Economy after the Two Sessions

China's “Two Sessions” are the yearly plenary meetings of the National People’s Congress and of the Chinese People’s Political Consultative Conference. Previous article here: https://www.dhirubhai.net/pulse/cpu-wars-two-sessions-rosa-giovanna-barresi/

China's ???????????????? ?????????????????? ???????????????????? ???????????????????????????? (NFRA)

The NFRA will centralize functions held by the ?????????? ?????????????? ?????? ?????????????????? ???????????????????? ???????????????????? (CBIRC), the ????????????'?? ?????????????? ???????? ???? ?????????? (PBoC), and the ?????????? ???????????????????? ???????????????????? ???????????????????? (CSRC). The new plan calls for having a one regulator/supervisor for the whole financial sector, less the security and commodity markets. The new regulator will be managed by the ?????????? ?????????????? (China's Government) and will be directly led by Premier Li Qiang, ensuring it will have power enough to be heard and obeyed by its regulated entities, which are turning over $57 trillion every year. Comparing the new structure with US institutions, the NFRA will combine the functions of the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp (FDIC), and also some regulatory roles held by the Federal Reserve.

Inside the ?????????????? ?????????????????? ?????????? (CCP) two commissions will oversee the new administration: the resurrected ?????????????? ?????????????????? ???????? ???????????????????? (asserting the ideological and political role of the CCP over the financial sector) and the newly-created ?????????????? ?????????????????? ???????????????????? dealing with financial policy decisions and replacing the previous ?????????????????? ?????????????????? ?????? ?????????????????????? ?????????????????? (headed by former Vice Premier Liu He).

The highest Party body for coordination and discussion on economy issues remains the ?????????????? ?????????????????? ?????? ???????????????? ?????????????? ????????????????????, where Liu He still keeps his role of Chief of General Office. A well-known figure in the international economy, last January Liu made a speech at the World Economic Forum in Davos. The commission, however, is going to be downsized, at least with regard to its day-to-day operation.

A new focus on monetary policy for the People's Central Bank of China

Under the same plan, the Bank's 9 regional branches will be replaced by 36 branches (China counts 7 regions and 34 administrative divisions at provincial level) in a total reversal of the 1998 attempt at establishing a regional administrative level between the State and its 34 Provinces.?As a result of this reorganization, the PBoC will lose some prudential supervision activities and will focus more on monetary policy,?

Through the newly appointed NFRA, the central authorities of the Chinese State and of the Communist Party will have a direct control over prudential supervision. Until now, regional government authorities were successful in carrying out regional banks bailouts, activities that are going to have lesser appeal with a central authority. As the real estate crisis is impacting small- and medium-sized provincial banks, some of them will be probably allowed to fail ???????? ???????????????????? ?????? ????????????.?

The PBoC is one of the few National Central Banks that still remain an executive department of their own Government. Also the State Administration of Foreign Exchange (SAFE), is an agency under the State Council, regulating FX activities and managing both foreign-exchange and gold reserves.

The yuan's new role in the commodity markets

According to SWIFT,?the yuan's share of global payments is 2.5%, still laboring to get near the U.S. dollar's 39.4% or the euro's 35.8%. Beijing’s efforts at changing the ???????????? ?????? are passing through the commodity markets which, as already described above, have been kept out of the scope of the NFRA regulator.

Last March, China reported the fifth consecutive monthly rise in gold reserves, bringing their total to 2,068 metric tons, something to be compared the amounts held by the US and Germany at 8,134t and 3,364t respectively. China is following a gold-based approach to establish a petro-yuan system, as it has (informally) committed to gold-back its national currency when used to settle commodity trades.

Although Switzerland still remains China's main supplier of gold, Russian exports to China increased by 67.3% in weight during 2022. So, is the gold-backed yuan a long-term commitment? In my opinion, that strategy is going to stay at least until payments will be carried out through the ??????????-???????????? ?????????????????? ?????????????? ???????????? (CIPS): when the Chinese CBDC will be definitely established as an international currency, there will be no reason for backing it. This is probably the long-term scenario: efforts at piloting the e-CNY will persist in the mainland, but the focus is now on the CIPS.

The diffusion of the CIPS RealTime Gross Settlement system

As the SWIFT message system is presently used to establish financial sanctions, the CIPS RTGS saw an increase in its popularity as an alternative to SWIFT. For example,?after Bangladesh and Russia finalized a deal for a nuclear plant, they had to use CIPS and to agree on the yuan as settlement currency. However, the main driver in the diffusion of CIPS is the increasing scope of Chinese diplomacy: Brazilian banks started to get CIPS memberships as a consequence of the growing number in real- and yuan- settled trades.

According to the last available data (Feb 2023) CIPS has 1,366 participants, 86 more than those in 2022. Although CIPS offers payment clearing and settlement services, these data should be compared with memberships to the SWIFT message system, which are more than 11,000 from some 200 States.

The gold-based yuan, a new player in OIl and Gas (O&G) trade

Last December, President Xi Jinping mentioned that the ???????????????? ?????????????????? ?????? ?????????????? ?????? ???????????????? (SHPGX) would be "fully utilized in RMB settlement in oil and gas trade." Amid Western sanctions, Russia became China’s largest oil supplier in the first two months of 2023 and is set to follow suit on liquified natural gas (LNG).

Last 30 March, ?????????? ???????????????? ???????????????? ?????? ?????????????? (CNOOC) and French ???????????????????????? finalised a first-ever yuan-settled deal on liquified natural gas (LNG). The trade, involving 65,000 tons of LNG sourced from the UAE, was facilitated by Shangai-based, state-owned ???????? ???? ????????????????????????????.

Of course, this expansion policy sometime encounters setbacks: according to Reuters, after months of negotiations, India and Russia have suspended efforts to settle trades in rupee, as Russia decided once for all to be paid in Chinese yuan or other currencies, and India would not oblige.

At present, the dirham, the rupee and the yuan are all striving for a role in the global economy, and the Middle East will be the place for all the currencies to reach a new balance.