Market Infrastructures: The Ties that Bind

Roughly nine thousand members of the global finance community gathered in Singapore last week at a conference devoted to ‘market infrastructures’ – meaning the plumbing (communication, clearing, settlement, depository) that makes finance work. On one level it was a very geeky affair with its own confusing jargon. The name of the conference, SIBOS, refers to another acronym, SWIFT. There was a whole forum devoted to standards – which are precise definitions for how things should look and work. If you wanted to fill a room, all you had to do was shout ‘block chain’ or ‘distributed ledger’. But the buzz was not only about technology. You could pack the room talking about China’s strategy to internationalize the renminbi just as easily. Market infrastructure is about power as well as plumbing. More important, the power and the plumbing tend to work at cross purposes.

This tension between how markets are connected and who has control over the infrastructure (or connecting bits) will define the next wave of globalization. Right now there is a contrast in views. The easiest way to illustrate this contrast is through two global thinkers. One is Parag Khanna; the other is Nader Mousavizadeh. Khanna is a long-time student of how the world is put together. He was one of the first to map the emergence of a new Silk Road across central Asia and he was at the leading edge of the debate about global cities. His new project is on is on connectivity, or ‘connectography’, and the general theme is that emerging markets are rewiring the world economy in their own interests – and have been for decades. The new Asian Infrastructure Investment Bank is only the latest iteration in a consistent strategy for China to build secure access to vital resources and global markets. Moreover, China is not alone in these efforts and other emerging markets are actively engaged: just look at the explosion in South-South trade. Even India, which has been slow off the mark, is now firmly in the game. The result is a world economy that is more interconnected in more diverse ways than ever before. Moreover, the pattern of interconnection is strategic – with South-South ‘infrastructure alliances’, as Khanna calls them, providing key insulation for national sovereignty. The end result is a world economy that countries in Europe and North America will find much harder to manipulate.

Mousavizadeh takes a somewhat less sanguine view. He is a long-term student of global power, having worked closely with Kofi Annan at the United Nations in the 1990s and having kept a tight finger on the pulse of geopolitical risk through his positions as Chief Executive Officer at Oxford Analytica and co-founder of Macro Advisory Partners. Mousavizadeh does not deny that the network of global connections is both expanding and deepening as emerging markets and rising powers put their stamp on the world economy. What he objects to is the idea that the pattern of interdependence is so tight, dense, or redundant that it can no longer be manipulated. On the contrary, he suggests, anything can be used by governments seeking to press a national advantage. The fact that redundant connections exist does not mean there is no cost to switching from one infrastructure to another and no vulnerability associated with the transition. Hence Mousavizadeh anticipates the ‘weaponization of everything’ – which is a world within which all governments, and not just global powers, seek to exploit interdependence to exert leverage.

The two perspectives highlight key elements of globalization as it is evolving. The world is becoming more interconnected and the connecting bits can be manipulated. The problem is that any attempt to use global market infrastructures as an instrument of foreign policy runs the risk of fracturing the world economy into overlapping and competing systems. This is one of the many reasons why it would be dangerous to try to exclude the Russian banks from the SWIFT network for financial communications (which was one of the ideas floated for tightening the sanctions on Russia over Russian policy toward Ukraine). The result would be to hurt the Russian banks in the short term but also to create a longer-term incentive for Russia and other countries that might one day face similar sanctions to build a financial telecommunications infrastructure beyond the control of policymakers in the United States and Europe. Indeed, it is no secret that they have already started – both in collaboration and for specific use in connecting financial institutions inside China. Such a parallel financial communications infrastructure would not only insulate foreign banks from Western policymakers, but it would also lower the efficiency of global financial transactions and it would make it easier for non-Western governments to think about how disrupting the SWIFT network might be used to exploit a vulnerability for Western banks. In other words, duplication or redundancy would set the stage for a kind of tit-for-tat weaponization of financial communications.

This explains why the internationalization of the Chinese currency is so important for the financial infrastructure community. In the past, the U.S. government has used access to dollar clearing as a powerful instrument of foreign policy. In doing so, they have also created an incentive for the Chinese government to promote the renminbi as a global instrument for trade and finance. Should they succeed in this endeavour, they will not only raise the prestige of the Chinese currency but also equip themselves to exploit other countries’ dependence on gaining access to renminbi clearing (and other post-trade services). The world economy will be more interconnected but it will also be subject to greater manipulation. Moreover, Chinese influence will only increase as the Chinese government succeeds in promoting the international use of renminbi denominated assets. China will not have to rival the U.S. dollar for this policy to count as a success. All it will need is to lock enough other countries into a new and vital piece of global financial plumbing for which it can control access.