Sino-EU Financial Cooperation and Perspectives for Reshaping the Global Financial Markets

Over the past decade, China has opened up its financial markets to the outside world and implemented many market-oriented reforms in the financial sector. Among the main accompanying processes are the promotion of Sino-EU financial cooperation through the BRI and CAI, deregulation of bilateral financial relations, and the acceptance of the RMB as the IMF reserve currency, which has stimulated RMB internationalization. Another accompanying trend in the more recent Sino-EU financial cooperation is green finance, where despite different approaches, both regions are stepping up their political, technical, economic, and scientific cooperation on climate change and clean energy. In addition, both trading blocs are taking the lead in aligning their sustainability taxonomies and tools, which could lead to the foundation for much-needed global standards in which the digitalization of both financial markets plays a crucial role. Regarding Sino-EU cooperation in the banking sector, it is important to distinguish between the local and global markets. While EU banks were initially strongly focused on traditional services to local markets, following the deregulation and liberalization of financial markets in the 1980s and 1990s, they have become global dynamic players with the largest cross-border lending of a full range of financial services. In contrast, Chinese state-owned banks immediately focused on lending to domestic export-oriented firms, which quickly gave them an international orientation and possibility to build up an extensive network of branches and subsidiaries throughout the EU. This can be seen as a larger strategy to facilitate FDIs in the EU by circumventing some regulatory and operational restrictions in EU member states. Unlike the EU, despite a strong government deleveraging campaign, there is still a significant shadow banking sector in China that poses a variety of risks that could also have a potential negative impact on EU FDIs in China. Partly due to the increasing financial interconnectedness, there have recently been more initiatives for Sino-EU financial cooperation in areas of financial security and regulation, systemic risks, monetary policy, and sustainable development. The People’s Bank of China has been taking the lead for some time with the introduction of the central bank digital currency or e-RMB for a more efficient payment system, RMB internationalization, retail payment system backup, and increasing financial inclusion in China. However, the slow and difficult implementation and acceptance of the e-RMB across China could be a warning signal for both the PBC and European Central Bank that there is still a long way to go to reduce USD dependence in the international payment and settlement system through the introduction of a digital yuan and digital euro respectively.