RMB. They want to deepen the capital market. We have seen recently that bond issue along a whole series of maturities have increased, and for that you also need very efficient payment infrastructure systems, and that is the area where I would say Europe also offers some experience it can share with China. And also it will be interesting for China not to only depend on a product and know-how that is coming from the most developed capitalist area: the US, but also seeing how resilient European infrastructure payment systems have been during the crisis, and this could be an area of the strongest cooperation in the future between China and Europe.
Xu Xian: There are many talks in China stating that the internationalization of the Chinese currency will provide some opportunities. But today I will ask you questions from another angle: which recent challenges do you think the internationalization of the Chinese currency is facing?
Yves Mersch：Well, I have said already in the past during conferences concerning the internationalization of the RMB that this does not come without challenges. We should also not expect that there would not be increased volatility, and have again a sense that it would not be a one-way direction with the currency, but it would really be a two-way risk, and I think this is part of the intention: You want to internationalize, you expose yourself to more volatility, and in that respect, the price also is more accurate and you will have in the end the market forces taking over larger roles in purely centrally directed capital markets. And I think that would in the end be a better allocation of capital. A better allocation of capital will increase the sustainability of long-term growth, and in the case of China, I think will it also contribute to diversifying the product market to allow also a more smooth transition from the rural population to the urban population, which is also I think part of the intention of the authorities.
Xu Xian: Okay, so my next question is how will the internationalization of the Chinese currency affect the Chinese economy and the European economy and the world economy?
Yves Mersch: There will be a larger integration of the Chinese economy and the global economy, and therefore direction would be facilitated and also not only trade but also in and outward investment. And I have mentioned yesterday the figures of the share of Chinese in and outward investment that is rapidly growing, and I think that again will contribute not only to addressing the issue of global imbalances, but it will also allow a better rebalancing of the Chinese domestic economy.
Xu Xian: Thank you. You know that Frankfort is the financial centre of Europe, and Shanghai is the financial centre in China. Do you think the internationalization of the Chinese currency will provide some opportunities for both the cities?
Yves Mersch: Any internationalization is always to the benefits of both sides. Just as China has different financial centers, Europe also has different financial centers, each having their comparative advantage, and each is also to some extent closely inter-related. And you know that the offshore RMB are not only limited to Frankfurt, you also have within Europe area Luxemburg, which is close to many Chinese banks. You have Paris, which mentioned that they wanted to play a role as well. And you have of course also London, but it’s outside euro area, obviously. I would even add on that beyond the financial centers, you also would have to develop contact with academia. And from that point of view, I also see the close relation between your university and other good universities. Other universities also have collaboration between them, for example, the University of Luxemburg has contact with universities in France and many other countries. So I think this shows that trade, finance and academia are forerunners of ever-closer cooperation.
Xu Xian: Do you have any recommendations about what research can be done in this area?
Yves Mersch: I think the area where we have the most in common is our structures. And in the area which I am more closely following: climate and financial stability, I think the Chinese economy is also largely financed by the banking system, so does the capital market. So in the area of the consequences of this in terms of regulation of credential civilians and end of monetary policy, I think both Europe and China will probably have more interest in looking into the credit aggregates in the old-fashioned style, which have to some extent been abandoned in the US. I think this is an area where I believe that in the future we could exchange, and certainly in areas like financial stability, the use of macro-credential instruments I think we can also exchange in the future.
Xu Xian: Thank you for the recommendation. I am an insurance professor, so my last question is whether the insurance industry in European countries is working close with the ECB?
Yves Mersch: I think the insurance industry and also the pension fund industry will have to play an increasingly important role in the future. So far, in the process of the de-risking of the banking system, the banks will increasingly have problems in terms of managing their maturity mismatch, and they will be increasingly having problems to ensure long-term financing, which is exactly where insurance and the pension fund will come in to finance long-term financing in and out of the economy. And I think this is also something that may play a larger role in China because what is improper shadow banking system includes also insurance and pension funds. I think the share of financing the economy of this non-bank financing will have to increase in the future, and we have to monitor this very closely.
Xu Xian: Okay. Thank you
Yves Mersch: Thank you very much.
