INTERNATIONAL FINANCE FORUM (IFF)

GLOBAL FINANCE
AND DEVELOPMENT
REPORT 2023

October 2023
 Preface

The International Finance Forum (IFF) has been

publishing the Global Finance Development Report
IFF Global Finance and Development Report
(Report) during the IFF Annual Meeting since 2021.
(IFF GFDR) 2023
www.iff.org.cn Based on a wide range of international data, the
www.ifforum.org Report tracks and researches on major global issues
to promote the role of finance services in supporting
economic recovery and sustainable development.
Host
It analyzes and forecasts global economic trends
International Finance Forum (IFF)
UIA International Organization ID: AA2980 and outlook, offers in-depth analysis on financial
development and innovation, and discusses global
Co-chair challenges and policies.
Han Seung-soo
The Report has four chapters. The first chapter,
About IFF
Jenny Shipley
ZHOU Xiaochuan written by Dr. Zhuang Juzhong, former deputy chief
economist of Asian Development Bank (ADB), looks
The International Finance Forum (IFF) is an independent, non-profit, non- IFF Board of Directors at global economic outlook, risks and possible leaning
governmental international organisation founded in Beijing in October 2003, Han Seung-soo, Jenny Shipley, Edmond Alphandéry, of policies. The second chapter reviews the financial
established by financial leaders from more than 20 countries and regions, Paul Chan Mo-po, Antony Leung, Mari Elka Pangestu,
market in the past year and forecasts possible trends.
including China, the United States, the European Union, emerging countries and Domenico Siniscalco, Erik Solheim, Jose Vinals,
leaders of international organisations such as the United Nations, the World Bank Gerry Rice, Siddharth Tiwari, YI Xiaozhun, ZHU Xian, This chapter is analyzed by Xia Le, chief economist for
and the International Monetary Fund (IMF). The IFF is a long-standing, high-level LIN Jianhai, Deborah M. Lehr, ZHOU Hanmin, Asia at BBVA Research. The third chapter reviews and
platform for dialogue and communication and multilateral cooperation and has ZHOU Yanli,Leong Vai Tac, Gloria Macapagal Arroyo, forecasts global green finance innovation and policies.
been upgraded to F20 (Finance 20) status. Ernesto Zedillo, Mehmet Simsek, Laurent Fabius, It is written by Lu Xuedu, former lead climate change
Kairat Kelimbetov, Jean-Claude Trichet,
The International Finance Forum (IFF) advocates an international and market- specialist at East Asia Department of ADB. The fourth
Sultan Bin Nasser Al-Suwaidi, Ambassador Yasser Elnaggar,
oriented operation mechanism to advance the supportive role of finance in sustainable chapter focuses on global digital finance. Song Min,
Stephen P. Groff, Frank Rijsberman, Sir David Wright,
development through its platforms of strategic dialogue, co-operation, communication,
Bryan Pascoe, Takehiko Nakao, Vera Songwe, former dean of economics and management school of
practice and innovation, research and training programme.
Zafar Uddin Mahmood, Axel Weber, LI Tong, Wuhan University, looks at the application of big data,
Samuel Yung Wing-ki, Ip Sio Kai, MA Zhigang, artificial intelligence and blackchain in finance.
Our Mission Sio Chi-wai, Zhangjizhong
Initiated by major global economic entities and
IFF Advisory Committee international organizations including the UN, the IFF
Upholding the spirit of “Comprehensive and Sustainable Development – New Capital,
Jean-Claude Trichet, Leo Melamed, Yukio Hatoyama is a platform for international financial dialogues and
New Value, New World”, since the founding in 2003, the International Finance Forum
WANG Mengkui, Charles H. Dallara, Domingo Cavallo, Carla Hills
(IFF) has been committed to building itself into a world-class academic think-tank and a leading academic think tank. Since its founding 20
Horst Köhler, Jacob Frenkel,Wim Kok, Jaime Caruana,
multilateral dialogue platform with strategic insight. years ago, the IFF has built close relations with more
Karel Lannoo
Christopher R. Hill, Olin Wethington, YU Hongjun, Justin Lin than 200 global political and financial leaders from
more than 50 countries and regions as well as more
Our Goals Editorial Board
than 50 international and regional organisations.
Th e I F F w i l l c o n t i n u e t o u s e i t s p l a t f o r m t o
The International Finance Forum (IFF) operates based on an open, transparent and fair ZHANG Jizhong, ZHU Xian, LIN Jianhai
promote strategic financial dialogues, international
mechanism to ensure its independence, objectivity, foresight and inclusiveness and to ZHUANG Juzhong, SONG Min
communications and cooperation, innovation,
facilitate global financial co-operation and exchanges. Through in-depth research on
research and talent cultivation. The IFF dedicates its
global finance, IFF is committed to promoting sustainable development of China and
the world economy. Our targets include: Editorial Department platform for world rld leading academic research and
Joanna Zhuang, SHEN Gang, WU Lixin, SI Haitao, XU Ruifeng multilateral dialogues.
1. International Financial Strategic Dialogue Platform
2. International Financial Cooperation & Exchange Platform Address
3. International Financial Innovation & Practice Platform F22, Pearl Development Building, Hengli Town, Nansha
4. International Financial Strategic Think-Tank Platform District, Guangzhou
Post Code 100095
5. International Financial Talents Platform Email / [email protected]
www.iff.org.cn
Zhang Jizhong
The views expressed in this publication are those of the authors and do not necessarily CEO / Founding Secretary General
reflect the views of IFF or its governing body. IFF does not guarantee the accuracy of COPYRIGHT STATEMNT
the data included in this publication and accepts no responsibility for any consequence The content of this publication is an exclusive property of Director of Executive Committee
of their use.
the IFF, and may not be reproduced or excerpted without International Finance Forum (IFF)
permission
 Table of Contents 4-6 List of tables and figures

Attachment 7-9
Table
Chapter 1 Global economic outlook, risks and policy priorities 10-25 Table 1.1: Annual GDP growth (%)
Table 1.2: Annual CPI Inflation (%)
1.1 Economic outlook
Table 2.1: USD dominance in IMS (functional view)
1.2 Risks to the outlook
1.3 Policy priorities Table 3.1: Signing Status of the JEPT Agreements
Table 3.2: Contribution of IMF Member Countries to the RST
Chapter 2 Global financial market review and outlook 26-43
Table 3.3: ASEAN Polices Updates

2.1 Two important risk events and their impact on international capital flow Table 4.2-1: EU’s Big Data Industry Policies
2.2 Currency performance heavily influenced by policy rates Table 4.3-1: Regulatory Policies in Digital Finance of China, the US and the EU
2.3 Performance of other major financial assets
2.4 The interest rate risk of higher-for-longer
Figure
2.5 Financial fragmentation risks give new impetus to de-dollarization
Figure 1.1 (a): Quarterly GDP growth (y-o-y, %), developed G20 economies
Chapter 3 Review and Outlook on Global Green Finance Innovation and 44-73 Figure 1.1 (b): Quarterly GDP growth (y-o-y, %), selected G20 developing economies
Policy Development Figure 1.2 (a): CPI inflation (y-o-y, %), selected G20 developed economies
Figure 1.2 (b): CPI inflation (y-o-y, %), selected G20 developing economies
3.1 Foreword
3.2 Why green finance Figure 1.2 (c): CPI inflation (y-o-y, %), selected G20 developing economies
3.3 Review of the Green Finance Market Dynamics Figure 1.3 (a): Central bank policy rate (%)
3.3.1 Green Financial Products Figure 1.3 (b): Central bank policy rate (%)
3.3.2 Carbon Markets
Figure 1.4 (a): Gross government debt, developed economies (% of GDP)
3.3.3 International Green Finance Policy review
3.3.4 Updates on Green Finance Policies and Standards in Different Countries Figure 1.4 (b): Gross government debt, developing economies (% of GDP)
3.4 Outlooks of Future Green Finance Development Figure 2.1: Persistent monetary tightening weighing on the liquidity of US banking system
Figure 2.2: Elevating pressure on the US fiscal situation
Chapter 4 Global Digital Finance Development Report 2023 74-113
Figure 2.3: IIF Tracker: Total Portfolio Flows into Emerging markets
Figure 2.4: Currency Performance versus accumulated interest rate hikes (as of August
4.1 Overview of Global Digital Financial Development
4.1.1 The concept of digital finance 15, 2023)
4.1.2 Global digital finance development from the perspective of patent Figure 2.5: Year-to-date return of selected financial assets (as of September 25, 2023)
4.1.3 Analysis of the rationale of digital finance Figure 2.6: Real residential property price developments in selected economies (y/y
4.2 Big Data, Artificial Intelligence and Blockchain Finance
changes)
4.2.1 Big Data Finance
4.2.2 Artificial Intelligence Finance Figure 2.7: Index of International Currency Usage
4.2.3 Blockchain Finance Figure 3.1: Alternative definitions of new finance
4.3 Risk and regulation Figure 3.2: Green Bond Issuance in Major Issuance Markets in 2022
4.3.1 Risks of Big Data, AI and Blockchain Finance
Figure 3.3: Currency Composition of New Global Green Bond Issues in 2022
4.3.2 Global regulatory policies for digital finance
Figure 3.4: Global Green Bond Fund Allocation from 2014 to 2022
4.4 Summary

4 5
 Figure 3.5: Statistics on Green Bond Issuance
Attachment
Figure 3.6: Comparison between Global Bond Market and Global Green Bond Market
Figure 3.7: Global Green Loan Issuance and Number of Issuers Attachment one: Glossary

Figure 3.8: Carbon Emission Allowance Price Fluctuations in Some Carbon Markets
Figure 3.9: Issuance of Carbon Certificates for Major Mechanisms, 2014-2022 英文缩写 英文全称 中文

Figure 3.10: Official Climate Finance by Sources ACMF ASEAN Capital Markets Forum 东盟资本市场论坛
Figure 3.11: Official Climate Finance by Purpose
ASEAN
Figure 3.12: Official Climate Finance Flows Grouped by Income Countries, 2016-2020 ASEAN Sustainability-linked Bond Standards 东盟可持续发展相关债券标准
SLBS
Figure 4.1-1: Digital Technology Transforming the Financial Ecosystem ASEAN ASEAN Sustainable and Responsible Fund
东盟可持续和负责任基金标准
Figure 4.1-2: Big Data, AI, and Blockchain Finance Lead Global Digital Finance Development SRFS Standards

Figure 4.1-3: Worldwide Digital Finance Patent Filings/Grants (2017-2022) CAR Climate Action Reserve 气候行动储备
Figure 4.1-4: Global Digital Finance Patent Filings/Grants (Top 10 Countries)
CBAM Carbon Border Adjustment Mechanism 碳边境调整机制
Figure 4.1-5: Worldwide Digital Finance Patent Applications (Top 10 Companies)
Figure 4.1-6: National/Regional Banking Technology Patent Grants 2017-2022 (Top10) CBI Climate Bonds Initiative 气候债券倡议组织

Figure 4.1-7: National/Regional InsurTech Patent Grants 2017-2022 (Top 10)

CBS Climate Bond Standard 气候债券标准
Figure 4.1-8: National/Regional Asset Management Technology Patent Grants in 2017-
2022 (Top 10) CCER China Certified Emission Reductions 中国核证减排量

Figure 4.1-9: How BAB Enable Financial Markets CDM Clean Development Mechanism 清洁发展机制
Figure 4.2-1: Global Big Data Storage and Growth Rate (2013-2021)
CGT Common Ground Taxonomy 共同分类目录
Figure 4.2-2: The U.S. Big Data Industry Policies
Figure 4.2-3: Milestones of China's Big Data Industry Policies CIS ASEAN Collective Investment Scheme 集体投资计划
Figure 4.2-4: Numbers of Big Data Finance Patent Filings in 2017-2022 (Top 10)
COP15 Conference of Parties 15 第 15 次缔约方大会
Figure 4.2-5: Application Scenarios of Big Data Finance
Figure 4.2-6: Workflow of SAS Fraud Management System Based on Big Data Finance COP26 Conference of Parties 26 第 26 次缔约方大会
Figure 4.2-7: Global Funding Amount/Frequency in AI Finance (2015-2021)
COP27 Conference of Parties 27 第 27 次缔约方大会
Figure 4.2-8: Worldwide AI Unicorns Top100
Figure 4.2-9: China Citing Other Countries' on AI Patent COP28 Conference of Parties 28 第 28 次缔约方大会

Figure 4.2-10: Application Scenarios of AI Finance

COP30 Conference of Parties 30 第 30 次缔约方大会
Figure 4.2-11: Smart Chaser AI-powered Prediction Tool Workflow
Carbon Offsetting and Reduction Scheme for
Figure 4.2-12: Worldwide Blockchain Equity Investment in 2021 CORSIA 国际航空碳抵消和减排计划
International Aviation
Figure 4.2-13: Distribution of Blockchain Equity Investments by Country 2021
Eps Equator Principles 赤道原则
Figure 4.2-14: Application Scenarios of Blockchain Finance
Figure 4.3-1: Total Global Cryptocurrency Market Capitalization since 2022 EU ETS EU Emissions Trading System 欧盟排放权交易系统

G7 Group of Seven 七国集团

6 7
 英文缩写 英文全称 中文 英文缩写 英文全称 中文

GFANZ Glasgow Financial Alliance for Net Zero 格拉斯哥净零金融联盟 SLLP Sustainability Linked Loan Principles 可持续相关贷款原则

GLP Green Loan Principles 绿色贷款原则 SRI Socially Responsible Investment 社会责任投资

GS Golden Standard 黄金标准 Task force on Climate related Financial

TCFD 气候变化相关财务信息披露指南
Disclosure
ICAP International Carbon Action Partnership 国际碳行动伙伴 TTF Title Transfer Facility 所有权转让设施

ICMA International Capital Market Association 国际资本市场协会 特指 IMF 的较高信用级别的信贷额

UCT Upper-Credit-Tranche 度（一个国家在 IMF 信贷额度的前
IFF International Finance Forum 国际金融论坛 25%）

UNEP United Nations Environment Programme 联合国环境规划署

IFRS International Financial Reporting Standards 国际财务报告准则
United Nations Framework Convention on
IMF International Monetary Fund 国际货币基金组织 UNFCCC 联合国气候变化公约
Climate Change

IPSF International Platform on Sustainable Finance 可持续金融国际平台 VCS Verified Carbon Standard 核证自愿减排标准

IRA Inflation Reduction Act 通胀削减法案 WTO World Trade Organization 世界贸易组织

ISSB International Sustainability Standards Board 国际可持续发展标准委员会

ITC Investment Tax Credit 美国太阳能投资税减免

JEPT Just Energy Transition Partnership 公正能源转型伙伴关系计划

LMA Loan Market Association 贷款市场协会

LTS Long-term strategies 远景发展战略

MRV Monitoring, Reporting, and Verification 监测、报告和核查

NDC Nationally Determined Contributions 国家自主贡献

Organisation for Economic Co-operation and

OECD 经济合作与发展组织
Development

PCAF Partnership for Carbon Accounting Financials 碳核算金融联盟

RSF Reform-Supporting Financing 改革配套融资

RST Resilience and Sustainability Trust 韧性和可持续性信托

SDGs Sustainable Development Goals 联合国可持续发展目标

SDRs Special Drawing Rights 特别提款权

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

1.1 Economic outlook 20 (G20) countries, which represents about

80% of the global economy, grew 2.8% in the
first quarter of 2023 and 3.5% in the second
Global growth slowed further this year due
Chapter 1: to the sharp tightening of monetary policy, quarter, compared with the same quarter
last year. The same growth rates were 1.8%
and is likely to remain weak in 2024.
Global economic outlook, risks and 2.5% for the United States (US); 4.5%
and 6.3% for China; 1.1% and 0.4% for the
and policy priorities 1
After a significant weakening in 2022, global
economic growth has slowed further this
European Union (EU); and 1.8% and 1.7% for
Japan, respectively ((Fig. 1.1 (a) and Fig.1.1
year due to the sharp tightening of monetary
(b)).
policy to contain inflation across the world.
Global economic growth slowed further in tightening could lead to more episodes of Growth has also been negatively affected
2023 due to the sharp tightening of monetary bank failure and financial instability in the The consensus view of markets now is that
by the continuation of the Russia-Ukraine
policy to contain inflation across the world. advanced countries and more widespread the global economy will grow about 3.1% this
war and lingering effects of negative shocks
Growth has also been negatively affected by debt distress in the developing world; geo- year, down from 3.4% in 2022 (using country
of the COVID-19 pandemic. The Group of
the continuation of the Russia-Ukraine war political tensions could intensify and lead
and lingering effects of negative shocks of to greater geo-economic and -financial
the COVID-19 pandemic. The global economy fragmentations; and growth of the Chinese Fig. 1.1 (a): Quarterly GDP growth (y-o-y, %), developed G20 economies
Fig. 1.1 (a): Quarterly GDP growth (y-o-y, %), developed G20 economies
is now projected to grow 3.1% this year, economy, which contributes about one
12
down from 3.4% in 2022, with the advanced third of global growth, could be lower than
co u n t r i e s co m b i n e d g row i n g 1 . 5 % a n d anticipated. If these risks materialize, global 10
developing economies as a group expanding growth would be lower, and global inflation
4.1%. In 2024, with tight monetary policy and may also turn out to be higher. 8
financial conditions set to continue, global
6
growth is expected to remain weak at 3.1%, To reduce the risks and support global
with the advanced countries growing 1.3% economic recovery and growth, the global 4
and developing economies expanding 4.3%. community should work together to address
both short- and longer-term challenges. 2
Global inflation moderated in 2023 on Monetary policy should continue the fight
the back of monetary policy tightening, against inflation, while maintaining financial 0
2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2
weaker global growth, softening of world stability and ensuring a soft landing for the
commodity prices especially energy prices, global economy. Fiscal policy should be Australia Canada EU Japan Korea UK US
and continued improvement of global supply geared toward consolidating fiscal positions
conditions. Global consumer price inflation while protecting vulnerable groups. Structural
rate is projected to decline to 7% in 2023, reform should address binding constraints to Fig. 1.1 (b): Quarterly GDP growth (y-o-y, %), selected G20 developing economies
Fig. 1.1 (b): Quarterly GDP growth (y-o-y, %), selected G20 developing economies
down from 9.2% in 2022, with prices rising long-term growth. Countries should pursue
by 4.6% in advanced countries and 8.6% international cooperation and multilateralism 14
in developing economies. In 2024, as tight in dealing with common challenges, including 12
monetary and financial conditions continue reducing poverty, protecting environment
10
to dampen demand growth and pandemic- and mitigating climate change, resolving
induced supply-side bottlenecks ease further, cross-country conflicts and reducing geo- 8
global inflation is projected to moderate to political tensions. 6
5.8%, with prices rising by 2.8% in advanced
4
countries and 7.8% in developing economies.
2
This outlook is subject to several downside 0
risks. Compared with current expectations, 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2
inflation pressures could turn out to be more
persistent; monetary and financial condition Brazil China India Indonesia Mexico Saudi Arabia Turkey G20

1 The cutoff date for data used in this report is the mid-September 2023. Source: The OECD Statistics web site, accessed 15 September 2023.

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

weights at the PPP exchange rates) (Table 1.1). Among major economies, the US is projected is expected to continue its tight monetary ASEAN as a group is projected to grow 4.6%
The advanced economies combined will grow to grow 2% in 2023, slightly down from 2.1% policy and maintain the interest rates at the in 2023 and 4.9% in 2024, down from 5.7%
1.5% and developing economies as a group in 2022. The US economy has so far proved current level for an extended period in order last year. The slowdown reflected a number
will expand 4.1%. But there are large variations resilient to the sharp tightening of monetary to achieve the 2% inflation target. But the of factors, including rising inflation, monetary
in the pace of growth across countries, policy, with household spending buoyed by disbursement of EU funds should support tightening by central banks across the region,
reflecting differential levels of inflation steady job growth and pay rises and factory growth. A key risk to growth outlook is the and weaker demand for manufactured
and pace of monetary policy tightening, investment spurred by the government’s escalation of the Russia-Ukraine war leading exports from key trading partners. However,
the strength of growth in 2022, and some fiscal incentives. In July 2023, the Federal to soaring energy prices and a significant domestic demand remains strong, and
region- and country-specific developments. Reserve (Fed) raised interest rates for the d a m p e n i n g o f co n s u m e r a n d b u s i n e ss private consumption has continued to be the
At these rates, the advanced economies will 11th time since March 2022, bringing the Fed confidence. primary driver of economic growth, backed
contribute 20% of the global growth in 2023, funds rate to a target range of 5.25-5.5%, by improved labour market conditions and
and developing economies will contribute the highest level in more than 20 years, but China is projected to grow 5.2% in 2023 and increases in income. Continued recovery of
80%. Across regions, developing Asia will in its September policy meeting, it left the 5% in 2024, up from 3% in 2022. The pickup the services sector, particularly tourism, also
contribute 60%, North America 11%, Middle rate unchanged, amid significant reduction in in growth is mainly due to the phasing out supported growth. Among major economies
East & North Africa 8%, Latin America & inflation, while not ruling out more rate hiking of its dynamic zero-COVID policy at the end of ASEAN, Indonesia is projected to grow
Caribbean 6%, high-income Asia 5%, the in coming months. The Fed will continue its of last year returning the economy back to 4.9% and 5%, the Philippines 5.8% and 6%,
EU and Sub-Saharan Africa each 4%, and fight against inflation by keeping the rates normal. Economic data in recent months Malaysia 4.5% and 4.9%, Singapore 1.2%
developing Europe 3%. Across countries, at high levels not seen for many years for a show some weakening in growth momentum and 2.5%, Thailand 3.6% and 3.8%, and Viet
China will remain the largest source of global considerable period of time. On the other due to a number of factors, including soft Nam 5.6% and 6.3%, in 2023 and 2024,
growth, contributing about 32%, followed by hand, the Inflation Reduction Act of 2022 household consumption, declining housing respectively. A key risk to growth outlook is
India at 15%, and the US at 10%. that provides incentives for investment in a investment, and sluggish exports (declining weaker than expected global growth leading
number of sectors will help offset somewhat by 5.6% in the first 8 months in US dollar to further deterioration of external demand.
Global recovery is set to continue in 2024, negative impacts of the tight monetary terms), although the August and September
b u t re m a i n s we a k . Wi t h t h e COV I D -1 9 and financial conditions. Against these d a t a s h owe d s o m e i m p rove m e n t s . To
pandemic finally over, it no longer constitutes considerations, growth is projected to slow support growth, the government in late July Inflationary pressures remain elevated
a significant drag on global growth. The cycle down to 1.2% in 2024. A key risk to growth rolled out 20 measures to help promote globally, but moderated amid tight monetary
of monetary tightening is likely to end in most outlook is that monetary tightening ends too consumer spending. Measures among others and financial conditions, and is likely to
countries next year. However, the monetary soon leading to a resurge of inflation or too include liberalizing car-buying restrictions, moderate further in 2024.
and financial conditions will remain tight and late pushing the economy into recession and encouraging the purchase of new energy
their lagging effects will continue to dampen leading to more episodes of bank failure and vehicles, supporting housing demand by first- The global inflation, while it remained
demand growth and limit the pace of global financial instability. time buyers and for upgrading, increasing elevated, has moderated since the second
recovery. Against this background, the global consumption of home improvement and half of 2022, as central banks around the
economy is projected to grow 3.1% in 2024, Th EU is projected to grow 0.8% in 2023 and h o u s e h o l d e l e c t ro n i c s , a n d p ro m o t i n g world tightened monetary policy. The average
the same rate as this year, with the advance 1.5% in 2024, down from 3.7% in 2022. The sports, recreation, eating-out, tourism monthly year-on-year inflation rate for the
economies combined growing 1.3% and slowdown was mainly due to high inflation and consumption of health services. To G20 economies declined from its recent peak
developing countries as a group expanding and monetary tightening curtailing domestic boost business confidence of the private of 9.5% in 2022 to 6.3% in August 2023. The
4.3%. demand. The continued Russia-Ukraine sector, the government also unveiled a declines were driven mainly by developed
war also affects consumer and business series of measures to encourage private countries as they drove the recent inflation
Among major groups of economies, confidence. The European Central Bank investment, including improved access to surge. Among these countries, the monthly
developing Asia is to grow 5.2% in both 2023 (ECB) in September 2023 pushed through a some key sectors and financing support. The year-on-year CPI inflation declined from
and 2024; high income Asia 2% in 2023 and 10th increase in a row in interest rates since government will continue to take actions the 2022 peak of 9.1% in the US, 11.5% in
1.7% in 2024; developing Europe 1.7% and July 2022, leaving its main lending rate at to ensure the orderly resolution of debt the EU, 11.1% in the UK, 8.1% in Canada, and
2%; the EU 0.8% and 1.5%; Latin America and 4.5%. It has also started to trim its balance problems of some large property developers 6.3% in Korea to 3.7%, 5.9%, 6.7%, 4%, and
Caribbean 2.4% and 2.4%; Middle East and sheet. Among the three largest EU member and sustainability of local government 3.4%, respectively, in August 2023 (Fig.1.2
North Africa 2.9% and 3.2%; North America economies, France is projected to grow 0.9% finance, and monetary and fiscal policies (a)). The decline in inflation has been more
1.9% and 1.2%; Sub-Saharan Africa 3.6% and and 1% in 2023 and 2024, respectively, Italy will continue to support recovery. Key risks limited for developing G20 economies as a
4.1%; ASEAN 4.6% and 4.9%; BRICS countries to grow 0.7% in both years, and Germany to growth outlook include a deeper than whole, although Brazil, Mexico, South Africa,
4.9% and 4.6%; the G20 group 3% and 2.9%; is projected to contract by 0.4% this year expected downturn in the housing sector, a and Turkey also saw large declines, with the
and one-belt-one-road economies 3.7% and but grow 0.9% next year. With underlying deepening of local government debt stress, monthly rate declining from the 2022 peak
3.9%, respectively. price pressures remaining high, the ECB and weaker than expected external demand. of 12.1%, 8.7%, 8.1% and 85.4% to 4.6%, 4.6%,

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

Fig. 1.2 (a): CPI inflation (y-o-y, %), selected G20 developed economies 4.8% and 59.1%, respectively, in August 2023 increase is expected to be modest. Third, the
Fig. 1.2 (a): CPI infla�on (y-o-y, %), selected G20 developed economies (Fig. 1.2 (b) and Fig 1.2 (c)). pandemic-induced supply-side bottlenecks
12 w i l l b e f u r t h e r re l a xe d i f n o t e n t i re l y
The moderations in inflation were mainly due eliminated. Against these considerations, the
10 to the sharp tightening of monetary policy global consumer price inflation is projected
constraining demand growth, especially in to taper off to 5.8% in 2024 (Table 1.2).
8
advanced countries, and further relaxation Inflation will moderate from 4.6% to 2.8% for
6 of supply-side bottlenecks as the COVID-19 developed economies and from 8.6% to 7.8%
pandemic ended and production returned to for developing economies.
4 normal. Softening global demand also led to
2 declines in world commodity prices, especially Among the developed economies, inflation is
prices of energy. Switching to renewable projected to soften from 4% in 2023 to 2.7%
0 e n e r g y, e s p e c i a l l y i n m a n y E u r o p e a n in 2024 in the US, from 6.5% to 3.7% in the EU,
Aug-21 Feb-22 Aug-22 Feb-23 Aug-23 countries, and efficiency improvement by from 7.6% to 3.5% in the UK, from 3% to 2.5%
industries and households, in response to the in Japan, and from 3.4% to 2.5% in Korea.
G20 Canada EU Korea UK US
energy crisis caused by the Russia-Ukraine Among developing economies, inflation is
war, were also major contributors to declines expected to remain at a two-digit level in
Fig. 1.2 (b): CPI inflation (y-o-y, %), selected G20 developing economies in energy prices. The consensus view now Argentina and Turkey, as the two countries
Fig. 1.2 (b): CPI infla�on (y-o-y, %), selected G20 developing economies is that global consumer price inflation rate continue to face macroeconomic challenges.
14 will decline to 7% in 2023, down from 9.2% Inflation is expected to moderate to 3%, 3.9%,
in 2022, with that of advanced economies 4.6%, 4.8% and 4.8% in Indonesia, Mexico,
12
falling to 4.6%, down from 7.3% in 2022, and Brazil, South Africa and India, respectively,
10 of developing countries moderating to 8.6%, but edge up to 6% in Russia. Inflation in 2024
8 down from 10.6% last year (Table 1.2). is expected to remain low in China and Suadi
6 Arabia, at 2% and 2.2%, respectively.
4 Among the developed G20 economies,
inflation in 2023 will be the highest in the UK
2
at 7.6%, followed by Germany and Italy at
0
6.2%, France at 5.7%, Australia at 5.5%, US at
-2 4%, Canada at 3.7%, Korea at 3.4%, and Japan
Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 May-23 Aug-23 at 3%. Among G20 developing economies,
A rg e n t i n a a n d Tu r key w i l l co n t i n u e to
Brazil China India Indonesia Mexico Saudi Arabia South Africa
experience a double-digit inflation in 2023,
at 99% and 50%, respectively. Inflation will
Fig. 1.2 (c): CPI inflation (y-o-y, %), selected G20 developing economies decline to the range of 5-5.9% in India,
Fig. 1.2 (c): CPI infla�on (y-o-y, %), selected G20 developing economies Mexico, Russia, and South Africa, 4.8% in
Brazil, 3.7% in Indonesia, and 0.7% in China.
140
Inflation will slightly edge up, to 2.6%, in
120
Saudi Arabia.
100
80 In 2024, inflation will moderate further for a
60 number of reasons. First, the tight monetary
40 and financial conditions and their lagging
20 effects will continue to constrain demand
0 growth. Second, while energy prices may
Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 May-23 Aug-23 increase somewhat from its 2023 level due
to slower supply growth if the Organization
Argen�na Turkey of Petroleum Exporting Countries and 10
affiliated member countries (OPEC+) continue
Source: The OECD Statistics web site. Accessed 23 September 2023. production cuts to support oil prices, the

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

Table 1.1: Annual GDP growth (%) Table 1.2: Annual CPI Inflation (%)

2020 2021 2022 2023 2024 2020 2021 2022 2023 2024
Projection Projection
World (PPP) -2.8 6.3 3.4 3.1 3.1 World (PPP) 3.5 5.0 9.2 7.0 5.8
Major groups of economies Major groups of economies
Developed economies -4.2 5.4 2.7 1.5 1.3 Developed economies 0.7 3.1 7.3 4.6 2.8
Developing economies -1.8 6.9 4.0 4.1 4.3 Developing economies 5.6 6.4 10.6 8.6 7.8
Developing Asia -0.5 7.4 4.4 5.2 5.2 Developing Asia 3.5 2.6 4.3 3.5 3.6
High income Asia -2.6 4.1 1.8 2.0 1.7 High income Asia 0.2 1.2 3.8 3.4 2.6
Developing Europe -2.9 6.0 -0.9 1.7 2.0 Developing Europe 3.1 6.2 14.2 8.7 7.6
Euro area -6.2 5.4 3.6 0.8 1.3 Euro area 0.3 2.6 8.5 5.6 3.1
Latin America and Caribbean -6.9 7.1 4.0 2.4 2.4 Latin America and Caribbean 6.9 10.4 15.2 15.5 13.0
Middle East and North Africa -1.8 6.3 5.5 2.9 3.2 Middle East and North Africa 11.7 17.8 29.5 23.3 21.3
Sub-Saharan Africa -1.6 4.8 3.9 3.6 4.1 Sub-Saharan Africa 13.0 11.5 15.4 14.6 10.3
ASEAN -3.2 3.2 5.7 4.6 4.9 ASEAN 1.5 2.0 5.0 4.2 3.3
BRICS -0.5 7.9 3.3 4.9 4.6 BRICS 3.4 3.0 4.6 2.5 3.2
European Union -5.6 5.6 3.7 0.8 1.5 European Union 0.7 2.9 9.3 6.5 3.7
G20 -2.8 6.5 3.3 3.0 2.9 G20 2.6 4.0 8.7 6.0 5.3
One-belt-one-road economies -1.1 6.6 3.5 3.7 3.9 One-belt-one-road economies 4.6 5.5 10.3 7.8 6.9
North America -3.0 5.9 2.2 1.9 1.2 North America 1.2 4.6 7.9 4.0 2.7
Major economies Major economies
Argentina -9.9 10.4 5.2 -2.3 2.0 Argentina 42.0 48.4 72.4 99.0 90.0
Australia -1.8 5.2 3.7 1.8 1.3 Australia 0.9 2.8 6.6 5.5 3.7
Brazil -3.3 5.0 2.9 3.0 1.6 Brazil 3.2 8.3 9.3 4.8 4.6
Canada -5.1 5.0 3.4 1.3 1.2 Canada 0.7 3.4 6.8 3.7 2.3
China 2.2 8.5 3.0 5.2 5.0 China 2.5 0.9 1.9 0.7 2.0
France -7.9 6.8 2.6 0.9 1.0 France 0.5 2.1 5.9 5.7 2.6
Germany -3.7 2.6 1.8 -0.4 0.9 Germany 0.4 3.2 8.7 6.2 3.3
India -5.8 9.1 6.8 6.3 6.2 India 6.2 5.5 6.7 5.4 4.8
Indonesia -2.1 3.7 5.3 4.9 5.0 Indonesia 2.0 1.6 4.2 3.7 3.0
Italy -9.0 7.0 3.7 0.7 0.7 Italy -0.1 1.9 8.7 6.2 2.6
Japan -4.3 2.1 1.1 1.9 1.0 Japan 0.0 -0.2 2.5 3.0 2.5
Korea -0.7 4.1 2.6 1.4 2.1 Korea 0.5 2.5 5.1 3.4 2.5
Mexico -8.0 4.7 3.1 3.1 2.2 Mexico 3.4 5.7 7.9 5.7 3.9
Russia -2.7 5.6 -2.1 2.0 1.0 Russia 3.4 6.7 13.8 5.3 6.0
Saudi Arabia -4.3 3.9 8.7 1.0 3.5 Saudi Arabia 3.4 3.1 2.5 2.6 2.2
South Africa -6.3 4.9 2.0 0.8 1.1 South Africa 3.3 4.6 6.9 5.9 4.8
Turkiye 1.9 11.4 5.6 4.0 2.7 Turkiye 12.3 19.6 72.3 50.0 55.0
UK -11.0 7.6 4.0 0.5 0.8 United Kingdom 0.9 2.6 9.1 7.6 3.5
US -2.8 5.9 2.1 2.0 1.2 United States 1.3 4.7 8.0 4.0 2.7

Sources: Growth rates for 2020-2022 are from the IMF; growth projections for 2023 and 2024 are based on the latest Sources: Inflation rates for 2020-2022 are from the IMF; inflation projections for 2023 and 2024 are based on the latest
available forecasts by international organizations (including the IMF, World Bank, ADB, OECD, EBRD, and AfDB) as of the available forecasts by international organizations (including the IMF, OECD, ADB, and AfDB) as of the mid-September
mid-September 2023, the September 2023 issue of Focus-Economics country reports, and IFF analysis. 2023, the September 2023 issue of Focus-Economics country reports, and IFF analysis.

16 17
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

1.2 Risks to the outlook again. More than expected production cuts
by OPEC+ countries could also push oil prices
of pro-longed monetary tightening resulting
in more episodes of bank failure and wider
the world have spent aggressively to help
households and firms to weather economic
to levels higher than projected. distress in financial systems cannot be ruled and social impacts of the pandemic in the
There are a number of downside risks to
out, including a repricing in financial markets past three years. The average ratio of gross
this outlook. If these risks materialize, global
Other factors that could cause inflation to be (see more discussions in Part 2 of this report). public debt to GDP—a key measure of a
growth would be lower and inflation higher,
more persistent include central banks ending country’s fiscal health—is expected to rise
and the possibility of a global economy hard
monetary tightening too soon, thereby failing Pro-longed monetary tightening in advanced to a record 67.5% by the end of 2023 for
landing cannot be ruled out.
to sufficiently contain demand growth, and countries not only tests the financial system emerging markets and developing countries
more occurrences of extreme weather events of their own, but also have significant as a whole, which is 12.4 percentage points
and natural disasters that are happening implications for macroeconomic and financial higher than it was in 2019 (Fig 1.4 (a) and Fig.
First, inflation pressures could be more
more frequently as a result of climate change, stability in emerging markets and developing 1.4 (b)). According to the IMF’s estimates,
persistent.
affecting agriculture production and raising countries. Increases in foreign borrowing 39 out of 69 low-income countries are now
food prices. Further, while global economic costs and capital outflows put pressure on in or near debt distress, with countries that
The consensus view is that global inflation
and financial integration has contributed their international reserves, cause currency were showing signs of debt distress before
will continue to decline and return to near
to low inflation worldwide in the past two deprecations, and make their foreign debt the pandemic being hit particularly hard. 2

target or pre-pandemic long term average

decades, the increasing geo-economic servicing more difficult. Governments around Deeper and more widespread debt distress
levels by late 2025 or 2026. However, several
and -financial fragmentations as a result of
factors could cause it to remain elevated
in 2024 and beyond. While the headline
intensifying geo-political tensions in recent Fig. 1.3
Fig. (a): Central
1.3 (a): Central bank
bankpolicy
policyrate
rate(%)
(%)
years could work the other way round and
inflation has declined significantly in many
have inflationary consequences (see more 25
countries mainly due to falling energy prices,
discussions below).
the core inflation that excludes energy and
20
food generally continues to stay well above
central bank targets. The core inflation could
Second, financial distress could widen and
deepen across the world. 15
prove to be more stubborn than expected
because of, for instance, tight labour markets 10
To fight against inflation, central banks around
putting upward pressures on wages or de-
the world have raised interest rates to levels
anchoring of long-term inflation expectations 5
not seen for many years (Fig. 1.3 (a) and Fig.
in response to the pro-longed above-target
1.3 (b)). High interest rates and tight financial
inflation. 0
conditions dampened demand growth and Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Feb-21 Aug-21 Feb-22 Aug-22 Feb-23 Aug-23
helped to contain inflation, but they have
An escalation of the Russia-Ukraine war
or more than anticipated disruptions to oil
also increased burdens of households, Brazil China India Indonesia Russia Saudi Arabia South Africa
corporates and governments with high debt Fig. 1.3
Fig. 1.3 (b):
(b): Central
Central bank
bankpolicy
policyrate
rate(%)
(%)
and food supplies by the war, sanctions and
and financial institutions that offered large
counter measures could cause more shocks 6
amounts of fixed-rate loans at time of low
to global energy and food markets. The
interest rates. In the US, monetary tightening 5
Brent crude oil price has been fluctuating
in the range of $70-95 per barrel following
has triggered the collapse of five banks so 4
far in 2023 (Silvergate Bank, Signature Bank,
a significant surge immediately after the 3
Silicon Valley Bank, First Republic Bank, and
outbreak of the war. The consensus view now
Heartland Tri-State Bank). The collapse of 2
is that the world oil price will be around 80-
three banks last March led to large selloffs of 1
85$ per barrel in 2023 and 2024 on average.
banking stocks and a more than 20% drop
These projections assume that demand 0
in NASDAQ banking index. More recently,
grows more slowly amid weak global GDP
Moody’s cut ratings of 10 US banks and put -1
growth and that there is no significant
some big names in the sector on downgrade Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Feb-21 Aug-21 Feb-22 Aug-22 Feb-23 Aug-23
worsening in supply conditions. However,
watch. The banking sector problem in the
if oil supply conditions worsen significantly US Euro area UK Japan Korea Canada
US has also prompted concerns over its
due to an escalation of the war or more than
contagion to Europe and elsewhere. Although Source: The Bank for International Settlements web site (accessed 15 September 2023).
anticipated disruptions by the war, sanctions
banks globally are now in a stronger position
and counter measures, oil prices could soar
than one and half decade ago, the possibility 2 IMF. Fiscal Monitor April 2023. Accessed 4 Aug 2023.

18 19
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

Fig.Fig.
1.4 1.4
(a):(a):
Gross government
Gross governmentdebt,
debt, developed economies
developed economies (%(% of GDP)
of GDP) international payments, and re-shoring and household consumption, falling housing
friend-shoring production. These measures, investment and shrinking exports. Although
often implemented together with the exercise t h e C h i n e s e g ove r n m e n t h a s re ce n t l y
Major advanced economies (G7)
of the so-called long-arm jurisdictions, are introduced a series of measures to stimulate
increasingly curtailing global trade and cross- d o m e st i c co n s u m p t i o n a n d e n co u ra g e
Advanced economies
border capital flows; restricting skill mobility private sector investment, it remains to be
and technology diffusion; increasing costs of seen how long these measures will take effect
Euro area
production, doing business and finance; and and how effective they will be. Furthermore,
constraining global growth. China's economy faces risks such as a larger-
European Union than-expected downturn in the real estate
Other advanced economies (Advanced A recent global risks perception survey by sector due to excess housing stock in some
economies excluding G7 and euro area) the World Economic Forum ranked “geo- 3
cities and loss-making, liquidity shortages
economic confrontation” including sanctions, and debt defaults for some developers, slow
0 20 40 60 80 100 120 140
trade wars and investment screening the third progress in resolving local government debt
2023 2019 most severe risk with the greatest potential restricting their ability to support economic
impact on a global scale over the next two growth through fiscal expansion, and further
Fig. years. A recent study by IMF staff shows that deterioration of the external economic
Fig. 1.4
1.4(b):
(b): Gross governmentdebt,
Gross government debt,developing
developingeconomies
economies(%(%
of of GDP)
GDP) trade fragmentation alone could cost the environment affecting exports. China's
world up to almost 7% of its combined GDP economy accounts for more than 18% of the
La�n America and the Caribbean global economy (measured at PPPs) and
in the long term. If technological decoupling
4

Emerging and developing Asia is added, some countries could see long term contributes about a third of global growth,
losses of up to 12% of GDP. The full impact and China is the world's largest trading
Emerging market and developing… would likely be even greater if restrictions on country and a major trading partner of more
cross-border migration, reduced capital flows, than 140 countries and regions around the
Sub-Saharan Africa
and a decline in international cooperation world. If China's economic growth does not
Middle East and Central Asia in tackling global challenges are taken into meet expectations, it will have a significant
account, in addition to trade restrictions and impact on global growth.
Emerging and developing Europe
barriers to the spread of technology. The
0 20 40 60 80 100 study also shows that under these scenarios,
l owe r - i n co m e co n s u m e r s i n a d va n ce d
2023 2019
economies would lose access to cheaper
Source: The IMF web site. Accessed 15 September 2023. imported goods, and small, open-market
economies would be particularly hard-hit.
in developing countries, by undermining year and half, the war has continued and is As developing economies would no longer
investor and consumer confidence and now the largest spot of geo-political tensions benefit from technology spillovers that have
constraining both demand and supply, could of the world. In the meantime, tensions in boosted productivity growth, they would
reduce global growth through their direct the Middle East, Korean Peninsular, and more fall further behind, instead of catching up to
impacts on developing countries themselves recently US-China relations show no signs of advanced economy income levels.
and indirect impacts on developed countries, lessening. Geo-political tensions are leading to
even if not triggering a financial crisis. geo-economic and -financial fragmentations Fourth, China's economic growth could be
a s s o m e co u n t r i e s i n c re a s i n g l y re s o r t lower than anticipated.
Third, geo-political tensions could lead t o u n i l a t e ra l e c o n o m i c s a n c t i o n s a n d
to greater geo-economic and -financial weaponization of economic policies in order As mentioned earlier, China's economic
fragmentations. to weaken the opposite countries. These data in recent months has been less than
have included imposing trade restrictions and s a t i s f a c t o r y, d r a g g e d d o w n b y w e a k
T h e R u s s i a - U k ra i n e w a r a n d We s t e r n embargoes, starting trade wars, seizing assets
sanctions against Russia have caused major of target countries, limiting access to cutting- 3 https://www.weforum.org/reports/global-risks-report-2023/in-full/1-global-risks-2023-today-s-crisis. Accessed 15
shocks to world commodity markets and edge technologies and high-tech products, September 2023.
were among key contributors to rising global screening investment, banning foreign direct 4 Shekhar Aiyar, et al. Geoeconomic Fragmentation and the Future of Multilateralism. IMF Staff Discussion Note (SDN/
inflation and economic slowdown. After one investment, removing banks from SWIFT 2023/001). January 2023. Cost of fragmentation_IMF 2023.pdf. Accessed 15 September 2023.

20 21
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

1.3 Policy priorities Interest rates have been raised to the levels
not seen for many years in a large part of
the world. In the coming months, central
To reduce the risks and support global
banks must walk a fine line—they need
economic recovery and growth, the
to ensure that monetary tightening is not
global community should work together
too much to lead to a hard landing for the
to address both short- and longer-term
economy and financial instability, or is ended
challenges. Policy priories going forward
too early to make inflation to resurge. They
include (i) continuing the fight against
should closely monitor and assess economic
inflation, while maintaining financial
data and make monetary policy decisions
stability; (ii) consolidating the fiscal position,
accordingly. To avoid large market reactions
while protecting vulnerable groups; (iii)
to policy changes, policy messages need
accelerating structural reform to address
to be carefully communicated. With highly
binding constraints to long-term growth;
integrated global financial markets, policy
and (iv) pursuing international cooperation
makers—especially in advanced economies—
and multilateralism to deal with common
will have to consider not only impacts of
challenges, including reducing poverty,
policy changes on their domestic economies,
protecting environment and responding to
but also spillovers to other markets, especially
climate change and resolving cross-country
developing countries.
conflicts and reducing geo-political tensions.

Monetary tightening should be implemented

Continuing the fight against inflation, while
in tandem with close monitoring of financial
maintaining financial stability.
sector risks and strengthened supervision of policy measures to control financial risks Fiscal deficits need to be brought down to
financial institutions. Countries should make and maintain financial stability. Isolated rebuild fiscal space, and this is urgent for
Monetary tightening has been effective in
more progress in implementing Basel III an episodes of financial institution distress need those with already unsustainable public debt
containing inflationary pressures so far, but
international regulatory framework for banks, to be managed carefully when occurring by levels. Moreover, many low-income countries
inflation remains elevated around the world.
remove oversight gaps for nonbank financial deploying tools including liquidity support face the daunting challenge of meeting their
In the US and Euro area, inflation is well
institutions, and employ macro-prudential to prevent them from developing into a sustainable development goals (SDGs) that
above central banks’ 2% long-term target.
systemic crisis, while mitigating the risk of has been disrupted by the pandemic and
moral hazard. Developing countries should that requires large fiscal spending, and many
continue to strengthen their macroeconomic advanced and emerging market economies
fundamentals and reduce vulnerability to will have to address mounting spending
external shocks, and use policy tools in pressures, including those from infrastructure
disposal including temporal capital control investment, climate change mitigation and
when necessary. Advanced and developing adaption, and provision of pension and
countries should work together to fight healthcare in response to population ageing.
inflation and achieve a soft landing for the
global economy. Fiscal consolidation requires both
expenditure and revenue measures. The exact
Consolidating the fiscal position, while mix of consolidation measures will depend
protecting vulnerable groups. on country circumstances. In general, the
expenditure measures involve cutting current
Rising levels of public debt following the expenditure by improving government
COVID-19 pandemic have raised the issue of e f f i c i e n c y a n d e l i m i n a t i n g u n t a rg e te d
fiscal consolidation now and in the coming subsidies (such as on fuels), while protecting
years for many countries. While economic public investment and targeted support for
recovery and surging inflation may have the most vulnerable groups. The revenue
h e l p e d t o re d u c e d e b t - t o - G D P ra t i o s measures include hiking taxes on incomes,
somewhat, the ratios remain high and well properties, consumption (e.g., VAT and
Image source: United Nations official website above pre-pandemic levels in most countries. sin tax), and emissions and environmental

22 23
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 1: GLOBAL ECONOMIC OUTLOOK, RISKS AND POLICY PRIORITIES

pollution and improving tax collection and and the level needed to meet development
administration. In cases in which countries goals, and narrowing or eliminating these
are in or at high risk of debt distress, gaps can not only boost long-term growth,
achieving debt sustainability may require but also support short-term economic
not only fiscal consolidation, but also debt recovery. In particular, investment in green
restructuring. Successful fiscal consolidation infrastructure can support economic growth,
requires mitigating negative social and while contributing to tackling climate change
political repercussions by means such as (see more discussions in Part 4 of this
early and regular engagement with key report). Boosting global potential growth
stakeholders and putting in place an effective also requires increased investment in human
communication strategy. 5
capital to make up the losses caused by the
pandemic and fill in the gaps that existed
Accelerating structural reform to address before the pandemic. It has been noted
binding constraints to long-term growth. that improvements in education can boost
labour force participation, as better-educated
The pandemic in the past several years workers tend to be more firmly attached to
diverted the attention of policy-makers to labour markets. According to World Bank
managing the health crisis, slowing down the estimates, reforms associated with higher
progress in implementing structural reform. physical capital investment, enhanced human
This could have negative implications for capital, and faster labour-supply growth
long-term global potential growth. With the could raise annual potential growth by 0.7
pandemic over now, it's high time to shift gear percentage point over the period 2022-30, Image source: ©FAO/Atul Loke

to address binding constraints to long term both globally and in developing countries. 6

development and boost potential growth. Global potential growth can be further tensions can reduce or prevent geo-economic
Higher physical capital investment including boosted by reforms to improve business Pursuing international cooperation and and -financial fragmentation. Lastly, closer
spending on infrastructure is key to boosting environment and strengthen governance, m u l t i l a te ra l i s m to d e a l w i t h co m m o n international cooperation is needed to help
potential growth. There are large gaps thereby facilitating private investment and challenges. fiscally stressed low-income and lower
between current spending on infrastructure stimulating innovation. middle-income countries to manage their
The multiple challenges the world is fiscal difficulties through debt relief or
facing make international cooperation restructuring. The global community should
and multilateralism even more important. work together to ensure these countries also
To achieve a soft landing for the global have needed financial resources to make
economy, central banks should coordinate significant progress in reducing poverty and
monetary policy closely through global achieving SDGs and to take climate actions,
processes such as G20. Policy coordination by providing more bilateral and multilateral
may enable the world’s major central banks funding support.
to achieve the goal of containing inflation at
a lower cost than when each takes actions
in isolation. It will also enable developing
countries to better prepare for weathering
external shocks. International cooperation
in areas of coordinating climate policy,
mobilizing green finance, developing and
sharing green technologies, and building
capacity is critical to accelerating the
Image source: Patricia Breuer Moreno
transition to the green economy and meeting
the global climate goal. Countries should
5 Vybhavi Balasundharam, et al. “Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design”. IMF resolve trade disputes under the framework
Working Paper, WP/23/63, March 2023. of the World Trade Organization. Pursuing
6 World Bank. Global Economic Prospects. Washington DC. June 2023. multilateralism in addressing geo-political

24 25
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

marked an unexpected shift away from ultra- foreseeable future. They have substantially
loose monetary policy and the experimental increased the risks of financial fragmentations
tool of yield curve control. At the beginning a s s o m e co u n t r i e s re s o r t to u n i l ate ra l

Chapter 2: of the year, the reopening of China's economy

f u e l e d i nve sto r o p t i m i s m fo r a ro b u st
economic sanctions and weaponization
of economic policies in order to weaken
Global financial market review recovery. However, the actual recovery fell
somewhat short of expectations, leading to a
their rival countries. As a consequence, the
rising fragmentation risks of global financial
and outlook significant market correction. system leads to the recent surge of interest
in de-dollarization. Although the US dollar
Despite the aforementioned drivers of continues to be the dominant currency of
The global financial market experienced wreaked havoc on the global financial market. fluctuations, the market has demonstrated the current international monetary system
large fluctuations through the first three A standoff in the US Congress over the remarkable resilience and exuberance thus (IMS) in terms of its crucial role in invoicing
quarters of the year, mainly due to challenges legislative debt ceiling brought the world’s far. Major developed economies' equity international trade, settling cross-border
testing the resilience of the financial system leading economic powerhouse to the brink markets have consistently rebounded from transactions, and serving as a store of wealth
in the aftermath of the Covid-19 pandemic. of default in early summer. Concurrently, their low points. As of mid-September, the for individuals and nations, the current
In March and April, several US regional ongoing fallout from the Russia-Ukraine MSCI G7 index is only about 10% below its trend towards de-dollarization may be
banks, including Silicon Valley Bank (SVB), war and subsequent financial sanctions previous high from 2021, despite a substantial more sustainable given the support of many
Silvergate Bank, Signature Bank and First led to intermittent market dislocation. The increase in interest rates since then. The bond emerging markets. Nevertheless, even the
Republic Bank (FRB), failed one by one due escalating competition between the US and market suggests that the United States may most optimistic advocates of de-dollarization
to their mismanagement of interest rate and China also contributed to market volatility, experience a turning point in its monetary cannot envisage that the USD abdicates from
liquidity risks. This triggered a market sell- amplifying the fragmentation risks of the policy change early next year, while European its dominance of the IMS soon. Moreover, it is
off of bank shares in the world that posed a global economy and financial system, as more countries may need to wait longer to witness important to note that any change in the IMS
serious threat to the global financial stability. sectors and businesses found themselves the European Central Bank's first policy rate could bring about greater volatilities and risks
The repercussion on the other side of the caught in the crossfire. cut. At the same time, emerging market as history has shown.
Atlantic was a bank run on Credit Suisse, a currencies are also finding some relief as the
globally systematically important bank with The substantial uncertainties surrounding interest rate hikes in the US are coming to
a history spanning more than a century. This policy changes and their outcomes further an end. Overall, the financial market appears
event forced Swiss authorities to advance its intensified market volatility. Investors were to have incorporated a scenario of a soft
merger with UBS to avert a blunt bank failure. taken aback by the unpredictable nature of landing.
transatlantic monetary policy, set against a
Adding to the banking system's severe backdrop of persistent inflation. In Japan, Looking ahead, financial risks and
strain, political and geopolitical risks also the change in the central bank governorship vulnerabilities loom large. Uncertainties
related to policy changes continue to cast a
shadow. Persistent inflation could lead to a
scenario of higher-for-longer interest rates
and strained market valuations. It could be
compounded by a slowdown in growth that
occurred more swiftly and profoundly than
anticipated. That being said, the confirmation
of a soft-landing is still pending. A stagflation
scenario, a combination of stubborn inflation
and anemic growth, will lead to sharp
corrections of the market. The monetary
authorities and financial regulators should
keep vigilant on the associated vulnerabilities
to guard against systemic risks.

In the meantime, geopolitical risks, such as

the Russian-Ukraine conflict and US-China
competition, show no signs of receding in the

26 27
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

2.1 Two important risk Silicon Valley Bank (SVB), Silvergate Bank, Fig. 2.1: Persistent monetary tightening weighing on the liquidity of US banking system

events and their impact

and Signature Bank, due to a rapid withdrawal
of depositors. The repercussions of these Billion USD US Bank Deposits
on international capital bank failures quickly spread to other parts of
the world and caused market gyrations, aided
18,200

flow by the dissemination of sensational news 18,000 Stress

through social media. It once seemed that
17,800 Period
a systematic collapse of the global banking
Before diving into the development of
system was imminent. Swiss authorities 17,600
global financial market, it is crucial to revisit
responded swiftly by announcing a state-
some important risk events early this year
supported merger between Credit Suisse 17,400
which put global financial stability to test.
and UBS, as panicked investors scrambled
Two notable episodes of financial market 17,200
to reduce their exposure to Credit Suisse,
turmoil emerged, namely the crisis in US
regional banks and the standoff in the US
pushing it to the brink of liquidation. This 17,000

2023-08-23
2023-08-09
2023-07-26
2023-07-12
2023-06-28
2023-06-14
2023-05-31
2023-05-17
2023-05-03
2023-04-19
2023-04-05
2023-03-22
2023-03-08
2023-02-22
2023-02-08
2023-01-25
2023-01-11
2022-12-28
2022-12-14
2022-11-30
2022-11-16
2022-11-02
2022-10-19
2022-10-05
2022-09-21
2022-09-07
2022-08-24
2022-08-10
2022-07-27
2022-07-13
2022-06-29
2022-06-15
2022-06-01
forced merger marked the first failure of a
Congress over the Federal government debt
globally significant bank since the 2008-
ceiling. Although these events originated in
2009 global financial crisis.
the US, their impacts were felt worldwide.
Fortunately, due to the timely intervention
Fortunately, the authorities responded with Source: US Federal Reserve and IFF
of the authorities, these risk events did
prompt policy actions. In addition to the
not escalate into a perfect storm in the liquidity within the banking sectors of the US from stringent requirements such as stronger
merger of the Swiss banks, the US Federal
global financial system. However, they still and Eurozone can be attributed to the swift capital and liquidity rules, comprehensive
Deposit Insurance Corporation announced full
constitute a warning for the global financial changes of monetary policy in recent years. resolution plans, and rigorous stress testing.
protection for depositors of stressed banks
system. With the US dollar's dominance in (Fig 2.1) The ultra-loose policy measures Unfortunately, this relaxed supervision
to prevent further deposit flight. The situation
the international monetary system, adverse implemented during the Covid-19 pandemic, encouraged risk-taking behavior among some
stabilized as summer approached, although
events in the US financial system can easily followed by a rapid tightening in response to beneficiary banks, including SVB, Signature
concerns about financial stability continued
spill over to the rest of the world, particularly surging inflation, created significant liquidity Bank, and First Republic Bank, and partially
to linger among investors.
impacting emerging markets. challenges for banks. The US Federal Reserve contributed to their failures.
reported a decline of $597 billion in uninsured
Reflecting on this episode, investors will find
US regional bank crisis deposits in the US banking system in the first Lastly, social media played a significant
several underlying structural factors that
quarter of 2023, equivalent to a sequential role in catalyzing the banking crisis. During
will persist at least in the near future. Firstly,
In March and April, there was a series of change of -7.8% from the end of 2022 or a the period of strain on the banks, various
the rapid and unpredictable fluctuations in
failures among US regional banks, including year-on-year decline of -15.2%. This placed social media platforms, particularly Twitter,
immense pressure on regional banks heavily demonstrated their ability to quickly spread
reliant on uninsured deposits, such as the negative news about the banks, undermining
failed SVB and Signature Bank. market confidence. Patrick McHenry, the chair
of the House Financial Services Committee,
Secondly, the rollback of regulations by even referred to the collapse of SVB as the
the US Congress also contributed to the "first Twitter-fueled bank run." One recent
crisis in the country’s regional banks. In an study provides empirical evidence of how
7

attempt to relieve regulatory burdens on social media amplified balance sheet risks of
small and medium-sized banks, the Trump stressed banks and accelerate the outflows
administration pursued an amendment to the of uninsured deposits. The study quantified
Dodd-Frank Act in 2018. This amendment that US banks with high exposure on Twitter
aimed to raise the threshold for enhanced experienced a 6.6 percentage point greater
regulatory standards from $50 billion to decline in stock market value leading up to
$250 billion, exempting medium-sized banks the failure of SVB. Moreover, the convenience

7 Cookson, J. Anthony and Fox, Corbin and Gil-Bazo, Javier and Imbet, Juan Felipe and Schiller, Christoph, Social
Media as a Bank Run Catalyst (April 18, 2023). Université Paris-Dauphine Research Paper No. 4422754, Available at
SSRN: https://ssrn.com/abstract=4422754 or http://dx.doi.org/10.2139/ssrn.4422754

28 29
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

of digital banks makes it extremely easy to been raised multiple times throughout history. Fig. 2.3: IIF Tracker: Total Portfolio Flows into Emerging markets
run a bank: investors do not need to queue However, the increasingly polarized political
up at the bank door but just move their landscape in the US led both Republicans and IIF Tracker: Total Portfolio Flows into Emerging Markets
fingers to complete deposit withdrawals. In Democrats to adopt a brinkmanship strategy $ billion
the age of social media and digital banking, during negotiations for raising the debt 100 China Debt Flows
bank runs can happen with lightning speed ceiling. The inability to raise the debt ceiling China Equity Flows
and on a scale not comparable to that of a created significant uncertainty in financial EM ex-China Equity Flows
80 EM ex-China DebtFlows
decade ago. markets, resulting in heightened volatility and
declining equity prices. The cost of insuring
T h e U S co n g re s s s t a n d o f f o f Fe d e ra l US debt against default surged, reflecting 60
government debt ceiling rising investor concerns about the risk of a
US default. 40
The resilience of the US economic and
financial system was tested by the 2023 On May 27, President Biden and House 20
US debt ceiling crisis, which was another Speaker Kevin McCarthy reached a deal
significant event with far-reaching to increase the debt ceiling while capping
consequences. On January 19, 2023, federal spending. The resulting bill, known as 0
the US federal government reached its the Fiscal Responsibility Act of 2023, passed
predetermined debt ceiling set by Congress. the House on May 31 and the Senate on June -20
Consequently, theTreasury was unable to 1. President Biden signed it into law on June 3, Jun 21 Dec 21 Jun 22 Dec 22 Jun 23
issue new debt until a new debt ceiling was effectively ending the crisis.
Source: Bloomberg, IIF,National Sources.
agreed upon, raising concerns about the
Source: National Sources, Bloomberg, IIF, IFF
government's ability to fulfill its financial H o w e v e r, t h e s t a n d o f f h a d s e r i o u s
obligations, including debt repayments, consequences. In August, Fitch Ratings,
salaries for federal employees, and payments one of the major international credit rating repeated debt-limit political standoffs and appetite deteriorated quickly. Fortunately,
fo r p ro g ra m s l i ke S o c i a l S e c u r i t y a n d agencies, downgraded the US Long-Term last-minute resolutions. According to the the adverse impact of the US regional bank
Medicare. Foreign-Currency Issuer Default Rating (IDR) bipartisan CBO’s projections, the US fiscal crisis is proved to be short-lived. International
from 'AAA' to 'AA+'. Fitch Ratings justified situation is set to deteriorate in the next capital flows to emerging markets resumed
The standoff surrounding the debt ceiling was this downgrade by citing the erosion of decade. (Fig 2.2) Going ahead, this could its recovery from April. The worries over the
primarily a political issue. The debt ceiling has confidence in fiscal management due to lead to more standoffs in the Congress and US debt ceiling in May slowed the moment
greater volatilities in the market. for a while. But funds continued to flow to
Fig. 2.2: Elevating pressure on the US fiscal situation emerging market as a whole in June and July
Billion USD Risk events’ impact on international capital on investors’ improved risk appetite as well as
flow their reignited hope for the end of policy rate
3,000 125%
hikes.
2,500 120% The abovementioned risk events have exerted
significant impacts on international capital
115% flows along with other factors. As shown in
2,000
110% Fig 2.3, international capital flowed back to
1,500 emerging markets strongly thanks to the
105% economic reopening of China and optimistic
1,000 market expectations towards the policy
100%
rate decision of major central banks. At the
500 95% beginning of the year, people anticipated that
the inflation will lose their momentum soon
0 90% in advanced countries, causing monetary
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 authorities to halt their interest rate hikes.

Fiscal Deficit Total Public Debt

The outbreak of US regional bank crisis
Source: CBO and IFF reversed the trend in March as investors’ risk

30 31
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

2.2 Currency performance against the USD, albeit to different degrees,

compared to their levels at the beginning
The outlook of currencies and portfolio flows
is still bearing great uncertainties. Although
the sovereign bonds of emerging markets, as
represented by JP Morgan’s EMBI Global Core
heavily influenced by of the year. Over the same period, the the policy rate hike in the US is expected Index, fare better than their peers of advanced

policy rates Canadian dollar was almost unchanged

while Norwegian Krone and Swedish Krona
to come to an end soon, the currently high
interest rate could be maintained till mid-
economies. The Index registered a positive
growth of 1.9% till September 25, showing that
depreciated to a certain degree. 2024, due to persistent inflation. Meanwhile, investors’ sentiment of emerging markets have
Through the first three quarter of the year, the balance sheet reduction of the Fed, somewhat recovered from the low point nine
the USD has shown a large degree of two- The Japanese Yen has exhibited a large along with the ECB, is set to continue in the months ago.
way fluctuations, mirroring significant gaps degree of depreciation against the USD since following months. That being said, the overall
between the Fed policy decisions and the beginning of the year. As of September monetary condition of major developed Global stock markets depict a different
market expectations that stem from high 25, the exchange rate of Japanese Yen versus economies still tilts towards the tightening picture from the sovereign bond market.
uncertainties of inflation outlook. In the first USD depreciated to 148.8, 13.2% lower than side. It will put persistent pressure on the In Fig. 2.5, almost all the stock index of
quarter, the stubborn inflation outturns sent the level of end-2022. Apparently, the BOJ’s currencies of emerging markets. advanced countries reap good returns in
the DXY to above 105 as the market realized tinkering of YCC tool failed to offset the 2023. Particularly for the NASDAQ index
that the tightening policy cycle is likely to
hold longer than previously expected. The
impact of the widening yield gap between
the US and Japan. Moreover, the Japanese
2.3 Performance of other of the US and Nikkei 225 in Japan, both of
them increase by above 25% in the first three
outbreak of US regional banking crisis in authorities seem comfortable with a weak major financial assets quarters of the year. It is noted that such a
March-April led to the plunge of the DXY in currency and have been reluctant to intervene gain is achieved in amidst of a number of risk
the ensuing months as the market believed into the FX market to boost its currency Global financial assets are largely driven events, including the US regional bank crisis
that the Fed has to end its policy tightening value. by monetary authorities’ policy conducts and Congress standoff of debt ceiling. Indeed,
soon in the face of financial instability. as well as the market expectation of their both index has been through violent ups-and-
Accordingly, the DXY once fell below 100 Among the emerging market, their currency further actions. Among the asset classes, the downs early this year. However, stock markets
in mid-July, the first time since April 2022. performance since the beginning of the year performance of sovereign bonds in advanced of advanced economies become optimistic
However, the DXY bounced back in summer. has been quite in tandem with their policy economies appear to be weak due to their again towards the end of summer despite the
In mid-September, the DXY rose above 105 reactions to the US Fed. For some emerging monetary authorities’ persistent tightening tightening monetary conditions and lingering
again. markets that actively follow the US Fed to efforts. As shown in Fig. 2.5, the year-to- risks in the US banking sector.
hike their policy rates, their currencies tended date (as of September 25) returns of US and
On the flip side, the performance of other to show a greater strength. On the contrary, a German 10 year Treasury bond are -5.6% and At the same time, the stock markets of
currencies against the USD depends on to number of emerging markets, mainly in Asia, -3.4% respectively, reflecting the fact that emerging economies underperform thus
what extent their central banks follow the US which tightened their monetary policy at a the market underestimated the magnitude of far. The MSCI Emerging Market Index, which
Fed to tighten their monetary policy. (Fig 2.4) pace milder than the US or even loosened policy rate hikes in the current tightening cycle are composed of large-and-mid-cap listed
Among the advanced economies, a number their monetary policy, witnessed relatively at the beginning of the year. Comparatively, firms across 24 Emerging Market (EM)
of currencies, including the Euro, Sterling, weaker performance of their currencies.
Swiss Franc, and Danish Krone, appreciated
Fig. 2.5: Year-to-date return of selected financial assets (as of September 25, 2023)

Fig. 2.4: Currency Performance versus accumulated interest rate hikes (as of August 15, 2023) Bitcoin 58.0%
Nasdaq index 26.2%
Nikkei 225 25.2%

20% WTI Crude Oil 12.8%

S&P 500 12.5%
Mexico Colombia German DAX 11.7%
Currency exchange rate changes

Brazil Brent Crude Oil 9.3%

10% Euro Stoxx 50 Index 8.6%
Switzerland Hungary RBOB gasoline 4.6%

Indonesia Canada Peru Dow Jones Industrial Index 2.5%

Denmark UK USD Index 2.1%
0% HK
Thailand Malaysia Singapore EU
EMBI Global Core Index 1.9%
Chile GBP 1.2%
Czech Australia New Zealand
China Korea Sweden Shanghai Composite Index 0.9%

-10% EUR -0.6%

Norway MSCI Emerging Market Index -1.9%

Japan South Africa MSCI BRIC Index -2.0%

German 10y Treasury Bond -3.4%
-20% RMB -5.2%
US 10y Treasury Bond -5.6%
Shenzhen Component Index -8.1%
Hang Seng index -10.4%
-30% JPY -13.2%

Russia Growth Enterprise Index -14.6%

Russian Ruble
Cumula�ve interest rate hike since March 2022 -25.2%

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Stock Currency Bond Energy

Source: WIND and IFF Source: WIND and IFF

32 33
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

economies, registered a slightly negative system given that the existing financial Fig. 2.6: Real residential property price developments in selected economies (y/y changes)
return so far this year. In China, Shanghai vulnerabilities, known or unknown, could
Composite Index registered a merely growth quickly lead to new risk events and pose 15.0%
of 0.9% while Shenzhen Composite Index systematic challenges to financial stability. In
and Hang Seng Index declined by -8.1% our opinion, the most likely catalyst of new
10.0%
and -10.4% respectively, indicating that the risks events is the extended period of higher
actual recovery of China’s economy since its interest rates.
reopening in November 2023 has somewhat 5.0%
fallen short of investors’ expectations. As discussed in Chapter 1, the inflation
pressure could be persistent due to not only
Energy prices appear to be strong albeit with volatile energy and food prices in amidst 0.0%

Nov-22
Jan-23
Nov-21
Jan-22

May-22
Jul-22
Sep-22

Mar-23
Nov-20
Jan-21

May-21
Jul-21
Sep-21

Mar-22
Nov-19
Jan-20

May-20
Jul-20
Sep-20

Mar-21
Nov-18
Jan-19

May-19
Jul-19
Sep-19

Mar-20
May-18
Jul-18
Sep-18

Mar-19
Mar-18
large up-and-downs along the path this year. of the ongoing Russia-Ukraine war but also
The WTI or Brent crude oil futures increased disrupted global supply chains amid the -5.0%
by 12.8% and 9.3% compared to nine months ever-strengthening de-globalization trend.
ago respectively. After the Russia-Ukraine war The monetary authorities of major advanced
comes to its second year, the market still has economies are likely to maintain their policy -10.0%

concerns over the war’s adverse spillover to rates at the current levels for a longer time Advanced economies (aggregate) United States Emerging market economies (aggregate) Euro area
the global commodity market. Over the same after the pause of further hikes.
period, the price of RBOB gasoline futures Source: BIS and IFF

increased by 4.6%, suggesting the still strong Such a higher-for-longer scenario of interest
fundamentals in the US economy. rates could have significant impacts on almost In addition to the banking sector, the impact after the US Fed started its rate hiking course.
all the important sectors in the economy and of high interest rates is pronounced in a The residential property markets in advanced
The price of Bitcoin experienced a strong pose serious challenges to financial stability. number of areas including Nonbank financial economies held well before the last quarter of
rebound from last year’s legendary landslide. In particular, it will raise debt servicing costs intermediaries (NBFIs) and the property 2022. It might be due to the fact that a lion’s
Even so, its current price is still below half for households, businesses and governments, market. The NBFI ecosystem is very broad share of the mortgages loans are extended
of its historical peak recorded in November making it increasingly difficult for borrowers and highly heterogeneous across different with a fixed rather floating rate. As such,
2021. The primary culprit of the crypto assets’ to service or refinance their debt. In turn, regions. As financial intermediaries, the households in these jurisdictions are less
woes in 2022 is the fast policy tightening of financial strains of these borrowers will affect majority of NBFIs share the features of leverage directly exposed to higher interest rates. For
major central banks, which led to a disorderly the lenders through the channels of bank operation, liquidity mismatch and high levels of example, 80% of mortgages in the US were
deleveraging in the universe of crypto assets. loans or market debt issuances. The asset interconnectedness with other parts of financial originated with a fixed rates lasting 15 years
quality of financial institutions will deteriorate system. Indeed, part of NBFIs are particularly or more. This ratio is significantly higher than

2.4 The interest rate risk if high interest rates hold longer. vulnerable to the interest rate changes due to
the risks associated with these features. For
around 50% in Germany, which can partially
explain why the US housing prices hold firmer
of higher-for-longer High interest rates will also weigh on market example, the UK pension funds, an important than their Eurozone peers. Moreover, as pointed
valuation of financial assets, in particular form of NBFIs, slid into a crisis in September out in section 1, the monetary policy tightening
The global financial system have successfully the assets with longer duration. It could 2022 when a sharp rise of UK gilt yields led is set to last longer in the Eurozone than in the
weathered a host of risk events since the significantly amplify market volatility and to large mark-to-market losses for them. US. Looking forward, the residential property
start of the ongoing policy tightening cycle even lead to liquidity crunch. Moreover, the Moreover, as analyzed by the IMF’s Global sector in Europe might be subject to a greater
in the aftermath of the Covid-19 pandemic, related valuation adjustments could further Financial Stability Report of April 2023, asset pressure from high interest rates than the US.
including the recent US regional bank crisis aggravate the mismatch between the asset management companies, insurance companies,
and congress standoff of debt ceiling. To a
certain extent, it has proved the effectiveness
and liability sides of financial institutions,
adding difficulties to their liquidity
hedge funds, structure finance vehicles and
central counterparties are also likely to fall
2.5 Financial
of regulatory reforms on global financial management in an environment of persistent victims of high interest rates. fragmentation risks
system in the aftermath of 2008-2009 global
financial crisis. Meanwhile, the authorities’
monetary tightening. That being said, the
US regional bank crisis could be repeated The property sector is also sensitive to interest
give new impetus to de-
interventions helped to prevent the risk in the US or somewhere else if large-scaled rate changes. As shown in Figure 2.6, the dollarization
contagion to other regions and other parts revaluation of FI holding assets drive their property prices started to correct last year,
of financial system. Nevertheless, market customers to move deposits and investment albeit at different paces. In emerging markets, Rising geopolitical tensions have intensified
participants have no reason to be complacent away from them in a short time. the property market correction came as early concerns about the risk of global financial
about the risk outlook of global financial as the second quarter of 2022, immediately fragmentation. The ongoing Russia-Ukraine

34 35
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

have already prompted a number of advanced system (IMS) for a long time, evidenced by Table 2.1: USD dominance in IMS (functional view)
countries to impose various forms of financial Fig 2.7. It is widely used to settle cross-border
sanctions on Russia, including the freezing transactions, both in trade and finance. It
Functions of International
Russia’s central banks’ asset and removing is the primary invoicing currency for major USD dominating performance in the areas
Currency
many Russian banks from the SWIFT system, global commodities, including crude oil,
aiming to weaken the country’s financial copper, iron ore etc. USD-denominated assets • Primary invoicing currency for major global commodities,
capacity and severe its connections with the make up the majority of foreign reserves held
including crude oil, copper, iron ore etc.
external world. by governments and monetary authorities
around the world. Furthermore, the private Unit of Account: • From 1999 to 2019, the USD was used for 96% of trade
Given that geopolitical tensions show no sectors outside the US also consider the invoicing in the Americas, 74% in the Asia-Pacific region, 20%
signs of receding in the Middle East, Korean greenback to be an essential form of storing in Europe, and 79% in the rest of the world
Peninsula, and more recently US-China their wealth.
relations, the market worries about the • In addition to cross-border invoicing, the USD cash serves
possibility that similar financial sanctions To gain a better understanding of the as a means of payment outside of the USA for overseas
could be weaponized in the future, along USD''s dominant role in the current IMS, it is residents.
with other forms of restrictions including helpful to examine it through the lens of the Medium of exchange
embargoes, trade wars, seizure of assets, international currency’s functions: serving as • The banknotes (cash) of the USD have the largest amount of
limiting access to capital and technology, a unit of account, a medium of exchange, and overseas circulation, estimated to be around USD 950 billion
s c re e n i n g o f i nve st m e n t e tc . P e o p l e ’s a store of value. (Table 2.1) as of Q1 2021 (versus Euro: USD 350 billion equivalent)
concerns could eventually lead to global
financial fragmentation. The de-dollarization The interest in the de-dollarization is on the • As of Q4 2022, the USD still accounted for 58% of globally
could be one of unintended consequences of rise disclosed official foreign reserves (versus Euro: 20%),
the financial fragmentation. although this has declined significantly from its position of
There has been a recent surge in interest Store of Value
71% in 2000.
The USD dominance as an international among the international community
currency regarding de-dollarization, which is being • In private sector, more than 60% of foreign debt instruments
evidenced by a number of emerging signs. are issued in USD, well ahead of the Euro (23%).
Th e U S d o l l a r h a s b e e n t h e d o m i n a n t A few Gulf countries, including Saudi Arabia
currency in the current international monetary and the United Arab Emirates, are currently
exploring the possibility of settling their Moreover, the escalation of US-led financial
Fig. 2.7: Index of International Currency Usage crude oil exports in currencies other than sanctions against other countries have
80 the USD. In May, Brazilian President Lula and substantially raised emerging markets’
Argentine President Fernández vowed to concern about “currency weaponization” and
70
devise a mechanism that would allow their prompted them to diversify their portfolios
60
local currencies to be used in bilateral trade away from USD-denominated assets. Some
instead of the USD. Furthermore, President countries that are devising or have already
50 Lula flagged the idea of creating a common established the international clearing system
currency for BRICS countries at their August of their local currencies. They are preparing
40 summit in South Africa. for the worst scenario of global economic
fragmentation.
30
It is not a coincidence that the issue of de-
20 dollarization has gained momentum under Will this time be different?
the current circumstance. Many emerging
10 markets have long been fed up with the It is not the first time for the USD hegemony
adverse spillovers of US monetary policy, to meet with grave challenges. Over the
0 which forced them to synchronize their policy past seven decades after the World War II,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
with the Fed regardless of their economic the dominant role of the USD in the IMS has
U.S. dollar Euro Bri�sh pound Japanese yen Chinese renminbi situations. Apparently, the USD’s hegemony been tested during some episodes, including
of the current IMS constitutes the institutional the breakdown of Bretton Wood system, the
Source: Federal Reserve, "The International Role of the U.S. Dollar" Post-COVID Edition,2023 by Carol Bertaut, Bastian
von Beschwitz, and Stephanie Curcuru, IFF foundation for such spillovers. fast rise of Japanese Yen in the IMS during

36 37
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

1980s, the creation of the Eurozone etc. digital assets that could potentially become
Nevertheless, the USD can always adapt global safe assets in the future. Central banks
to the violent changes of the international worldwide are also exploring Central Bank
environment and secure a grip of dominance Digital Currencies (CBDCs) to prepare for
in the IMS. upcoming currency competition.

A co u p l e o f fa c to r s s u g g e s t t h a t t h i s Nevertheless, even the most optimistic

time might be different from previous advocates of de-dollarization cannot envisage
challenges to USD hegemony. First, past that the USD abdicates from its dominance
challengers were US allies, and their currency of the IMS soon. The current de-dollarization
competition took place amid deepening trend, which even seems more sustainable
economic and trade ties. However, the than in the past, can at most lead to certain
US now appears determined to push for diversification of international currency usage
some degree of economic fragmentation but can barely shake the USD’s dominance. In
with major competitors, particularly China particular, we expect that the diversification
and Russia. This rising risk of economic will proceed on the following fronts in terms
fragmentation could lead to a bifurcation of of its international currency functions.
the global financial system and increased use
of alternative currencies as discussed in the
previous section.

Second, technological progress has made

it possible to replace the USD in many
scenarios. The rapid growth of electronic Unit of Account: This trend will become even more
payment technology has reduced the demand pronounced if more central banks unveiled
for cash, and international travelers can now Other currencies are going to erode the share their CBDCs. The size of greenback’s overseas
use mobile payment options instead of USD of the USD in invoicing global commodity circulation will diminish.
banknotes. Additionally, the development trade. In this respect, not only China is trying
of cryptocurrencies has given rise to new to denominate their imports of crude oil and Store of Value
iron ore in the RMB but also BRICS countries
set out to push for the commodity trade Other countries used to favor USD
invoicing in local currencies. denominated assets as their foreign reserves
Moreover, there are more options available because they were the most liquid assets
for invoicing or settling the international during bad times. Nowadays, more and more
trade between non-USA countries. The Bank countries feel the need to guard against
of International Settlement is piloting an financial sanction risks associated with their
umbrella program (M-bridge) to facilitate the foreign reserves. Therefore, it become a
local-currency clearing between countries. natural choice for many countries to diversify
Several countries proactively invite foreign their portfolios towards gold and towards
institutions to participate in their self-devised nontraditional reserve currencies, such as the
clearing system for cross-border settlement. RMB.

Medium of exchange Moreover, central banks of emerging markets

can consider to sign bilateral currency swap
The popularization and development of lines with their peers of big economies,
electronic payment reduces the demand for China’s PBOC or ECB etc. These bilateral
cash. Although many foreigners will continue currency swap lines can perform as a liquidity
to hold the USD banknotes as an asset, backstop if the country falls into a liquidity
their role as a payment means is set to be crunch.
weakened among the international travelers.

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

************************************** system. Monitoring the situation in the real China's finance ministry indicate that local
estate market and its ripple effects on the government debts amount to approximately
Box: Financial vulnerabilities deteriorate in China but financial sector will be crucial in assessing RMB 37 trillion, equivalent to 30% of total
the authorities have adequate policy levers to maintain the potential risks and taking appropriate
measures to mitigate them.
GDP. However, this figure does not include
implicit debt, which some experts estimate
the stability of financial system could double the total amount of local
Indebtedness of corporate government debt if considered.

Following the Covid-19 pandemic, China's by the authorities. The market quickly lost
sector and local governments The high levels of debt in both the corporate
f i n a n c i a l st a b i l i t y i s fa c i n g s i g n i f i c a n t momentum as households became more
and local government sectors create the
challenges both domestically and externally. cautious about purchasing homes. Real
China's corporate debt stands among the potential for a wave of defaults during an
Domestically, the recovery has been slower estate developers, particularly those with
highest in the world, posing significant economic downturn. The sluggish demand
than expected, which has prolonged the stretched balance sheets, bore the brunt
concerns for its financial stability. According in the property market has already led to
process of restoring financial health for of this significant adjustment. Many private
to the Bank for International Settlements numerous real estate developers defaulting
households and corporations. The real estate developers, including some of the largest
(BIS), the ratio of gross corporate debt on their debt instruments or loans. If this
sector, particularly private developers, has o n e s , we re u n a b l e to m e e t t h e i r d e b t
to G D P i n C h i n a wa s 1 5 8 . 2 % a s o f Q 4 wave of defaults spreads to other companies
been heavily impacted by sluggish property obligations when housing sales plummeted.
2022. This exceeds the average levels of and local governments, lenders will face
demand and stringent regulations. Many This further discouraged Chinese households
advanced countries (91.4%) and emerging significant deterioration in the quality of
developers have struggled to meet their debt from buying houses amidst the uncertain
markets (106.7%). The rapid accumulation their holdings. This situation could lead
obligations, leading to concerns about the market conditions.
of corporate debt in China can be attributed to systematic risks throughout the entire
stability of the sector.
to the country's investment-led growth Chinese financial sector.
The challenges faced by the real estate
model, which encourages borrowing for
Externally, the high-interest-rate environment market have put increasing pressure on
infrastructure and real estate development.
in overseas markets, coupled with rising China's financial sector. Apart from the Financial Vulnerabilities
geopolitical risks, has put pressure on the development loans borrowed by real estate
Simultaneously, China's local government
exchange rate of the Chinese currency, developers, the mortgage loans taken by China's financial vulnerabilities are
d e b t h a s a l s o ex p e r i e n ce d s u b st a n t i a l
the RMB. This has raised concerns about a Chinese households have also resulted in exa ce r b a te d by t h e h i g h - i n te re st - ra te
growth since 2017. The official figures from
potential downward spiral between currency a substantial exposure of banks to the real
depreciation and capital outflows. These estate sector. Additionally, numerous non-
factors have contributed to negative market banking financial institutions, often referred
sentiment regarding China's financial risks. to as the shadow banking sector, have their
Despite these financial vulnerabilities, it is own exposures to the real estate market. For
unlikely that they will lead to systemic risks instance, reports have indicated that certain
due to a combination of institutional and trust companies have distributed wealth
policy factors. The Chinese authorities have management products (WMPs) to clients that
sufficient tools at their disposal to ensure are based on real estate assets. With the real
the stability of the financial sector. They can estate sector encountering difficulties, clients
implement various measures and policies to may face difficulties in withdrawing their
address the challenges and mitigate risks as funds.
needed.
In light of these circumstances, the risks to
the financial sector will persist and potentially
Financial Vulnerabilities worsen as long as the real estate market
remains in turmoil. The exposure of banks
Real estate market
and non-banking financial institutions to
the real estate sector, coupled with the
After experiencing more than two decades
challenges faced by developers and the
of rapid growth, China's real estate market
reluctance of households to engage in
entered a period of adjustment in 2021 due
property transactions, create an ongoing
to the impact of the Covid-19 pandemic and
concern for the stability of China's financial
the implementation of strict regulations

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 2: GLOBAL FINANCIAL MARKET REVIEW AND OUTLOOK

environment in overseas markets. In order of the financial system, potentially creating

to stimulate domestic demand, Chinese systemic risks.
authorities may need to implement looser
monetary and fiscal policies. However, this The aforementioned financial vulnerabilities
could widen the interest rate differential require close monitoring and timely
between China and other countries, intervention from the authorities. However,
potentially dampening the exchange rate several factors suggest that the chances of
of the Chinese currency. Additionally, rising these vulnerabilities evolving into systematic
geopolitical risks have prompted some financial risks in China remain low.
international investors to redirect their
investments away from China's financial Firstly, the Chinese government exercises
market. strategic control over the country's financial
system. It has significant influence over major
The rapid depreciation of the currency, banks, financial institutions, and corporate
coupled with increasing capital outflows, sector borrowing and investment. This
creates the potential for significant systemic control enables proactive management of
risks through a downward spiral effect. financial risks and the prevention of individual
The initial depreciation of the currency risk events from escalating into systematic
may prompt more investors to withdraw risks. The government's ability to exert
their funds from the country. Subsequently, control makes it highly unlikely for a "Lehman
the escalating capital outflows put further moment" scenario to occur in China.
pressure on the exchange rate, leading to a
self-reinforcing cycle. These dynamics pose Secondly, China's financial system is relatively
challenges to China's financial stability. The closed, with measures in place to restrict the Chinese financial system from global financial reserves, amounting to USD 3.16 trillion as of
potential for a depreciating currency and free movement of capital into and out of the shocks and reduces the risk of capital flight. the end of August 2023. These reserves serve
capital outflows can impact the overall health country. This insulation helps safeguard the as a buffer against external financial shocks,
Thirdly, the Chinese government has made allowing for currency stabilization, support to
sustained efforts over the past decade to the banking system, and fiscal stimulus during
manage vulnerabilities and enhance the downturns. Additionally, China's household
financial safety net. For instance, to address sector maintains a high saving rate, which has
the real estate bubble, China previously even increased recently due to precautionary
implemented restrictive requirements on motives. The high domestic savings provide
mortgage down payments, with a minimum ample liquidity to China's banking sector.
of 30% for the first home and 70% for the
second home. Only recently have authorities In sum, the likelihood of China's financial
st a r te d to l owe r t h e s e d ow n p ay m e n t vulnerabilities escalating into systematic
requirements to stimulate housing demand. risks is currently low. The strategic control
Furthermore, since 2018, China's authorities of the government, the relatively closed
h ave b e e n re g u l at i n g s h a d ow b a n k i n g financial system, ongoing efforts to manage
activities, leading to a substantial decline in vulnerabilities, and the presence of important
associated risks, as stated in the People's cushions in both the public and private
Bank of China's 2022 financial stability report. sectors contribute to the resilience of
This regulation helps prevent contagion from China's financial system. However, continued
the real estate sector to the financial sector. vigilance and proactive measures will be
essential to maintain financial stability in the
Lastly, both China's public and private sectors face of evolving challenges.
possess important cushions against potential
financial shocks. The Chinese government
maintains a large amount of foreign exchange

**************************************

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 3: REVIEW AND OUTLOOK ON GLOBAL GREEN FINANCE INNOVATION AND
POLICY DEVELOPMENT

environmental costs if they emit more usually have a large investment in the early
pollutants, while climate-friendly companies stage of the project and a long repayment
and green projects could acquire additional period, while banks generally have a shorter

Chapter 3: financial returns by capitalizing on green

benefits. In addition, distinguishing green
debt maturity.

Review and Outlook on Global finance also helps financial institutions with
environment-related risk assessment and
To promote further development of green
finance, on the one hand, further actions
Green Finance Innovation and Policy management. shall be adopted to explore green finance
instruments including the use of concessional
Development Th e e s t a b l i s h m e n t o f t h e S u s t a i n a b l e loans, credit guarantees, blended financing
Development Goals (SDGs) by the United and other instruments to improve risk-
Nations in 2015 and the adoption of the sharing mechanisms, to mobilize more
Paris Agreement at the 21st Session of the private sector investment and ultimately to
Foreword financing pilot program. These consensus
and agreements have further promoted
Conference of the Parties (COP 21) to the alleviate the maturity mismatch issue. On
UNFCCC are the two important milestones the other hand, Governments of all countries
the efficient operation and high-quality in promoting global action on sustainable shall continuously develop effective policy
The urgency of combating global warming
development of the green finance market. development. To rapidly transition to green, and regulatory frameworks to further cope
and the imperative demand for sustainable
development have prompted the international low-carbon, and sustainable growth mode, with market failures, and scale up the green
This report will review the latest trends the world needs to invest heavily in green finance market. In addition, for a smooth
community to come to an agreement that
and dynamics for different green financial and low-carbon technology research and green transition, more attention is required
addressing climate change is a universal
i n st r u m e n t s , g a i n i n s i g h t s o n t h e n ew development, and infrastructure construction, on sustainable information disclosure, and
challenge for all mankind at present and
international green policies and mechanisms, resulting in a huge demand for green finance. climate risk management mechanisms.
for a long time to come. To protect the
a n d l o o k p r o s p e c t i ve l y t o t h e f u t u r e However, the green finance market still
environment, the trend of green development
development of the green finance market. faces huge challenges to operate efficiently. Green finance has no unified definition,
has become unstoppable, and the green
finance market has entered a stage of rapid First, the total amount of green finance a n d t h e i n co n s i ste n c y o f d e f i n i t i o n i s
development. I. Why green finance required to achieve the goal of limiting also a challenge of green finance market
global warming to 1.5 degrees Celsius as development. Currently, major products in the
Since 2022, despite the global market In retrospect, the essence of green finance set by the Paris Agreement is huge, but the current green finance market include green
grappling with various adverse factors is to reconcile the imbalance between total green finance market is still too small, bonds, green loans/credits, green funds,
such as geopolitical tensions, economic rapid human development and the natural accounting for less than 5% of the overall guarantees, carbon credits, green insurance
downturns, energy crises, and food crises, environment protection, to correct market financial market. Second, public sector (such as climate or flood insurance), green
the overall performance of the green financial failures, with structured financial instruments, funding and policy guidance have limited leases, and green financial derivatives. Green
market has remained relatively stable. The by putting prices on environmental rights, abilities to channel and scale up private finance covers green investment coming
green development and progress have also and to allocate social resources in a more sector funding into green and climate change from private and public funds, including
received growing attention, and a series of efficient manner. At present, the market initiatives. Green projects are often carried multilateral and bilateral financial assistance
positive consensus and agreements have particularly distinguishes green finance from out in developing countries where the to support developing countries in mitigating
been reached at international conferences. the traditional finance market, because for market mechanism is immature, which brings and adapting to climate change. In addition,
On November 6, 2022, at the 27th session of green projects, in addition to calculating the problems such as high investment cost, high the concept of "climate investment and
the Conference of the Parties of the UNFCCC return on investment, financial institutions risk, and information asymmetry. In 2020, financing", which is currently frequently
(COP 27) all parties agreed to establish the n e e d to p a r t i c u l a r l y i d e n t i f y p ro j e c t s ’ the public sector invested more than $83.3 mentioned in China, has also been clearly
Loss and Damages Fund to provide financial green attributes and measure their positive billion to help developing countries cope defined as an important part of green finance.
supports for climate-vulnerable countries to externalities to the environment. For projects with climate change (Details shown in later According to UNEP, the definitions and their
deal with negative consequences caused by with proven strong additional environmental chapters), but such great amount of funding scopes of green finance and several other
climate change; the International Sustainable b e n e f i t s , n o n - m a r ke t m e a n s , s u c h a s only catalyzed 13.3 billion euros from the financial terms on environmental rights are
Standards Board (ISSB) officially issued its policy incentives shall be exerted to help private sector, accounting for less than 16% of summarized as follows:
inaugural standards—IFRS S1 and IFRS S2 environment-friendly projects acquire better the total official climate finance flows. Third,
on June 26, 2023, which are the world's first and lower-cost financing sources if needed. the low-efficiency usage of green money due
unified sustainable development disclosure Alternatively, carbon pricing/emission pricing to market information asymmetry. Fourth, the
standards; in addition, China has launched mechanisms are also effective measures to maturity mismatch between green funds and
and implemented climate investment and force companies to pay for the additional green projects, since general green projects

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 3: REVIEW AND OUTLOOK ON GLOBAL GREEN FINANCE INNOVATION AND
POLICY DEVELOPMENT

Figure 1 Alternative definitions of new finance

3.1 Green Financial As for currency composition of issued green
bond, the Euro continues to maintain its
Products dominant position. In 2022, the Euro (EUR)
accounted for 42% of the total newly issued
green bonds, followed by the US Dollar (USD)
3.1.1 Green Bonds at 29% and the Chinese Yuan (CNY) at 10%.
This correlation reflects the close relationship
Green bond is currently the most mature and between the green bond issuance market
widely used financial products in the field of and currency choices. In fact, Europe has
green finance, and it dominates the current been the world's largest green bond issuance
landscape of the green financial product market since 2014.
market. The green bond market experienced
a significant growth in 2021 and maintained
high issuance level in 2022. According to data
from the Climate Bonds Initiative (CBI), the
global issuance of green bonds reached a
total of $487.1 billion in 2022, with 741 issuing
institutions from 51 countries and regions
worldwide. Among them, China, the United
Source: United Nations Environment Programme. 2016. Inquiry: Design of a Sustainable Financial System - Definitions and
Concepts - Background Note. States, Germany, the Netherlands, and France
are the major issuing countries in the global
green bond market. To be noted, in 2022,
II. Review of the the green finance market continued to remain
steady.
China surpassed the United States for the
first time and became the largest issuer of
Green Finance Market green bonds worldwide.
Dynamics In terms of green finance policies, since
the end of 2021, policies, standards, and
regulatory frameworks in the overall green
Green investment and financing products are
finance market have been continuously
crucial tools to support green, low-carbon
improved. At COP26, the Glasgow Climate Figure 2 Green Bond Issuance in Major Issuance Markets in 2022
and sustainable development projects in all
Conference, Parties reached a consensus on
countries. In 2021, the overall green finance 90000
the implementation rules and procedures
market experienced record-breaking growth,
with green bond issuance almost doubled
of the Paris Agreement. In addition, since 80000
the end of 2021, several new major climate
and green credit growing by more than 80%. 70000
policies have been adopted . These new
60000

million USD
climate policies and regulations are expected
Turning to the carbon market, the European
to have profound impacts on the overall 50000
Union carbon market saw continuous growth
t re n d s a n d d eve l o p m e n t o f t h e g re e n 40000
in prices throughout 2021, reaching a historic
finance market, presenting new challenges
high of 100.7 per ton at the beginning of 30000
and opportunities for various industries and
2022. After a slight dip in the second half 20000
businesses.
of 2022, carbon prices again grew to nearly
10000
100 per ton in March 2023 as the compliance
This chapter will introduce the performance 0
deadline was approached. The voluntary
of major green finance instruments,

CHINA

SUPRANATIONAL

SPAIN

CANADA
JAPAN

SOUTH KOREA
AUSTRIA
USA

UK
FRANCE

ITALY

NORWAY

AUSTRALIA

INDIA
SWEDEN
DENMARK

BELGIUM

SAUDI ARABIA
GERMANY

HONG KONG

HUNGARY
NETHERLANDS

FINLAND
SINGAPORE

NEW ZEALAND

SWITZERLAND
IRELAND
LUXEMBOURG
carbon market also experienced rapid
international market mechanisms, such as
growth in 2021 and reached total market
green bonds, green credits, carbon markets
size of $2 billion, with its market size nearly
(including voluntary and compliance carbon
quadrupling compared to 2020. In 2022,
markets), public climate funds, and individual
despite overall economic downturn pressures,
countries’ policy updates from the end of
the resurgence of the COVID-19 pandemic,
2021 to 2023.
and geopolitical conflicts in various countries, Data Source: CBI

46 47
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 3: REVIEW AND OUTLOOK ON GLOBAL GREEN FINANCE INNOVATION AND
POLICY DEVELOPMENT

Figure 3 Currency Composition of New issuing institutions), the decline was more Over the past two years, countries and usage. However, starting from 2022, China
Global Green Bond Issues in 2022 pronounced in Europe and North America, i n te r n at i o n a l o rg a n i z at i o n s h ave b e e n initiated its climate investment and financing
where green bond issuances decreased by working towards the mutual recognition of pilot program and has tried to formulate
2% 3%
22.3% and 26.3%, respectively. In contrast, green finance standards to promote cross- more systematic and detailed evaluation
the Asia-Pacific region saw relatively stable border green capital flows. Previously, and information disclosure requirements for
13%
10% green bond issuance, with an overall decline differences in the identification, assessment, climate-friendly projects, which would further
of only 6.9% compared to 2021. Combined and certification standards for green bonds improve the evaluation standards of China's
with the overall performance of the market, among countries hindered the issuance and green projects.
29%
the reduction in global green bond issuance circulation of international bonds to some
42% is primarily attributed to the volatility of the extent. 3.1.2 Green Credits
global economic and financial performance,
rather than the weakness of the green finance During the COP26, the International Green credits are loans extended to raise
market itself. Platform on Sustainable Finance (IPSF), funds for "green projects." Green loans are
initiated by China and the European Union also one of the most commonly used debt
JPY GBP CNY USD EUR Other
Figure 5 Statistics on Green Bond Issuance and other economic entities, released the financing tools for green projects. Unlike the
Data Source: CBI 700 "Common Ground Taxonomy (CGT)”, a decline in green bond issuances in 2021, the
600 jointly recognized classification directory green loan market maintained robust growth
Green Bond Issurance /$bn comprising 72 economic activities that make in both 2021 and 2022. According to the
In terms of industry classification, in 2022, 500
significant contributions to mitigating climate Environmental Finance Database, the global
o u t o f a l l f u n d s ra i s e d t h ro u g h g re e n 400
change. The Central Bank of Sri Lanka and issuance of green loans reached a record high
bonds globally, 37.3% of the funds were 300
commercial banks in Pakistan also referred in 2022, totaling $51.3 billion, representing
allocated to the energy sector, 29.5% went 200
to the CGT while developing local green a 43.7% increase from the previous year.
to the construction sector, and 19.72% were 100
finance classification directories. On 30 These loans were issued by 221 institutions,
directed towards the transportation sector. 0
2014 2015 2016 2017 2018 2019 2020 2021 2022 May 2023, China and the European Union nearly doubling from the previous year. In
Correspondingly, according to data from the
Africa Asia-Pacific Europe La�n America North America Suprana�onal officially launched Phase II of the "Common terms of financing costs, on average, green
International Energy Agency (IEA), energy,
Ground Taxonomy." On 17 July 2023, the first enterprises applying for loans from green
construction, and transportation sectors Data Source: CBI
batch of 193 Chinese green bonds that met banks tend to receive a discount of 50 to 59
are currently among the top five sectors for
In 2022, the impact of inflation caused by the requirements of the "Common Ground basis points (Hans Degryse, 2023) compared
carbon emissions in the world.
interest rate hikes and rising energy prices Taxonomy" were labeled by the Green to non-green enterprises, resulting in lower
l e d to a d e c re a s e d w i l l i n g n e ss a m o n g Finance Committee of the China Finance financing costs. China also introduces special-
Figure 4 Global Green Bond Fund Allocation
from 2014 to 2022 countries to issue bonds. This resulted in Association, marking the official adoption of purpose loans to support low-carbon and
a 28.9% decline in global bond issuance in the "Common Ground Taxonomy" in China. energy-efficient development. For example,
8.58% 2022 compared to 2021. In that sense, the The mutual recognition of green standards the People's Bank of China launched carbon
4.43%
16% decrease in green bond issuance shall among countries undoubtedly promotes reduction support tools at the end of 2021 to
29.50% 2.45%
actually be outperformed the overall global further development in the green bond support the development of key green areas
bond market. market. such as clean energy, energy conservation,
19.73% e nv i ro n m e n t a l p ro te c t i o n , a n d c a r b o n
Figure 6 Comparison between Global Bond Based on comparisons of the Common
5.01% Market and Global Green Bond Market reduction technologies. Through a direct
0.83%
Ground Taxonomy, it can be seen that China's lending mechanism known as "lend first,
37.30%
100.00% 85.53% 86.88% 91.88% evaluation standards for green projects are borrow later," the People's Bank of China
0.75%
80.00% primarily qualitative, and lack of quantitative provides funding support equivalent to 60%
Water Waste Unspecified A&R Transport Land Use 59.04%
60.00% criteria. of the principal for qualified carbon reduction
Industry ICT Energy Buildings

40.00% 24.93% 6.70% 12.49% loans issued by financial institutions to

Data Source: CBI E xce p t t h o s e a c t i v i t i e s s u c h a s t h e
20.00% -16.28% relevant enterprises in key carbon reduction
0.00%
-4.62%
24.66% manufacturing of new energy equipment sectors, with interest rates as low as 1.75%.
11.29% 8.96%
4.35%
It's worth noting that, although the global -20.00%
-6.94%
-1.10% like photovoltaics where China has taken the
green bond market experienced its first -40.00%
-28.89% lead in the development, the European Union While green loans, like green bonds, are
decline in a decade in 2022 (with a 16% 2015 2016 2017 2018 2019 2020 2021 2022 generally has more stringent or more detailed essential tools in the green finance market,
decrease in issuance compared to 2021 Increase in Global Bond Issuance Increase in Global Green Bond Issuance assessment criteria, as well as more detailed it's crucial to note that it’s difficult to
a n d a 24 % d e c re a s e i n t h e n u m b e r o f Data Source: CBI disclosure requirements for projects’ capital unify the statistical caliber in green loan

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 3: REVIEW AND OUTLOOK ON GLOBAL GREEN FINANCE INNOVATION AND
POLICY DEVELOPMENT

Figure 7 Global Green Loan Issuance and Number of Issuers limit for a country or region and divide this to data from the World Bank, as of the
limit into tradable emission allowances or end of 2022, there are a total of 73 carbon
60 300 permits. These emission allowances can then pricing mechanisms in operation worldwide,
51.3 be bought and sold in the market. Carbon- covering approximately 23% of global carbon
emitting entities (such as factories and emissions. The following chart, based on
50 250 power plants) can purchase these allowances data from the International Carbon Action
Total Amount/billion USD

221 to comply with their emission limits, and Partnership (ICAP), illustrates the carbon

Number of Issuers
40 200 entities with lower emissions can sell excess trading price trends for some of these major
35.7
allowances for profit. compliance carbon markets:
29.1
30 150 Overall, carbon prices are gradually rising. In
3.2.1.1 Global Compliance Carbon 2022, developed countries such as Europe
19.1 115 Market and the United States experienced significant
20 17 100 inflation and rapid price increases, along with
82 Among all the carbon markets in the world, economic downward pressure. Nevertheless,
65 the most well-developed and widely followed
10 5.9 50
38 carbon emissions trading market is the
0.3 0 0.2 16 European Union Emissions Trading System
0 1 0 2 0 (EU ETS). This is one of the largest and
2014 2015 2016 2017 2018 2019 2020 2021 2022 earliest-established carbon markets globally.
The EU ETS covers carbon emissions from all
28 European Union member states, as well
Total Amount Number of Issuers
as Iceland, Liechtenstein, and Norway. This
Data Source: Environmental Finance Database market currently encompasses sectors such
as energy, industry, and aviation. According
certification standards and the comparability market mechanisms to price carbon emission
is poor among different countries and rights, which is currently the most mature
Figure 8 Carbon Emission Allowance Price Fluctuations in Some Carbon Markets
institutions, because different countries and market attempt to realize environmental
institutions have great differences in green benefits. The growth of the carbon market 120
loan certification standards. Green bonds reached its highest level in nearly a decade in
typically need to circulate in the secondary 2021 and remained high in 2022. The carbon 100
market, thus the certification standards within market is further divided into carbon quota
the same market are the same and are similar market (compliance carbon market) and

Carbon price/USD
80
across different markets. While loans often voluntary emission reduction market. The
involve bilateral transactions between the following sections will analyze and illustrate
60
borrower and the lender. In many cases, even the recent dynamics and development trends
within the same market, different institutions of carbon markets over the past two years.
may have varying green loan standards. 40
Such differences can make it challenging to
harmonize the statistical criteria for green 3.2.1 Compliance Carbon Market 20
loans. Therefore, the comparability of green
The compliance carbon market, also known 0
credit scale between different markets will
as the cap-and-trade market or carbon
depend on the comparability of statistical

30

28
/1

29

8
/1
quota trading market, is one of the carbon

/3

/2

/2
/1

/7

2/

2/
2/
caliber.

/6

/6

/6
20

20

/1

/1
/1
21

22

23
pricing mechanisms, another commonly

20

22
21
20

20

20

20

20
20

20
20
used carbon pricing mechanism is the
3.2 Carbon Markets carbon tax. In a compliance carbon market, EU ETS California-Quebec Carbon Market
governments or international organizations NZ ETS RGGI
typically employ a cap-and-trade mechanism, China's Na�onal Carbon Market
The carbon market is an important part
where policymakers set a total emissions
of green finance. The carbon market uses Data Source: ICAP

50 51
 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 3: REVIEW AND OUTLOOK ON GLOBAL GREEN FINANCE INNOVATION AND
POLICY DEVELOPMENT

structures among different countries. The scale, having good quality data collection,
uniform carbon price may distort the status which makes it easier for supervision and
and role of the carbon market, and lose the operation as the first sector to be included in
carbon markets’ price discovery function the carbon market. According to the national
in the local emission rights capitalization plan, during the "14th Five-Year Plan" period,
process. Furthermore, according to the China’s national carbon market will gradually
UNFCCC principle, developed and developing and systematically expand to cover all eight
countries share a "common but differentiated high-energy-consuming industrial sectors:
responsibility" for global climate action. power generation, building materials, steel
Having a unified carbon price is against and iron, non-ferrous metals, petrochemicals,
this principle and is unfair to developing chemicals, papermaking, and aviation.
countries, thus the idea of having a unified
carbon pricing mechanism is difficult to
implement in short term. 3.2.2 Voluntary Emission
Reduction Markets
3.2.1.2 China’s Compliance Carbon The voluntary emission reduction market
Market refers to the carbon trading market formed
and participated by enterprises on their own
compared with the beginning of the year, emission reduction factor from 1.74% to 2.20% China's carbon market, comprised of the initiative. Unlike compliance carbon markets,
the carbon prices at the end of 2022 remain compared to the third phase, and raised compliance carbon market, i.e., national the primary trading instruments in voluntary
stable, demonstrating carbon market’s price the manufacturing sector’s free allocation carbon market, and regional pilot carbon emissions reduction markets are carbon
resilience and stability in the face of inflation. benchmark to make the emission reduction markets including Beijing, Tianjin, Shanghai, credits. Currently, the voluntary emissions
target more stringent, which ultimately led to Chongqing, Hubei, Guangdong, Shenzhen, reduction market mechanisms are mainly
As demonstrated from the figure above, more active trading in the EU carbon market and Fujian, currently operates in parallel. The composed of three categories:
it shall be seen that there are substantial in 2021 than other carbon markets (CEEP Chinese compliance carbon market generally
differences in carbon prices among different BIT, 2022). In contrast, developing countries applies both free allocation and auction, • National voluntary emissions reduction
markets. For example, in China's national face significantly different situations in the with free allocation being the dominant mechanisms in various countries, such
carbon emissions trading market, which supply and demand dynamics of their carbon approach and auction accounting for a as China Certified Emissions Reductions
began operating after 2021, carbon prices markets due to variations in climate targets, smaller proportion. Starting in 2022, several (CCER).
fluctuated around $10, representing only policy measures, and market conditions. pilot carbon markets began accelerating • International carbon reduction
about one-seventh of the prices in the China's climate targets are to peak emissions their practice of auctions. For example, in mechanisms, such as the Clean
European compliance carbon market. The before 2030 and achieve carbon neutrality by November 2022, Beijing held its first auction Development Mechanism (CDM).
reasons for such significant differences are 2060. Currently, China is still in the emissions since 2013, generating a total revenue of 113 • Th i rd - p a r t y i n d e p e n d e n t vo l u n t a r y
multifaceted, such as the supply of emission p e a k i n g p h a s e, t h e ove ra l l f re e q u o t a million CNY (16.4 million USD). In August emissions reduction mechanisms, such
permits, marginal emission reduction cost, allocation accounts for a relatively large 2022 Shenzhen also conducted its second as Verified Carbon Standard (VCS), Gold
market maturity and other factors. These proportion, resulting in lower compliance auction since 2014 (World Bank, 2023). As of Standard (GS), Carbon Registry (CAR),
factors collectively affect the final carbon pressure on enterprises. Additionally, China's the end of 2022, according to the data of the etc. These mechanisms aim to reduce or
prices and price trends for each carbon carbon financial derivative trading is still in Shanghai Environment Exchange, the total offset greenhouse gas emissions through
market. Taking the European Union’s carbon its preliminary stages and limited to regional trading volume in China's carbon markets had the implementation of sustainable
market as an example, its climate target is pilot carbon markets, with relatively low exceeded 10 billion CNY (1.37 billion USD). projects. They differ in terms of the
to reduce greenhouse gas emissions by 55% overall trading volume and liquidity, the sectors they cover, the methodologies
compared to 1990 levels by 2030. To ensure further affecting the equilibrium of carbon China's national carbon market currently for project registration, and the types of
the timely achievement of EU’s climate goals, supply and demand. only covers the power generation sector. The carbon offset credits issued.
the compliance carbon market quota supply power generation industry is the first sector
needs to match its climate objectives. In 2021, Recently, there has been discussion about to be included in the national carbon market C a r b o n re d u c t i o n c re d i t s ve r i f i e d a n d
the European Union Emissions Trading System establishing a global unified carbon pricing mainly because it has the highest carbon issued through these three categories of
(EU ETS) officially entered into fourth phase. mechanism. However, at present, there are emissions, accounting for more than 40% of mechanisms are known as carbon credits
The fourth phase of the EU Emissions Trading substantial differences in emission reduction the national emissions. Additionally, power and are traded in the voluntary emissions
System in 2021 increased the annual total targets, development stages, and economic industry enterprises are generally large at reduction market. One carbon credit is

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POLICY DEVELOPMENT

Figure 9 Issuance of Carbon Certificates for Major Mechanisms, 2014-2022 reduction activities and improving the voluntary emission reduction market. The
quality of carbon emission reduction credits CCER is expected to restart by end of 2023.
through mandatory information disclosure The restart of CCER market will undoubtedly
400 and exploring the use of digital monitoring significantly increase the activity of China's
reporting and verification (MRV) technology. national carbon market.
350 Secondly, some national governments, such
Issued Credit/million tons

300 VCS as Indonesia, are restricting the trading of

carbon credits between their own countries
3.3 International Green
250 Plan Vivo and the international carbon market, which Finance Policy review
caused concerns among international carbon
GS
200 credit buyers. Those countries worried about
GCC that the sale of carbon credits may affect 3.3.1 Official Climate Finance flows
150 Climate Forward their ability to meet the target of National
At the COP 15 of UNFCCC in Copenhagen,
Determined Contributions, and therefore
100 CAR restrict the participation in the international
Denmark, a an agreement was achieved to
mobilize $100 billion annually for developing
ACR m a r ke t fo r vo l u n t a r y c a r b o n e m i ss i o n
50 reduction credits.
c o u n t r i e s by 2 0 2 0 . T h e 2 0 1 0 C a n c u n
Conference of the Parties (COP 16) agreed to
0 establish the United Nations Green Climate
2014 2015 2016 2017 2018 2019 2020 2021 2022 3.2.2.2 China’s Voluntary Emission Fund to take this business forward.
Reduction Mechanism: CCER
Data Source: Climate Focus Voluntary Carbon Market Dashboard Currently, all funds provided through bilateral,
The China Certified Emissions Reduction regional, and multilateral channels, as well as
(CCER) is the voluntary carbon emissions private sector funds mobilized through public
reduction trading market implemented in interventions, are counted towards the official
equivalent to one metric ton of carbon market will reach between 10 billion and 40
China. CCER projects cover multiple areas, climate finance goal. Additionally, various
dioxide equivalent emission reduction. In billion USD (BCG, 2023).
including energy efficiency improvements, types of climate finance provided through
the voluntary emissions reduction market,
renewable energy development, forestry financial instruments (grants, concessional
individuals, organizations, or companies can Due to various factors, including the impact
carbon sink and agriculture greenhouse gas l o a n s , n o n - co n ce ss i o n a l l o a n s , e q u i t y,
voluntarily buy and sell certified emissions of the global macroeconomic situation, the
emission reductions. The CCER mechanism guarantees, insurance) also count towards
reduction units, such as carbon offsets and issuance of global carbon reduction credits
has been in operation since 2015 and was the $100 billion target. At the request of
emission reduction certificates. decreased by 21% in 2022 compared to 2021.
suspended in March 2017, mainly because developed countries, the OECD collects
Apart from the impact of macroeconomic
the limited demand for CCER leads to a small statistics annually on the implementation
factors, several uncertainties, including the
3.2.2.1 Global Voluntary Emission trading volume, and also because there are of the $100 billion pledge by developed
lack of a unified regulatory framework and
some operation issues . However, since China countries, and the latest available OECD
Reduction Mechanism monitoring mechanism, might constrain the
announced its national carbon emission official climate finance data is for 2020, as
integrity and quality of carbon markets and
According to the latest report from the World peaking target and carbon neutral target in shown in Figure below.
carbon credits. First, the global voluntary
Bank, as of the end of 2022, out of the 475 September 2020, there has been a growing
carbon market has not yet established
million carbon reduction credits issued in call to restart the CCER. In June 2023, the The official climate finance flow is divided
a unified specification and supervision
the global voluntary carbon market, 58% Ministry of Ecology and Environment issued a into two major categories: adaptation and
mechanism on emission reduction activity.
were issued by third-party independent note seeking public input on the greenhouse mitigation in terms of the total amount,
Due to the lack of uniform carbon credit
voluntary emissions reduction mechanisms gas voluntary emissions reduction official climate finance flows from developed
quantification, certification and issuance
and standards (275 million). The voluntary methodology proposals. On 7 July 2023, the countries to developing countries have been
regulations, the carbon credits issued by
emissions reduction market continued to Ministry of Ecology and Environment publicly on the rise since the Paris Agreement came
the voluntary carbon market face questions
expand in the past two years. In 2021, the solicited public opinions on the "Management into force at the end of 2016. In 2020, the
about double counting, lack of additionality,
global voluntary emissions reduction market Measures for Voluntary Greenhouse Gas total amount of official climate finance flows
and lack of contribution to sustainable
grew rapidly, reaching a historic high of 2 Emission Reduction Trading (Trial)”. The reached US $83.3 billion, but it still has not
development, resulting in some carbon
billion USD, which is four times the market issuance of these two notes conveyed a clear yet reached the promised target of US $100
credits being accused of "greenwashing".
size in 2020. It is estimated that by 2030, message to the market that the government billion per year.
At present, carbon credit issuing agencies
the size of the voluntary emissions reduction intends to accelerate the restart of the
are improving the transparency of emission

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POLICY DEVELOPMENT

Figure 10 Official Climate Finance by Sources Figure 12 Official Climate Finance Flows In addition to the lack of effective published the transitional implementing rules
Grouped by Income Countries, 2016-2020 m e c h a n i s m s fo r a t t ra c t i n g e q u i t y a n d for the Carbon Border Adjustment Mechanism
90
8% private sector funds to developing countries, (CBAM). According to implementation details,
80 19%
achieving the $100 billion per year target the CBAM will enter its transition period in
70
31.4
60
32 28.7
3%
c u r re n t l y s t i l l f a c e s o t h e r i s s u e s a n d October 2023.
27
challenges:
Billion USD

50

40
28
43% During the transition period, traders are only
30 27.1 30.5 34.7 36.9 27% • Multilateral and bilateral banks provide required to report the implied emissions
20 18.9 most of the official climate finance of their CBAM-covered imported products
3 2.7 2.6
10 1.5
1.9
flows, and their nature as risk-bearing and are not required to pay for any financial
14.5 14.7 14.4 13.1
10.1 Low Income Countries Lower Middle Income Countries
0
Higher Middle Income Countries High Income Countries
institutions determines that they are more charges. After the transition period, the
2016 2017 2018 2019 2020
Unspecified likely to use debt instruments to finance EU will gradually impose a carbon border
Mobilised private (a�ributed) Export credits
Data Source: OECD
Mul�lateral public (a�ributed) Bilateral public Data Source: OECD projects in middle-income countries with adjustment tax on the direct emissions of
larger and more secure future cash flows steel, aluminum, cement, fertilizer, electricity
In 2020, public climate finance (including countries flew to low-income countries, and back. This leads to a situation where and hydrogen, and indirect emissions of
bilateral funds from developed countries approximately one-quarter flew to Africa. countries in most need of climate finance, some industries under certain conditions.
and multilateral funds) saw some growth Both regions are highly vulnerable to the including the least developed countries In the transition phase, CBAM will provide
and continued to share the largest part of adverse effects of climate change and and small island countries, are not the higher free carbon allowances, which will be
the total climate finance (at $68.3 billion, are home to most of the world's poorest primary recipients of official climate gradually reduced, and to zero in 2034.
accounting for 82%). Private sector funds population (UN, 2023). finance.
mobilized through public interventions • Many developing countries, especially the The EU's CBAM is the world's first officially
slightly decreased ($13.1 billion) compared Regarding financial instruments, loans
least developed ones, lack the capacity to implemented one. Although the trade volume
to previous years, and climate-related export constituted the largest amount, accounting
formulate and implement climate finance and carbon emissions initially involved by
credits remained limited ($1.9 billion). for over 70% of official climate finance
projects, as well as to access and manage CBAM may not be substantial, it has opened
flows and mainly flowing to middle-income
international funds effectively. This limits a direct pathway to impact global industries
In terms of the use of climate funds, official countries. Equity investments and private
their ability to access more public finance and companies' carbon emission reduction
climate finance primarily flowed into the area sector funds mobilized by public climate
funds. efforts, profoundly affect international trade,
of climate mitigation, but the least developed finance of developed countries made up a
• Small island countries and climate- international finance, and thus shape a new
countries and small island states receive a smaller proportion. Moreover, private sector
fragile countries and regions need more international political and economic order
large proportion of climate adaptation funds. funds mobilized by public climate finance of
adaptation investments. If these funding centered around carbon reduction.
When looking at the overall amount, only developed countries showed growth from
gaps are not filled soon, as climate
about 8% of the funds provided by developed 2016 to 2017, stagnated from 2017 to 2019,
disasters become more frequent over The implementation of CBAM will prevent
and experienced a slight decline in 2020.
time, and the demand and supply gap EU industries from losing competitiveness
Figure 11 Official Climate Finance by Purpose
may be scaled up even further. due to significant carbon reductions and will
In recent years, developed countries tried to
increase fiscal revenue for EU member states.
catalyze more private-sector climate finance
Therefore, in addition to urgently meeting However, its impact on certain developing
by using public funds as seed investments.
the annual $100 billion target, international countries, especially small economies, could
However, data suggests that leveraging
climate funds should also further optimize be substantial. For instance, Mozambique is
private-sector climate finance with public
and reform in its composition and structure to one of the severely affected economies as
funds remains challenging. The total demand
address climate change more effectively and over 20% of its exports is aluminum to the EU
for climate finance far exceeds $100 billion
to achieve the 1.5-degree Celsius warming countries. After the implementation of CBAM,
annually, thus it’s a precondition using public
target. Mozambique is expected to face an annual
finance resources to catalyze more private
carbon border adjustment tax as high as
sector funding in order to reach the 1.5-degree
3500 million euros.
Celsius target set by the Paris Agreement. 3.3.2 Carbon Boarder Adjustment
As a result, more effective and innovative
Mechanism (CBAM) of the EU Currently, CBAM has a limited impact on
financial instruments, such as blended finance
China's overall export trade. According
instruments and risk-sharing mechanisms,
The EU's CBAM Regulation (Regulation [EU] to data from the General Administration
should be actively explored to mobilize more
2023/956) officially came into effect on 17 of Customs, in 2022, CBAM-covered steel
private sector capital flows to developing
May this year. On 17 August, the EU formally and aluminum products accounted for
Data Source: OECD countries to address climate change.

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POLICY DEVELOPMENT

Table 1 Signing Status of the JEPT Agreements

Beneficiary Signed
Donor Amount Targets
Country Time

Reduce emissions by 1-1.5 billion tons over

France,
the next 20 years and support South Africa in
South Africa Germany, the 2021.11.2 8.5 billion USD
phasing out coal and accelerating the transition
UK, and the US
to a low-emission and climate-resilient economy.

By 2030, achieve the peak total emissions from

the power sector, anticipating the expected
emission peak.
20 billion USD in
By 2030, limit carbon dioxide emissions from
total, where 10
the power industry to 290 MtCO2e , lower than
billion USD comes
The US, Japan, the baseline of 357MtCO2e .
from public sector,
Canada, E st a b l i s h t h e g o a l o f a c h i ev i n g n e t -ze ro
and the other
Denmark, the emissions in the power industry by 2050,
10 billion USD is
Indonesia EU, France, 2022.11.15 advancing Indonesia's power sector net-zero
coordinated by the
approximately 2.4% and 0.7%, respectively, 3.3.3 Just Energy Transition Germany, Italy, emissions goal by ten years.
Glasgow Financial
of China's total exports to the EU. Exports Partnerships (JETP) Norway, and Accelerate the deployment of renewable energy,
Alliance for Net
of fertilizers, cement, and hydrogen were the UK aiming for renewable energy generation to
Zero (GFANZ) from
even smaller. Additionally, aluminum has The Just Energy Transition Partnership
account for at least 34% of the total electricity
the first batch of
relatively high indirect emissions, but CBAM (J E T P ) i s a n ew i n te r n a t i o n a l c l i m a te
generation by 2030. Compared to the current
private investments
currently does not account for indirect financing cooperation mechanism that
plan, the total deployment of renewable energy
emissions from steel, aluminum, or hydrogen. emerged at the 26th Conference of the
during this decade is expected to roughly
Therefore, the direct impact on the aluminum Parties (COP26) to the UNFCCC held in
double.
export industry is limited. However, CBAM's Glasgow. During COP26, France, Germany,
implementation sends a clear signal to the United Kingdom, the United States, and Accelerate decarbonization of the power system,
C h i n e s e ex p o r t co m p a n i e s , w h i c h w i l l the European Union pledged to mobilize $8.5 reducing the net-zero peak from the current
motivate them to conduct internal carbon billion to support South Africa in promoting 280 MtCO2e to 240 MtCO2e by 2035, with the
The EU, the 15.5 billion USD in
accounting and implement carbon reduction just energy transition. Following South goal of achieving a peak in power generation
UK, France, total, where 7.75
measures, in preparation for the further Africa, the second batch of countries joined emissions of no more than 170 MtCO2e by 2030.
Germany, billion USD comes
expansion of carbon border taxes to other JETP, including India, Indonesia, Vietnam, Reduce the reserve capacity of coal-fired power
Vietnam the US, Italy, 2022.12.14 from public sector,
countries and industries. and Senegal. The group of donor parties projects in Vietnam, with the current planned
Canada, the other 7.75
has expanded to other developed countries, peak capacity of 37 gigawatts aiming to reach a
Japan, Norway, billion USD are from
Moreover, the implementation of the EU's multilateral development banks, and national peak of 30.2 gigawatts.
Denmark. private money
carbon border tax has already prompted development banks. By 2030, ensure that at least 47% of electricity
other developed countries to consider similar generation comes from renewable energy
mechanisms. Currently, other developed Currently, South Africa, Indonesia, Vietnam, sources, surpassing the original plan of 36%.
countries, including the United States and and Senegal have completed JETP
Canada, have indicated their intentions negotiations and signed agreements with the Accelerate the deployment of renewable
to introduce their own CBAMs. On the donor parties. India began negotiations with energy to increase its share in Senegal's
France,
other hand, the EU has mentioned that the the G7, as well as Norway, Denmark, and the installed capacity to 40% by 2030 and release
Germany, the 2.5 billion EUR
industries subject to border carbon taxes in EU, on JETP issues in October 2022 but has Senegal 2023.6.22 a Long-Term Low Greenhouse Gas Emission
EU, the UK, (2.635 billion USD）
this instance are just the first batch, and more not been able to sign the JETP agreement Development Strategy (LTS) at COP28, followed
Canada
carbon-intensive industries may be gradually due to its unwillingness to reduce domestic by a new Nationally Determined Contribution
included in the CBAM in the future. Therefore, coal consumption. More details of the JETP (NDC) at COP30.
the scope of CBAM's impact extends far agreements could be referred in the table
beyond what is currently seen. below:

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POLICY DEVELOPMENT

While JEPT is a way for developed countries term financing to low-income, vulnerable Table 2 Contribution of IMF Member Countries to the RST
to help developing countries achieve net medium-income countries, and small
zero transition and meet their climate economic entities. The Trust aims to help
SDR (billion) USD (billion)
commitments, within the current international these countries establish external impact-
energy landscape, the structure and resistant ability, ensure sustainable economic Total Commitments 312 415
approach of just energy transition investment growth, and facilitate these countries’
for recipient countries (such as Indonesia and ability to maintain the long-term balance of Of which: basket of contributions with loan
261 348
resources
South Africa) has also attracted some critical payments and stability. This fund serves as a
discussions. significant complement to the IMF's existing Total Received 276 367
lending tools by offering long-term, low-
Currently, recipient countries usually heavily cost financing sources to address long-term Of which: basket of contributions with loan
225 299
resources
rely on cheap and high-emission energy challenges, including climate change and
sources like coal for power generation. pandemic preparedness. The funding for RST Australia 9 12
These enterprises often carry significant primarily comes from voluntary contributions
Canada 14 18
debt burdens. On the other hand, the so- from IMF member countries with strong
called "grants" announced as part of the external economic resources. This includes China 60 80
p a r t n e r s h i p s a c t u a l l y i nvo l ve a m i x o f countries that wish to allocate Special
various financial instruments, including Drawing Rights (SDRs) to low-income and France 31 41
grants, concessional and regular commercial more vulnerable medium-income member Japan 50 66
loans, World Bank loans or guarantees, and countries. RST aims to raise 33 billion SDRs
uncertain combinations of private sector (approximately 42 billion USD) to meet the South Korea 9 12
equity investments. The proportions of these anticipated lending demand and maintain Lithuania 1 1
different forms of investment are not explicitly adequate reserve accounts.
outlined and the variations in investment Netherland 12 16
forms can be significant. If recipient countries As of 30 June 2023, 13 member countries Oman 0.4 1
p r i m a r i l y re ce i ve co m m e rc i a l l o a n s o r have signed donation agreements totaling
equity investments, then after building new 27. 6 b i l l i o n S D R s ( a p p rox i m a te l y 3 6 .7 Spain 14 19
renewable energy facilities, these countries' billion USD) and have made good progress The UK 25 33
power plants will be responsible for servicing in finalizing these agreements to fulfill
existing coal-related debts plus new debts for the commitment of 31.2 billion SDRs Of which: independent contributions 51 68
constructing renewable energy generation (approximately 41.5 billion USD). The specific
Estonia 0.3 0.3
facilities. contributions are as follows:
Germany 51 67
Therefore, despite the apparent magnitude of RST offers a repayment term of 20 years,
the Just Energy Transition Partnerships, if the with a grace period of 10.5 years. For RST
RST officially commenced operations on RST, and only 26 of them have Upper Credit
financial structures received from JEPT do borrowers, their financing is capped at 150%
1 May 2022, and as of June 2023, the first Tranches (UCT) programs that exceed 18
not align with the current situations in these of the IMF quota or 1 billion Special Drawing
three countries—Barbados, Costa Rica, and months, and the maximum borrowing amount
developing countries, the debt burdens of Rights, whichever is smaller. In addition,
Rwanda—have received final approval for of these 26 countries is only $16.1 billion. This
these developing countries may be exerted an upper-credit-tranche (UCT) standard
RST funding. Costa Rica, Barbados, Rwanda, implies that the IMF needs to negotiate UCT
even heavier. Hence, developed countries program with at least 18 months remaining
Bangladesh, Jamaica, Kosovo, Seychelles, programs with more countries to enable them
should refine the structure of the funding at the time of the approval of the RST is also
and Niger have already received Reform- to access RST funding, which adds more
provided to ensure the realization of a required. Additionally, RST is strictly tied to
Supporting Financing (RSF) support to complexity and resource costs to the RST
genuinely "just transition" commitment. reform progress, with each RSF expenditure
implement RST. process. Overall, the rapid development of
associated with a reform measure. These
RST presents certain challenges, and the IMF
3.3.4 IMF “Resilience and reforms can be a single policy action or could
However, there are also critics of the rapid may need to continuously adjust its policies
Sustainability Trust” also be part of a series of reforms or linked
development of RST. Under the current and rules to ensure that more countries
actions. If a reform measure includes several
RST rules, recipient countries may find it can be fully benefit from the program and
The International Monetary Fund's (IMF) actions, the RST shall not be paid until all
challenging to fully absorb funds from RST. effectively absorb funds from the program.
Resilience and Sustainability Trust (RST) actions have been implemented.
There are in total 142 countries eligible for
provides economically affordable long-

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POLICY DEVELOPMENT

3.3.5 The Latest Developments in Standard No. 1 - General Requirements for recommendations, including the development financing ecosystem. One
Other International Policies Sustainability-Related Financial Information e s t a b l i s h m e n t o f a t ra n s i t i o n f i n a n c e of the tasks is the Technical Assistance
Disclosure" (IFRS S1) and the "International framework, enhancing the credibility of Action Plan (TAAP). In the context of
Financial Reporting Sustainability Disclosure financial institutions’ net-zero commitments, technical assistance, the Sustainable
3.3.5.1 UNFCCC COP27 Standard No. 2 - Climate-Related Disclosures" improving the accessibility of funds, and Development Working Group has released
(IFRS S2). Both standards will come into reducing the cost of financing through a dedicated TAAP, outlining short-term
The COP27 conference, held in Sharm El Sheikh, e f f e c t f ro m 1 J a n u a r y 2 0 24 . D i f f e re n t sustainable finance tools. The transition (2023-2025) and medium-term (2023-
Egypt, in November 2022, concluded after a countries could adopt transitional measures finance framework consists of five pillars 2028) goals aimed at government and
two-day extension, with mixed results. On the before formal disclosure, depending on and 22 principles that must be followed. financial institutions:
positive side, COP27 adopted the "Sharm El their specific circumstances. The disclosure Transition finance primarily supports the
Sheikh Implementation Plan" and established requirements outlined in IFRS S1 are process of traditional high-emission industries • Creating an enabling environment to
“Loss and Damage Fund" for vulnerable designed to enable companies to report to transitioning from high-carbon to low-carbon enhance capacity-building services.
countries and regions. The establishment investors on the sustainable-related risks emission mode. Traditional carbon-intensive • Tailoring capacity-building plans.
of the fund marks a positive progression in and opportunities faced by companies in industries often face financing difficulties • Enhancing capacity-building for transition
resolving this long-standing unresolved issue. the short, medium, and long term. IFRS S2 in investing transitioning projects due to finance and other SDG-related initiatives.
Additionally, the conference reaffirmed the specifies specific climate-related disclosures discrepancies with emission scenarios in a
goal of limiting global warming to 1.5 degrees to be used in conjunction with IFRS S1. net-zero carbon emission context. However,
Celsius and called for a global reduction in the decarbonization of traditional industries
greenhouse gas emissions by half by 2030.
COP27 also released the first report from the
The ISSB was initiated by the International
Financial Reporting Standards Foundation
is a necessary step to reach net-zero emission
goal, and the decarbonization process
3.4 Updates on Green
High-Level Expert Group (HLEG) on Non-State (IFRS) and was announced at COP26 in requires enormous amount of funding. In Finance Policies and
Entity Net-Zero Commitments, which criticized
"greenwashing" behavior and provided a
Glasgow in 2021. The primary responsibility
of the ISSB is to develop sustainability
addition, issues such as carbon lock-in and
just transition also require careful scrutiny.
Standards in Different
roadmap for net-zero commitments. reporting standards that align with Therefore, the reassertion on transition Countries
International Financial Reporting Standards finance has significant positive implications
On the other hand, the United Nations (IFRS). The IFRS S1 and IFRS S2 are the first for developing countries.
In addition to international advocacy and
E nv i ro n m e n t P ro g ra m m e re l e a s e d t h e set of the globally applicable environmental
policy development, countries have also
Emissions Gap Report 2022 before the and climate-related disclosure standards. The 18th G20 Leaders' Summit took place
shown continuous progression in green
opening of COP27, pointing out that according These standards play crucial roles in the in New Delhi, India in 2023, with the theme
finance policy. This section highlights a few
to the current climate policy implementation development of sustainable finance and are "One Earth, One Home, One Future." The
representative policy updates, including
efforts, the global temperature is expected a key component of financial institutions' Sustainable Development Finance Working
China's climate investment and financing
to rise by 2.8°C above pre-industrial level by d i s c l o s u re p r i n c i p l e s a n d f ra m ewo r k s . Group of the Summit achieved meaningful
pilot program, the climate change-related
the end of this century, and even with the full Standardized and unified sustainability consensus and outcomes, and highlighted
provisions in the U.S. inflation reduction bill,
implementation of the nationally determined reporting frameworks help investors in the following three aspects (G20 Sustainable
and the progress made by ASEAN countries
co n t r i b u t i o n s , t h e te m p e ra t u re r i s e i s climate and environmentally friendly sectors Finance Working Group Deliverables, 2023):
in green project identification and assessment
expected to be limited to 1.8-2.1°C. Current to better compare companies' performance in
standards.
policy mechanisms and nationally determined the field of sustainability, reduce investment • Creating mechanisms that can mobilize
contribution commitments are insufficient to risks stemming from information asymmetry, resources for climate financing in
achieve the goal of limiting global warming to improve investment efficiency, and enable a t i m e l y a n d a d e q u a t e m a n n e r, 3.4.1 China's Pilots for Climate
1.5°C. investors to use green funds more efficiently, including using policies and financial Investment and Finance
thus enhancing the environmental benefits instruments to catalyze the deployment
generated per unit of investment. a n d i m p l e m e n t a t i o n o f l ow- c a r b o n In December 2021, the Ministry of Ecology
3.3.5.2 ISSB Releases Its First Set technologies. and Environment, along with other eight
of International Sustainability • Promoting financing activities aligned ministries, initiated the Climate Investment
Disclosure Standards. 3.3.5.3 Main Green Finance with Sustainable Development Goals and Financing Pilot Program. In August 2022,
Outcomes from G20 in past Two (SDGs), including expanding investment they announced the list of 23 selected pilots
On 26 June 2023, the International Years tools that prioritize social impact and aiming at exploring replicable experiences in
S u st a i n a b i l i t y St a n d a rd s B o a rd ( I SS B ) enhancing data collection and reporting climate investment and financing practice.
officially released the "International The G20 Sustainable Finance Working related to natural climate. The first batch of the 23 pilots includes 12
Financial Reporting Sustainability Disclosure Group’s 2022 report presented several • Building the capacity of the sustainable municipalities, 4 regions, and 7 national-

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tax credit (ITC) for centralized and on Chinese companies. On the contrary,
distributed PV plants on the demand South Korean companies would have been
side. Additionally, the law introduces significantly affected since the legislation
tax credits on the manufacturing side, resulted in the loss of all subsidies for their
and provides subsidies at various levels products. The implementation of IRA will
across the entire photovoltaic production certainly promote the U.S. climate ambition,
chain, including polysilicon, silicon wafers, but it needs more time observing and
cells, modules, backplanes, inverters, assessing its further impact on domestic
and more. For a long period of time, manufacturing capacity, its influence on
the United States has had one of the global supply chains, and its impact on
highest photovoltaic installation costs multinational corporations.
globally. This legislation will reduce
the construction costs of photovoltaic 3.4.3 ASEAN Capital Markets
systems in the U.S., potentially increasing Forum (ACMF)
the total installed photovoltaic capacity
from 123 GW to around 560 GW, thus The ASEAN Capital Markets Forum (ACMF),
promoting the low-carbon transformation a high-level mechanism of capital market
of the U.S. energy system. regulators from the 10 ASEAN countries,
level new districts. These pilots will focus projects with investment demand of 2 trillion • The IRA also offers new tax-cut policies has been leading the development of green
on those areas such as curbing the non- CNY. for the new energy vehicle industry. It finance policies in ASEAN. On 27 October
p l a n n e d d eve l o p m e n t o f h i g h - c a r b o n removes the previous cap of 200,000 2022, the 37th Chairman's Meeting was held
projects, orderly development of carbon 3.4.2 Inflation Reduction Act of vehicles per automaker for subsidies and in Phnom Penh, Cambodia, under the auspices
finance, strengthening carbon accounting 2022, USA provides a maximum of $7,500 in tax cuts of the Securities and Exchange Commission
a n d i n fo r m at i o n d i s c l o s u re, m o d e a n d per electric vehicle for low- and middle- of Cambodia (SERC). At this meeting,
tools innovation for climate investment and On 16 August 2022, the Inflation Reduction income individuals who purchase EVs. ASEAN countries reached a consensus on
financing, policy coordination, building a Act of 2022 (IRA) was signed into law. However, since U.S. automakers are heavily improving the ASEAN green finance policy
national climate investment and financing This is a significant piece of legislation dependent on Korean suppliers for power framework: ACMF approved and launched
project program, enhancing climate talent introduced by the U.S. government to batteries, they may find it challenging to t h e ' A S E A N S u s t a i n a b l e - L i n ke d B o n d
development, and enhancing international address inflation issues and strengthen qualify for the subsidies provided by the Standards (ASEAN SLBS)' and the 'ASEAN
cooperation on climate-related fields. domestic manufacturing. The IRA aims to IRA, especially after the minimum content Sustainable and Responsible Fund Standards
raise $737 billion over five years, with $369 requirements of 40% for raw materials (ASEAN SRFS)’. The 'ASEAN Sustainable-
The development of the Climate Investment billion allocated to address climate change (with a significant proportion from the Linked Bond Standards (ASEAN SLBS)' aim
and Financing Project Program is at the core and enhance energy security. Therefore, IRA United States or countries with free trade to enhance the transparency, consistency,
work of the pilot program, which will be a is widely seen as the largest-ever climate agreements with the United States) and and uniformity of ASEAN sustainable-linked
powerful tool for the country to practice investment bill in U.S. history, even the bill 50% for battery components (completion bonds, which will facilitate the development
climate investment and financing instruments. appears to be addressing inflation concerns. of battery component manufacturing of the new asset class, reduce due diligence
It also enables the country and local regions The IRA, combined with existing federal and within the United States) came into effect c o s t s , a n d a s s i s t i nve s t o r s i n m a k i n g
to have a platform to demonstrate practical state-level policies, can drive emissions down on January 1, 2023. more informed investment decisions. The
actions and contributions to addressing by approximately 40% by 2030 compared to 'ASEAN Sustainable and Responsible Fund
climate change. The project program can act 2005 levels. Without the IRA, the emissions It's worth noting that, although the IRA Standards (ASEAN SRFS)' further expand
as a platform for the tripartite cooperation reductions during the same period would represents a new phase in U.S. climate policy, ASEAN's sustainable asset categories and
among government, enterprises and banks, only be in the range of 25% to 34% (Jason, certain concessions were made to fossil fuel specify minimum disclosure and reporting
helping both supply and demand sides 2022). usage to gain support from the Republican requirements to mitigate “greenwashing”
of climate finance to identify high-quality side. Policies in support for the fossil fuel risks.
projects, reducing information asymmetry, The IRA covers two core aspects of climate industry were not completely removed,
and improving the efficiency of industry- investment: which, to some degree, weakens the bill’s Furthermore, ACMF provided strong support
finance docking. As of the end of 2022, all effectiveness in addressing climate change. fo r t h e s e co n d e d i t i o n o f t h e ' AS E A N
23 pilots have initiated the development of • The legislation will significantly stimulate Taxonomy'. Following the publication of the
project program. By the end of 2022, the t h e d eve l o p m e n t o f t h e U . S . s o l a r In terms of global market impact, the IRA first ASEAN Taxonomy in November 2021, the
Pilot Program has collected more than 1,500 industry. It extends the 30% investment currently has a relatively minor impact ACMF has partnered with the International

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Table 3 ASEAN Polices Updates could not be adjusted solely by the market those projects with strong environmental
force, and it requires the guidance and additionality.
regulation from public policy side. To some
Country Time Development extent, climate policy is as important to green To f u r t h e r re d u ce m a r ke t i n f o r m a t i o n
finance markets as monetary policy is to asymmetry. For green projects, project
traditional financial markets. As mentioned in data collection, submission and disclosure
Indonesia Nov. 2022 Release of "Indonesia Green Taxonomy (Version 1.0)"
the beginning of this chapter, the essence of are crucial for investors to know the nature
green finance is to correct the market failure of the project. It is difficult for the current
Release of "Environmental, Social, and Governance for the public goods, and the correction must data acquisition and reporting mechanism
Indonesia Nov. 2022
(ESG) Framework and Manual" not only rely on the self-discipline of other t o a c h i eve t h e d e t a i l e d a n d a c c u ra t e
participants in the market, and the policy reporting of project green characteristics.
Mandatory Carbon Trading Phase One for Coal Power adjustment mechanism will always be the The application and development of cutting-
Indonesia Feb. 2023
Plants most important instrument for the sound edge technologies such as the Internet of
development of the green finance market. Things, blockchain and digital Monitoring,
Release of "Good Governance Principles for
Malaysia Apr. 2022 Therefore, it will need to continue to actively Reporting, Verification (MRV) in the field of
Government-Linked Investment Companies (PGG)"
guide the green finance market development green finance may be the effective means
Release of "Malaysia Capital Market Sustainable and through policy intervention. to address information asymmetry in the
Malaysia Dec. 2022
Responsible Investment Taxonomy (SRI Taxonomy)" green financial market. The application of
To improve the efficiency of capital use and these cutting-edge technologies should help
Malaysia Dec. 2022 Establishment of Bursa Carbon Exchange (BCX)
pay attention to the evaluation of projects’ improve the statistical accuracy of projects’
Requirement on Climate Disclosure by Listed green externalities. At present, green finance environmental data, and the Internet of
Singapore Jan. 2022 markets usually neglect the assessment of Things and blockchain technology will boost
Companies
green projects’ additional environmental green project identification and enhance the
"Singapore Green Taxonomy" enters final public benefits. Current financial products in the accuracy of project’s environmental data
Singapore Feb. 2023
consultation stage
green finance market, including green bonds collection, monitoring and evaluation, which
and green loans, are generally labelling on will help address the distrust issue caused
projects and then doing statistical summaries. by asymmetric information in the voluntary
Sustainable Development Standards Board robustly in 2022 against the backdrop of the
This is because that the market has not yet carbon market. Further, the development
(ISSB) to promote sustainable information global economic downturn and increased
developed appropriate ways to accurately and usage of artificial intelligence will also
disclosure across ASEAN and refine the market uncertainty. As for policy updates, in
identify and quantitatively evaluate the empower the identification of low-carbon
'ASEAN Taxonomy'. The second edition of the the past two years, despite the influence of
“additional” emission reduction and/or other assets, the quantification of transition risks,
'ASEAN Taxonomy' was released on 27 March economic fluctuation and political instability,
environmental benefits created from the and the disclosure of climate information.
2023, which enhanced the 'Basic Framework' overall, both international organizations and
green projects, so such labelling behaviour Solid World and Climate Warehouse have
of the first taxonomy and incorporated individual countries have made significant
does not always have significant additional made good progress in this area: Solid World
additional contents. These policy updates in policy progress in the field of green finance.
emission reduction or pollution reduction. set up a liquidity pool for long-term carbon
ASEAN have also spurred domestic policy Such major policy progression includes the
In addition, regardless of the various green forward contracts, which applied blockchain
d eve l o p m e n t s w i t h i n A S E A N m e m b e r efforts to unify standards internationally,
finance policies, the current green support technology by setting up a liquidity pool on
countries, and the table below highlights implementation of incentivizing mechanisms
instruments usually offer discount interest the blockchain network to pre-sell future
some of the recent developments: and the efforts to channel more capital flow
rate and other financial concessions only carbon credits; while Climate Warehouse
to the green sector. Looking ahead, the
based on the type of projects, but not on has prototyped, tested, and developed a
further development of the green finance
the projects’ funding gaps, which is not the digital infrastructure to build an end-to-end
Ⅲ . Outlooks of market requires substantial progress and
continuous attention in the following areas.
efficient use of the limited green finance. ecosystem for carbon market, including a
Future Green Finance Therefore, more attention should be paid metadata platform to connect and aggregate
to improving the utilization efficiency of registry information (the Climate Action Data
Development To constantly improve incentivizing policy
green fund. It is then urgent to effectively (CAD) Trust), digital MRV systems, national
pathways to nudge the momentum of the
Overall, after experiencing record growth in utilize different risk preferences and types carbon registries, tokenization instruments,
green finance market. Public policy is a
2021, the statistical/labeling green finance of green financial products to improve the and a knowledge-sharing and capacity-
tool to adjust market failure. The negative
market, which is dominated by green bonds optimal investment portfolio of green funds building enhancing platform. Therefore, it is
ex te r n a l i t i e s c a u s e d by e nv i ro n m e n t a l
and green credits, continued to perform for maximum emission reduction benefits, very necessary to further study and explore
pollution and greenhouse gas emissions
and leverage private capital to finance the full use of digital technology and artificial

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2050. Prior to the official release of the ISSB, options for their projects. In that sense, it is
major financial institutions had also begun urgently needed for multilateral organizations
to actively utilize frameworks such as TCFD to simplify green project financing process,
(Task force on Climate related Financial make more efforts to improve climate finance
Disclosure), and PCAF (Partnership for accessibility and provide clear guidance and
Carbon Accounting Financials (PCAF)) for support during the financing process for
sustainable information disclosure practice. In developing countries. At the same time, the
addition, since 2021, financial institutions of developing countries should also strengthen
China, the United States, and some European their capacity building, actively disseminate
countries have completed the first-round trial relevant green finance knowledge, and help
of climate stress tests. It is foreseeable that climate-friendly project owners connect with
climate risk management will be normalized, appropriate financing resources in more
streamlined and standardized in operation in efficient and high-quality manners.
banks and non-bank financial institutions. In
China, banks and other financial institutions Finally, it shall be highlighted that addressing
are holding a high proportion of coal assets, climate change is a great challenge to,
therefore, it would be a great challenge for and responsibility of, all countries and all
China's policymakers and financial institutions mankind. Whether countries can maintain
to manage low carbon transition risks by sustained cooperation will directly determine
intelligence technology to improve the quality should be paid to enhancing the quality of avoiding “climate hard landing”. the success or failure of the global efforts
of the green project data collection and carbon credits and capitalizing mechanism to address climate change and achieve
reporting while ensuring cost control, and for the green equity, while encouraging To i n c re a s e t h e a cce ss i b i l i t y o f g re e n s u st a i n a b l e d eve l o p m e n t . Th e re fo re i t
address the issue of green finance market enterprises to actively participate in the finance resources by developing countries. is urgent to emphasize and call on the
information asymmetry. voluntary emission reduction market. Although climate finance continues to flow international community to maintain a
from developed to developing countries positive and open attitude for collaboration,
To emphasize green equity capitalization Financial institutions should reduce their through multilateral, bilateral and other seek solutions to disputes through
mechanism. The development of green carbon footprints and environment risk channels, accessibility to such climate and international cooperation, and make best
finance market is a process of constantly on their portfolio. Financial institutions green finance is still limited in developing use of the annual COP of the UNFCCC and
exploring and trying to use market-oriented are important parts of the green finance countries. In many cases climate-friendly various multilateral and bilateral conversation
means to solve the negative impact caused by market. In the context of frequent global project owners do not know how to access mechanisms, for jointly coping with climate
human activities on the environment. It is the climate disasters, financial institutions public climate finance or the best financing challenges.
biggest challenge for green finance practice need to strengthen their environmental
to accurately and effectively capitalize risk management and improve the climate
environmental rights and interests among re s i l i e n c e o f t h e i r h o l d i n g p o r t f o l i o s .
all others, while carbon market may be the Therefore, the holding portfolio’s carbon
best try in facing such challenge. The global footprints accounting, climate information
carbon pricing mechanism is developing disclosure framework, and climate risk
unevenly, for instance, the derivatives market management practice shall be the focus of
(such as carbon futures, and carbon forwards, financial institutions in the future. In 2021,
etc.) is quite behind in most countries except the Glasgow Net Zero Financial Alliance was
for the European Union and a few developed established by the banks in some developed
countries. It should be noted that in 2023 countries to advocate financial institutions
China is accelerating the restart of its CCER to comply with the Paris Agreement by
market while other voluntary carbon markets e a r l i e r a c h i ev i n g n e a r - ze ro e m i s s i o n s
are improving their methodologies to ensure from their holding portfolios. Banks such
data quality, which implies that the voluntary as Barclays have set low-carbon targets,
emission reduction market would have a aiming to achieve near-zero emissions from
steady growth and would gradually become their facilities and electricity by 2030, while
the focus for capitalizing environmental meeting commitments to near-zero CO2
rights and interests. Therefore, more attention emissions from their holding portfolios by

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BA5%202022%20Summary_Web_AW.pdf

World Bank (2023). "State and Trends of Carbon Pricing 2023." Washington, DC: World Bank.Available at: 10.1596/978-1-
4648-2006-9. License: Creative Commons Attribution CC BY 3.0 IGO.

World Bank. "Carbon Pricing Dashboard." Available at: https://carbonpricingdashboard.worldbank.org/.

Zhi Ying Barry (2022). Global Green Finance Saw Record Growth In 2021, Exceeding US$720 Billion.Available
at: https://www.forrester.com/blogs/global-green-finance-saw-record-growth-in-2021-exceeding-us720-
billion/#:~:text=According%20to%20Forrester%E2%80%99s%20analysis%2C%20in%202021%3A%20Green%20
finance,funds%20to%20buy%20companies%20that%20bring%20environmental%20benefits.

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 4: GLOBAL DIGITAL FINANCE DEVELOPMENT REPORT 2023

With the wide application of digital financial institutions to better identify market

Chapter 4: te c h n o l o g i e s s u c h a s B i g D a t a , c l o u d
computing, IoT, AI, Blockchain, and 5G, the
trends and risk factors, which in turn improve
the accuracy and efficiency of decision-

Global Digital Finance Development financial ecosystem has been revolutionized

in terms of data volume, arithmetic
making. Cloud computing technology can
provide efficient data computing capabilities

Report 2023 power, and algorithms. And various digital

technologies are interconnected and mutually
to process massive financial data in a short
period of time, and improve the processing
—Big Data, Artificial Intelligence and Blockchain Finance reinforcing, and the entire process of data speed and analysis accuracy of financial data
acquisition, data storage, data analysis, and through complex data analysis and model
data application has improved . training.

4.1 Overview of Global Artificial Intelligence (AI), Internet of Things

(IoT), Blockchain, and 5G technology are In terms of data, the field of digital finance In addition, Blockchain technology utilizes
Digital Financial widely applied in the finance sector. The is data-intensive. With the development of block-chain data structure to verify and store

Development continuous expansion of the depth and

breadth of the applications of technologies in
technology, Internet platforms such as social
media, online transactions, search engines,
data. It uses distributed node consensus
algorithms to generate and update data. It
financial services has not only promoted the and mobile applications generate massive uses cryptography to ensure secure data
4.1.1 The concept of digital digital transformation of traditional financial amounts of data, supplemented by the transmission and access. Blockchains also
finance institutions, but also given rise to new real-time data, sensor data and monitoring utilize automated script codes to form smart
financial services such as digital currency, data generated by Internet of Things (IoT) contracts to program and manipulate data,
digital banking, digital insurance, digital devices, sensors and monitoring systems. In which improves the quality and efficiency
4.1.1.1 What is digital finance?
payment and DeFi (decentralized finance). terms of data transmission, 5G technology of financial services in the whole process.
(which utilizes high-band wireless spectrum P a r t i c u l a r l y, b e c a u s e o f i t s t e c h n i c a l
Different countries and organizations around
and large-scale multiple-input and multiple- features of openness and transparency, non-
the world have given different definitions of 4.1.1.2 Development patterns for output (MIMO) antenna technology) and tamperable time-stamping, and consensus
digital finance. The IFF Global Finance and
digital finance various other innovative means such as new rules, Blockchain is a confidence machine, a
Development Report 2022 points out that
network architecture and edge computing technology that establishes trust between
digital finance reflects the mutual integration The IFF Global Finance and Development have enabled high-speed, low-latency, and completely trustless nodes , which will 2

and interpenetration of digital technology and Report 2022 analyzed and reflected on the high-reliability communications. These rebuild the financial trust mechanism and
traditional finance and is a new technology development of global digital finance and technologies provide key support for a variety bring about disruptive financial innovations.
and new business model based on traditional the rationale behind that from the aspects of emerging application scenarios, and have
f i n a n ce . I t re p re s e n t s n o t o n l y a n ew of technologies and their applications. In enabled a significant increase in the efficiency • The differences and connections between
financial business model and a new financial terms of applications, the report summarizes of data transmission. In terms of data storage, Big Data, Artificial Intelligence and
development stage, but also a continuation the current status of new financial services Big Data technology adopts distributed Blockchain Finance (BAB)
of the sustainable development of the including digital banking, digital insurance, storage to store data across multiple nodes
financial industry. Compared with traditional and digital brokerage from the perspective in order to improve storage efficiency and The essence of finance is “ the flow of
finance, digital finance is more information- of financial institutions. As the digital reliability. Specifically, technologies such capital” from surplus party to deficit party.
driven, Internet-based and intelligent. Data te c h n o l o g y ke e p s a d va n c i n g , t h e n ew as distributed file systems (e.g., HDFS), Relying on massive data, Big Data Finance
and information technologies, mere tools in pattern of “ technology + finance” has columnar databases (e.g., HBase), and object analyzes the collected and stored data with
the past, have become important resources, drawn extensive attention worldwide, and storage systems (e.g., Amazon S3) can slice cloud computing and other informatization
platforms, and means of production. They a favorable development environment has the data into multiple data blocks or objects m e t h o d s t h ro u g h t h e p ro ce ss o f E T L ,
have transformed the economic and financial been created for it in terms of infrastructure, and store them on multiple nodes. At the modeling, development, and visualization
structure and brought vitality to the economy investment and financing, and policy support. same time, data backup, data encryption, to provide a basis for subsequent financial
and financial system. Different from last year’s, this report analyzes access control and other technologies are d e c i s i o n - m a k i n g a c t i v i t i e s . Th e re fo re,
the more “generalized” new patterns of used to protect data integrity and privacy. In compared with traditional financial model,
S p e c i f i c a l l y, d i g i t a l f i n a n c e i n v o l v e s digital finance based on the application of terms of data analysis, Artificial Intelligence Big Data Finance is better at predicting the
technology layer and their application layer. information technology, from the perspective algorithms such as deep learning, natural trends of asset prices, assessing individuals’
The development of information technology of “technology + finance”. language processing, and image recognition and institutions’ credit, allocating funds, and
is the prerequisite and driving force of
can automate the analysis and prediction of controlling financial risks . 3

digital finance. State-of-art technologies • Digital technology rebuilds the financial large amounts of financial data, which allow
i n c l u d i n g c l o u d co m p u t i n g , B i g D a t a , ecosystem Big Data Finance provides support for

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 4: GLOBAL DIGITAL FINANCE DEVELOPMENT REPORT 2023

financial institutions' decision-making mainly syste m a n d Z h i m a C re d i t , w h i c h h ave Figure 1-2 Big Data, AI, and Blockchain Finance Lead Global Digital Finance Development
by mining valuable information from massive enormous user behavior data, are also
data. In a sense, it is result-oriented, while unable to eliminate defaults due to the lack
AI Finance emphasizes the intelligence of accurate assessment, identification, early
generated by processing data. Based on warning and risk control of customers who
the needs of different business scenarios, AI fail to repay their debts. The main reason
Finance applies technologies such as machine for this is the lack of technical solutions and
learning, deep learning, and natural language ecosystem to accurately measure credit
processing to develop intelligent financial and integrate credit in everyday production
solution through learning and self-adaptation, and consumption scenarios. Therefore,
which gradually replace human decision- Big Data Finance and Artificial Intelligence
making and task execution. The revolutionary Finance have not fundamentally solved
advantage of AI Finance lies in the radical the problem around information. From
increase of efficiency and comprehensively a technological dimension, Blockchain
improving the efficiency, precision and is a chain data structure combining data
intelligence of financial services. blocks chronologically. It is a distributed
Source: IFF Institute
ledger and a distributed architecture that
However, human beings are emotional cryptographically protects data from being
creatures, and behaviors vary greatly in tampered with or forged. In the Blockchain will not have the motivation for default or natural language clauses and risk assessment
different social environments. Therefore, a system, the cost of the fraudulent behavior of fraud, thus establishing a “trust system that in the contracts.
credit measurement tool based solely on members (nodes) is higher than the potential does not require trust”. Currently, Blockchain
computing lacks operability and accuracy. benefits. Since the costs and benefits can Finance has made disruptive innovations such
Taking credit evaluation as an example, the be accurately calculated and published in as cryptocurrencies and DeFi (decentralized
People's Bank of China credit reference advance, it is clear that rational participants finance), which play an important role in
cross-border payments and supply chain
financing. Therefore, going from zero to one,
Figure 1-1 Digital Technology Transforming the Financial Ecosystem Blockchain Finance is the newest finance
form.

Big Data, AI and Blockchain Finance have

different focuses, but they are all important
aspects of digital finance. Big Data Finance
uses large volumes data for analysis and
decision-making; AI Finance simulates
the human brain to achieve intelligence;
and Blockchain Finance focuses on
decentralization and transparency. They
can combine and facilitate each other. For
example, by combining Big Data and Artificial
Intelligence, financial institutions can analyze
customers data and market trends. They
can apply machine learning technology to
provide customers with customized financial
services; Blockchain technology provides a
more secure and reliable way of storing and
sharing data, thus improving the efficiency
and quality of Big Data Finance; in terms of
smart contracts, Blockchain technology can
Source: IFF Institute automate contracts and bring transparency
whereas AI technology can help process

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 4: GLOBAL DIGITAL FINANCE DEVELOPMENT REPORT 2023

4.1.2 Global digital finance Over the past six years (2017-2022), 302,700 Figure 1-4 Global Digital Finance Patent Filings/Grants (Top 10 Countries)
digital finance patents have been filed
development from the Number of filings Number of grants Grant ratio
globally . Patent filings increased year-
8

perspective of patent on-year from 2017 to 2020, and peaked at

200000
180000
178870
31.6% 31.6%
35.0%
30.0%
160000 28.3% 27.9%
58,000 in 2020, with an average annual 140000
26.1% 25.0%
In recent years, financial technology has 102862 23.3% 23.4% 23.1%
120000 20.0%
growth rate of about 10 percentage points. 100000
emerged globally. Financial institutions, 16.6% 15.0%
The applications dropped in the following two 80000 13.6%
44435 42342 39608
Internet technology companies, traditional 60000 29780 29107 10.0%
years, especially in 2022 when the number of 40000 14050 21425 17829 17246 16432 14711
9876 10352 5012 5642 3981 4099 5.0%
financial IT service providers and other 20000 2236
applications declined by 30% year-on-year. 0 0.0%
types of organizations are leading the
However, in contrast with the rapid increase in

US

a
pe

K
a

da

lia

e
in
d i g i t a l t ra n s fo r m at i o n o f t h e f i n a n c i a l

in

pa

or
di
RO

ra
ro

na

Ch

In
Ch

ap
Ja

st
Eu
the number of applications, the global digital

Ca

ng
Au
,
ng
industry through the utilization of Artificial

Si
Ko
finance patent grants decreased year-on-year

ng
Intelligence, Blockchain, cloud computing,

Ho
in 2017-2022. And only 4.8% patent filings
Big Data and other technologies. As a result, Data source: IFF Institute, PatSnap Patent Database
were granted in 2022. It indicates patent
the number of related patent applications has
bubbles in the global digital finance. And the Figure 1-5 Worldwide Digital Finance Patent Applications (Top 10 Companies)
increased significantly. In the development
quality of the patents needs to be improved.
of digital finance, financial institutions
competitive edge hinges on technological Alibaba Group 6743
• Country ranking figures
innovations and their applications, which Bank of China 4005
also give them a head start in digital finance
During 2017-2022, China led the world in the Tencent 3814
co m p e t i t i o n . Pate n t s , a s a n i m p o r t a n t
number of patent filings (178,900), followed MasterCard 3125
criterion for digital financial innovation, can
by the United States (102,900) and Japan
reflect the status of global digital finance Alipay 3019
(44,000). China has become a top power
development.
of patents in digital finance, far surpassing Capital One 2935

the United States. However, only 16.6% of Ping An Technology 2810

4.1.2.1 Analysis of total global digital the Chinese patents were granted, lower
ICBC 2370
finance patent than the global average of 21%. It shows that
there is an imbalance between “quality” and Toshiba 2218

• Annual figures “quantity” of patents. China Construction Bank 2144

0 1000 2000 3000 4000 5000 6000 7000

Figure 1-3 Worldwide Digital Finance Patent Filings/Grants (2017-2022) Data source: IFF Institute, PatSnap Patent Database
• Companies applying for patents
Number of filings Number of grants Grant ratio
banking sector began digital transformation
70000 35.0% The world’s digital finance patent applications later than Internet tech companies and
58342
60000 30.4% 29.6%
56076 54469 30.0% are mainly filed by companies. During 2017- foreign financial institutions, the number
52739
26.4% 2022, the number of patent applications filed of patent filings by Chinese banks showed
50000 42858 25.0%
38219
by companies around the world amounted the rapid development of fintech in China in
40000 20.7% 20.0% to 239,900, accounting for 78% of the total recent years.
30000 15.0% filings. Among the top 10 patent filers, there
15595
11.4% were seven Chinese companies, namely
20000 14806 10.0%
13027 12076
Alibaba (6,343 filings), Bank of China (4,005 4.1.2.2 Analysis of global patent in
6186
10000 4.8% 5.0%
filings), Tencent (3,814 filings), Alipay (3,019 different digital finance practice
1850
0 0.0% filings), Ping An Technology (2,810 filings),
2017 2018 2019 2020 2021 2022 Due to the different focuses of companies in
Industrial and Commercial Bank of China
Data source: IFF Institute, PatSnap Patent Database (2,370 filings), and China Construction Bank fintech, this report further analyzes the patent
(2,144 filings). The rest of the filers were applications in three major divisions, namely
MasterCard (3,125 filings) and Capital One banking technology, insurance technology
8 The digital finance patents in this report, defined by the internationally recognized IPC International Patent
(2,935 filings) from the U.S. and Japan's and asset management technology.
Classification Numbers G06Q20, G06Q30, and G06Q40, are in categories that cover several application areas such as
payments, tax, banking, and insurance. Toshiba (2,218 filings). Although the Chinese

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 4: GLOBAL DIGITAL FINANCE DEVELOPMENT REPORT 2023

Figure 1-6 National/Regional Banking Technology Patent Grants 2017-2022 (Top10) population have given rise to a large demand four from China, and one from Switzerland.
for insurance. The vast majority of global Chinese companies accounted for 75% of the
1800 1702 investment and financing in the insurtech total insurtech patent grants of the top 10
was made in these regions in recent years, companies, and surpassed the US by only 112
1600
incubating many unicorn companies. patent grants (Figure 1-7). This shows that in
1400 1260 According to 01Thinktank, by the end of China insurtech development is largely driven
1200 2022, there were 49 insurtech unicorn by big tech companies and top insurers, while
1000 enterprises globally, 36 of which are still in there is less difference among enterprises in
800 668 operation; 27 of which are from the United the US.
540 States. contributing to the prosperity of the
600
U.S. insurtech sector. In contrast, emerging • Asset management technology
400 300 266
209 174 markets in Asia like China have realized the
200 100 77 continuous development of insurtech on In terms of the number of asset management
0 the basis of the low insurance penetration technology patent grants, the top 5
China US Japan ROK Europe Canada Singapore Australia India Philippines rate, rapid economic development and countries/regions from 2017 to 2022 were the
Data source: IFF Institute, PatSnap Patent Database
demographic dividend. In addition, China US (510), China (428), the Republic of Korea
has the most insurtech patent grants thanks (347), Japan (294), and Europe (285). The
• Banking technology to the innovations made by technology top 5 companies are Trading Technologies
which are leading the development of companies such as Alibaba and the digital I n te r n at i o n a l ( 37 ) , C h i c a g o M e rc a n t i l e
In terms of the number of banking digital banking and accelerated the digital transformation of the insurers such as Ping Exchange Holdings (30), Alibaba (29),
technology patents grants in the period transformation of Chinese commercial An and Taikang. Tencent (20), and Rising Bull (16).
between 2017 and 2022, the top 5 countries banks. Major commercial banks partnered
and regions were China (1,702), the US (1,260), up with fintech companies or set up fintech As shown in the PatSnap patent database, The United States is the global leader in asset
Japan (668), the Republic of Korea (540) subsidiaries to focus on digital finance, which the global top 10 companies in the insurtech management technology, mainly for two
and Europe (300). Six of the top 10 countries has greatly improved the efficiency and patent grants from 2017-2022 were Ping An reasons:
were Asian, reflecting Asia’s potential for quality of banking services. According to (306), Alibaba (176), Taikang Insurance (159),
growth in the banking technology. And statistics from PatSnap, the top 10 companies Allstate (62), State Farm Mutual Automobile Traditional securities industry in the United
the rise of digital banking is one of main with the largest number of global patent Insurance (53), Hart Ford Fire Insurance (51), States is mature and has made huge
reasons for the fast development of banking grants in the field of banking technology Alipay (46), IBM (28), Yhoo (20), and Swiss investments in technology. Comparing the
technology in Asia. Except Singapore, the in the past six years are Capital One (139), Re (19). Of these, five were from the U.S., securities sectors in China and the United
financial systems in ASEAN and South Asia Alibaba (131), Bank of China (128), Alipay (98), States, Wind data shows that as of December
are not well developed and regular financial Industrial and Commercial Bank of China (50),
services are inadequate. For example, 60% Ping An Technology (49), Tencent Technology Figure 1-7 National/Regional InsurTech Patent Grants 2017-2022 (Top 10)
of ASEAN’s population do not have a bank (47), Bank of America (45), PayPal (42), and
account; and the credit card penetration rate Sumitomo Mitsui Banking Corporation (38). 1200
1080
in Indonesia and the Philippines is less than Of these companies, six are from China, three
968
2%,. These countries have a lot of room for are from the United States, and one is from 1000
the development of the banking industry. Japan.
M o re ove r, m o st o f t h e d i g i t a l b a n k i n g 800
services in the Asia-Pacific are launched by • Insurtech
622
tech giants or large financial institutions that 600
have funds and technology. With a large In terms of the insurtech patent grants, China
population (60% of the world’s population) ranked first followed by the United States, 365
400
and the adaptability and openness to new with 1,080 and 968 filings respectively. 281
231
technologies, Asia is leading the global In terms of regions, developed markets
200 144 140
banking technology revolution. including Europe and the United States and 89
38
emerging markets in Asia are leading the
In China, investments and innovation by tech development of the insurance technology. 0
China US Japan Europe ROK Singapore Canada Australia India Philippines
companies such as Tencent and Alibaba I n E u ro p e a n d t h e U n i t e d S t a t e s , t h e
led them to launch WeBank and MyBank, long history of insurance and the aging Data source: IFF Institute, PatSnap Patent Database

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2022, Goldman Sachs' total assets were 10.04 p rov i d e d m o re va l u e - a d d e d s e r v i c e s , Figure 1-9 How BAB Enable Financial Markets
trillion yuan, higher than the total assets of contributing to the development of asset
China's top 10 brokerages combined (7.18 management technology in the United States.
trillion yuan); while China's top-ranked
securities brokerage CITIC Securities’ total 4.1.3 Analysis of the rationale of
assets were 1.3 trillion yuan. In addition,
digital finance
according to ArchForce data, JPMorgan
Chase invested approximately $10 billion in Digital finance is still finance in nature, so
tech in 2019, far exceeding other international price discovery, resource allocation and risk
securities firms, and Citi's tech investment management remain its main functions.
a m o u n t e d t o $ 7.07 7 b i l l i o n . H oweve r, The rapid development of digital finance,
Chinese securities brokerages’ investment in especially with technologies such as Big
technology was much less. In 2022, Huatai Data, Artificial Intelligence and Blockchain,
Securities invested the most in technology has expanded traditional financial services
with 2.724 billion yuan, accounting for only and played a crucial role in improving the
4% of JP Morgan's investment in 2019. operational efficiency of the financial market
and optimizing the financial system.
The digital transformation started earlier,
and the competition is fierce. American
companies Wealthfront and Betterment 4.1.3.1 Price discovery function Source: IFF Institute
pioneered the application of Artificial
Intelligence financial products, through the Price discovery is the process of setting the
and new financial products can be created the degree of correlation through in-depth
optimization of the programs to customize proper price of an asset or commodity in
to meet market demands [4]. For example, learning to provide market participants
the design of portfolio allocation strategies. the marketplace through the interactions of
some digital financial institutions create with more accurate and timely information;
With the further application of Artificial buyers and sellers. With the accumulation of
smarter and customized credit products adaptive algorithms enable continuous
Intelligence, Big Data, Blockchain and data elements using technologies such as Big
and achieve more accurate price discovery learning and adjusting strategies to adapt to
other innovative technologies, more asset Data, Blockchain and Artificial Intelligence,
by integrating and analyzing a massive changes in the market, thus improving price
management technology products become digital finance promotes more precise price
amount of lending data, credit ratings and discovery efficiency.
available and the competition is fierce. While discovery process. First, by analyzing and
other information. Second, thanks to the
maintaining their traditional businesses, the processing massive data, judgements are
decentralized and non-tampering Blockchain
asset management technology companies made on the properness of asset prices,
technology, market participants interact
4.1.3.2 Asset allocation function
directly, free from intermediaries [5]. For
Asset allocation is the implementation of
Figure 1-8 National/Regional Asset Management Technology Patent example, market participants can set trading
Grants in 2017-2022 (Top 10) an investment strategy that attempts to
conditions on price, quantity and time period
balance risk versus reward by apportioning a
via smart contracts. When the conditions
600 portfolio's assets such as stocks and bonds.
are met, the deal will be made automatically,
510 It aligns the proportions of the investment
free from human intervention and price
500 portfolio with the investor’s expected rate of
428 manipulation; furthermore, the issuance
return, variance, liquidity and time horizon.
and trading of digital assets provide market
400 347 Digital finance can expand the space of
participants with more opportunities and
294
financial resources allocation through the
285 asset choices, improving the price discovery
300 spatial effect of financial inclusion. First,
function. Finally, digital finance utilizes
digital finance can increase the diversity and
intelligent decision-making technologies
200 159 157 flexibility of financial products and services
s u c h a s m a c h i n e l e a r n i n g t o i m p rove
110 104 97 to meet the needs and preferences of
market transparency and efficiency, further
100 different investors [7] . For example, digital
improving the price discovery function[6].
currencies, commodities, and alternative
For example, digital finance utilizes natural
0 investments have emerged in digital finance,
language processing (NLP) technology to
US China ROK Japan Europe Canada Singapore Australia India UK providing investors with more choices and
integrate massive news and data, and analyze
Data source: IFF Institute, PatSnap Patent Database
combinations. Second, digital finance can

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make use of cutting-edge technologies

such as Big Data, Artificial Intelligence
For example, digital currencies, digital bonds,
and digital insurance are new types of risk
4.2 Big Data, Artificial abundant of market structures will emerge
in the China's Big Data industry, which would
and Blockchain to improve the efficiency transfer tools in digital finance, and they Intelligence and imply a bright industry future.
and quality of the acquisition, analysis and
transmission of financial information, and
provide more choices and combinations for
financial institutions and clients. Finally, by
Blockchain Finance • “Big Data Race” among nations worldwide
help investors make better asset allocation establishing unified standards and norms,
decisions [8]. For instance, intelligent digital finance can improve the alignment and 4.2.1 Big Data Finance Since 2013, the tide of Big Data has swept the
investment advisors can utilize algorithms to consistency of risk management, promote world and gradually become a major driver
analyze investors' risk preferences, investment effective communication and cooperation of financial innovations. Brand new products
4.2.1.1 Current situation of Big Data
goals and specific background information, mechanisms between financial institutions and services and business models showed
Finance up constantly including Internet monetary
and build the optimal investment portfolios and regulators, and prevent and resolve
and diversified investment solutions based on systemic risks [12]. For example, as the use fund and quantitative investment under the
• Big Data storage volumes are growing
specific strategies. Finally, digital finance can of AI and other technology continue to support of FinTech. Regional and national
rapidly around the world, with China and
lower the threshold for asset allocation and grow in finance, the U.S. National Institute of strategies are released by governments
the U.S. as two hubs of global data
increase market participation and liquidity[9]. Standards and Technology (NIST) released around the world to ensure the advantages in
For example, convenient and low-cost the Artificial Intelligence Risk Management the Big Data competition.
With the rapid development of the
transaction services are made available, such Framework (AIRMF) as a guidance for
Internet of Things, e-commerce, and social In the United States, private enterprises play
as digital payment, mobile banking, and organizations to design, develop, and apply
networks, global Big Data storage volumes the major role in the Big Data industry while
online wealth management, so more people AI systems so that financial institutions and
are booming, laying a foundation for the its government mainly focuses on the top-
can participate in asset allocation, and have investors can control various types of risks.
development of the Big Data industry. down national and industrial strategies. In
access to financial services and markets.
According to International Data Corporation 2012, the White House launched The Big
(IDC), worldwide data storage volumes grew Data Research and Development Initiative,
4.1.3.3 Risk management function from 4.3ZB in 2013 to 53.7ZB in 2021, with the first national development plan for Big
an annual growth rate of 37.1%. In terms of Data in the world and set up the “advanced
Financial activities are often accompanied the data generated by country/region in group guiding Big Data” which sought
by a variety of risks, such as credit risk, 2021, about 23% of them are from China, 21% to harness the utilization of Big Data to
market risk, operational risk, legal risk, from U.S., Data from EMEA (Europe, Middle accelerate the pace of innovation in the
and technology risk. Smart digitalized risk East, Africa) around 30%, and 18% from APJ fields of science, engineering, security and
control technologies such as automatic (Asia-Pacific and Japan). According to IDC, education and boost up the predictive power
auditing, intelligent approval, Big Data it’s estimated that by 2025, China will create on the economic and social development.
credit collection, intelligent credit scoring 48.6ZB data, 27.8% of the total global data. At present, the United States has laid out an
models, and dynamic monitoring provide With growing data and more application- integral system ranging from development
new ways of financial risk management. driven innovations, more business models and strategy, legal framework to practice plan
First, digital finance can utilize Big Data,
Artificial Intelligence, Blockchain and other
Figure 2-1 Global Big Data Storage and Growth Rate (2013-2021)
technologies to improve the ability of risk
identification, assessment and monitoring, Data storage(ZB) Growth rate(%)

and help financial institutions and regulators 60 100

87.2 53.7
identify and respond to potential risks in a 90
50
timely manner [10]. For instance, the AI-based 44 80
41
70
anti-fraud system, the Big Data-based credit 40
53.5 33 60
scoring system, and the Blockchain-based
30 50
identity authentication system are technical 21.6 52.8 40
solutions that enhance risk management. 30.3
20 16.1 24.2
34.2 22 30
Second, digital finance can provide diverse
8.6 20
and flexible solutions for risk transfer and 10 6.6 7.3
4.3
10
diversification via innovative products and
0 0
services to help financial institutions and 2013 2014 2015 2016 2017 2018 2019 2020 2021
clients reduce risk exposure and losses [11].
Data source: International Data Corporation (IDC), IFF Institute

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and has already published four plans(Figure attention on the delivery of the data value. In
2-2) since 2012. According to the plans, the April 2020, the “Opinions on Building a More
US government aims to maintain its leading Complete System and Mechanism for Market-
status in the Big Data industry, safeguard oriented Allocation of Factors” was issued,
its national security, and improve the safety which identified data as the fifth production
of the information network. In addition, the factor apart from the land, labor, capital,
United States attaches great importance and technology. In November 2021, the “14th
to the application of Big Data by the public Five-Year Plan for the Development of Big
sectors, and reiterates the governments Data Industry” was unveiled, and it further
should make their inner data open. underlined data as an important production
factor in the new era and a national basic
Despite of late start, the Chinese government strategic resource. The positioning of the
has issued multiple policies considering the Big Data in no doubt would accelerate the
importance of Big Data for the economic development of the digital economy.
development to ensure the high-quality
development of the industry. According to As early as in the beginning of the twenty-
related statistics, China has released more first century, European countries have realized
than 30 state-level policies on the Big Data that data was a strategic resource, and have
industry (see Figure 2-3 for major policies). been paying attention to the storage, tapping
China has continuously strengthened the top- and collection of variety of data. Currently,
level design to materialize the mechanism the policies on Big Data in the EU’s and its
based on the partial and integral policies. members mainly focus on the protection,
Moreover, Chinese government paid more sharing and mechanism of utilization of
Source: Public information, IFF Institute

Figure 2-2 The U.S. Big Data Industry Policies

Big Data.. Three characteristics have been data market based on the former’s industrial
summarized as follows (see Table 2-1). Data advantages and weaken the competitive
unification. The EU sets the construction of advantages of American Internet giants. On
common European data space and unified the other hand, EU improves the recognition
data market as its major goals to safeguard of the European management model and
the integration and utilization of the data amplifies its voice in the international data
in the union which may be affected due to governance system.
the internal differences among its members.
Elevating the competitiveness. With the
strong conventional industry, EU however
Source: Publicly information, IFF Institute
has been left behind in the data industry.
Therefore, the EU takes measures to increase
Figure 2-3 Milestones of China's Big Data Industry Policies
investment on the industry, strengthen the
technological sovereignty and support the
digital utilization of SMEs in the region.
Besides, it has also drawn up a series of
industrial standards to protect the interests
of companies inside the union. Highlighting
the EU values. The EU regards the protection
of personal data as its strategy and devotes
to standardizing its paradigm around the
world. In accordance with its values, EU, on
the one hand, forms certain policy barriers
through strict personal data protection rules
to resist the U.S. expansion in the European
Source: Public information, IFF Institute

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Table 2-1 EU’s Big Data Industry Policies 9

Figure 2-4 Numbers of Big Data Finance Patent Filings in 2017-2022 (Top 10)

Objectives Specific policies 35000

29065
30000
Digital Single Market Strategy (2015)
25000
• Demolishing the “institutional walls” among the 28 members to fulfill the free
20000
flow of data and promote the development of the digital economy in Europe 14607
15000
Data Unification
10000
Data Governance Act (2022) 3541
5000 1661 1615
• Enhancing the data sharing inside EU and strengthening the data availability 707 698 638 222 154
0
in order to cultivate an integral digital market China US ROK Europe Japan India Australia Canada UK Singapore

Data source: WIPO, IFF institute

Open Data Strategy (2011)

• Promoting the openness and sharing of data, elevating data accessibility

and usability to facilitate innovation and development by the businesses and 4.2.1.2 Big Data Finance application becomes feasible to recommend different
scenarios and cases financial services and products to different
individuals
customers with reference to the marks they
Big Data is mainly applied to the product get from the Big Data. The costs in the
Strategy to Promote Data-Driven Economy (2014)
designing, customer profiling, precision process could be cut dramatically. Regarding
Elevating the competitiveness
• Focusing on the value chain of Big Data and call upon European countries to marketing, and risk management of the risk management, Big Data finane could use
seize the opportunities generated by Big Data financial sectors. As for the product designing, technology to build up a risk ranking system
Big Data can be used to build comprehensive based on the risk prevention models which
models of financial products, create the most can help identify the clients with default risk.
European Data Strategy (2020) Compared with traditional methods, the Big
suitable products for the market, and provide
• Enabling the EU to become the most attractive, most secure and most
relevant solutions to optimize business based Data has more parameters thus could work
dynamic data- agile economy in the world on the analysis of the information in the more efficiently with lower costs.
industry[13]. As for customer profiling, Big
Data can be used to categorize customers • Case One: China’s Ant Group utilizes Big
General Data Protection Regulation (2016)
according to their account status, trading Data Finance to safeguard consumers'
• Strengthening the regulation of data controllers and processors, and funds
habits, and investment preferences and
defending the rights of personal data, marking the establishment of the EU
figure out the most valuable and potential
personal data protection mechanism customers. Then the resources and service can Ant Group identifies risks and prevents
Highlighting the EU values be allocated accordingly. In terms of precision its customers from fund loss through Big
Digital Services Act, Digital Market Act (2020) marketing, Big Data tools can predict the Data Finance. The report titled “Ant Group
habits, hobbies and purchasing power based 2022 Semiannual Report on Anti-fraud
• Breaking monopoly of US Internet giants, fostering digital innovation,
on the customer profiling. Therefore, it Governance” released by the group shows
retaining the market order and regaining the European digital sovereignty,

safeguarding fundamental individual digital rights

Figure 2-5 Application Scenarios of Big Data Finance
Source: Public information, IFF Institute

• China and U.S. lead innovation in Big Data WIPO, from 2017 to 2022, China filed 29,065
Finance applications on Big Data Finance while the
U.S. filed 14,607. The number from the two
The numbers of patent filings demonstrate countries accounts for more than 80% of the
that China and the United States take the total.
lead at the Big Data Finance. According to

9 Individual policies may have multiple strategic objectives, which are classified in this report according to their focus. Source: IFF Institute

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Figure 2-6 Workflow of SAS Fraud Management System Based on Big Data Finance

Source: IFF Institute

that its intelligent risk prevention and According to the People's Bank of China, the
control system could scan and conclude a global fraud rate on bank card was about
transaction completed within 0.01 second. 7.76BP (the ratio of the fraud amount per
This would benefit the security of payment RMB 10,000 yuan), and the actual fraud
and experience of users. According to the loss rate was 4.17BP in 2005; The numbers
report, the technological system could of fraud rate in the United States and in
update its database timely by aligning with Europe were 14.19BP and 5.29BP respectively
the latest fraud models unveiled by official while the fraud loss rates were 7.86BP and
agencies on public security. It also puts 1.38BP in the two regions., The new tools and
more power on squashing the rampant “click services like the Internet banking, mobile
fraud”. The rate of customers’ financial loss banking, mobile payment facilitate the
caused by this type of fraud has decreased financial payment and transaction as well as issue nowadays is to address the data rights data subjects from exercising their rights
by 36.9 percent in the first half of 2022. In the scams. With about $2.5 trillion in assets, for the purpose of data penetrability and in the future. It’s taken as the first step to
addition, more than 10 million cell phones like HSBC is a world-renowned bank and financial accessibility. By clarifying the scope of data build a data market in China. In addition,
Honor and Vivo have been equipped with the institution and provides service to more use and sharing, we can prevent the abuse or the document above makes it clear that
terminal “trusted privacy sandbox” provided than 100 million customers through 10,000 leakage of personal information, and reduce individuals are entitled to ask the data buyers
by Ant Group in order to reduce the data offices in 86 countries and regions. HSBC disputes and conflicts among data owners, to pay them by how much time they ues and
flow and strengthen the security of users' prioritizes the anti-fraud efforts referring to users and processors, and improve the individuals could claim their rights if the users
information and funds. Moreover, 330,000 the payment card, online transaction, and utilization efficiency of data. At present, many pay nothing without permission. In fact, this
game minor players have been protected even customer fraud etc. HSBC has deployed countries are promoting the safe protection can partly restrict the data abuse and theft.
from variety of frauds in collaboration with the SAS fraud management system in many and utilization of data. China, the United This marks a critical step for China to establish
game producers. The rate of typical scam business departments, and has successfully States and Europe are exploring effective data its data rights.
identification has been up 30 percent as the avoided many fraud-related losses. The circulation mechanisms respectively, and are
capacity of analysis and detection through system was expected to reduce 3 dollars in making efforts in the areas of data trading 4.2.2 Artificial Intelligence
Big Data technology. loss by investing 1 dollar in the first place but and circulation and the prevention of data Finance
the real ratio is about 6:1. monopolization, but no one has yet enacted
• Case Two: The global fraud management official legislation on data rights.
system by HSBC Hong Kong and SAS 4.2.2.1 Current situation of Artificial
4.2.1.3 Outlook for Big Data Finance
O n J u l y 5 , 2 0 2 3 , C h i n a re l e a s e d “ t h e Intelligence finance
development
On the basis of preventing credit and debit Implementing Opinions on Further
card fraud, HSBC has been worked with Data is becoming increasingly important in Accelerating the Development of the Digital • AI Finance racetrack under spotlight
SAS, a leading global data analytic company, financial business. Some financial institutions Economy by Better Utilizing Data Elements”
and developed a global fraud prevention may collect “extra personal information”, and which demonstrates that we should explore According to the “2021AI Investment Report”
a n d m a n a g e m e n t s y s t e m ( S A S F ra u d there are some financial irregularities when the establishment of a structurally classified by CB Insights, the AI industry in 2021 sees a
Management) serving fraud prevention running related businesses. In order to better data property rights system and improve sharp rebound from the slowdown in 2020.
for multiple-line businesses and related protect personal information and rights and the reasonable distribution solution on data Both the volume and value of the trading
channels. By collecting and analyzing Big interests of customers, regulatory capabilities revenues. The “structurally classified” principal hit record high and total $66.8 billion, 108
Data, the system could identify the abnormal on the financial data are urged by all sides considers the different sources, subjects percent up year-on-year, are raised for this
transactions and sound the alarm rapidly. of the market. However, the most urgent and quality of data which would benefit the industry. Companies based in the U.S. and

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China are in the leading positions with regard Canada five, and China four. The others are Worldwide AI Unicorns Top100 Figure 2-9 China Citing Other Countries' on
to the funding. The AI startups in the U.S. from India, Sweden, Switzerland, Israel and US UK Canada China Other AI Patent 10

raised $10.5 billion for the 273 deals. From Germany (see Figure 2-8).
10
the perspective of industry distribution, AI 4
Finance investment worldwide grew rapidly, In terms of citation of patent, China's citation 5
with an average annual growth rate of 22.4% of U.S. patent in AI is about 68% (see Figure
8
in the number of financing cases and 33.1% in 2-9). It shows that there is still a large gap
the funding amount from 2015 to 2021 (see between China and the U.S. in the field of AI.
Figure 2-7). But with the construction and development
73
of the digital economy and the digital society,
• AI companies in the U.S. are leading the more and more data would come out and
world and helping AI Finance develop can be utilized for the modeling, training and
application of AI technologies. Data source: CB Insights, IFF Institute Data source: WIPO, IFF Institute
In recent years, the U.S. government has
speeded up the layout of Artificial Intelligence
4.2.2.2 AI Finance application risky transactions on the basis of data analysis,
at the national strategic level, and issued a
scenarios and cases and then block the deal and sound alarm
number of development plans. And lots of
automatically. That’s the way for the AI to
research agencies and labs related to AI got
undertake the management of financial risks.
supported by U.S. government in the form of AI Finance is applied and plays an important It plays an important role in the whole process
fund, talent, policies and laws. According to role in payment, customer service, investment of lending business. The intelligent regulation
the CB Insights’ 2022 AI 100 List, there are consulting, claim settlement, risk management, allows the regulators to apply the Artificial
16 unicorns with a valuation of over $1 billion and supervision through technologies such as Intelligence technology in the regulation of
out of the 100 companies from 10 countries facial recognition biometrics, machine learning financial service institutions such as banks,
and regions on the list. Seventy-three of the algorithms, and knowledge graphs[14]. For insurers, as well as listed companies with the
100 selected companies are from the United instance, the intelligent investment consulting main focus on anomalies in high-frequency
States (US) ranking first, the United Kingdom service based on a series of complex machine trading, algorithmic trading, and block trading.
second with eight companies selected, learning algorithms makes it possible to
comprehensively assess the customers’ risk • Case 1: ICBC RPA+AI Application
Figure 2-7 Global Funding Amount/Frequency in AI Finance (2015-2021) appetite and financial situation, predict their
investment objectives, and incorporate the RPA (Robotic Process Automation) is a
Amount of funding (Unit: 100 million dollars) Frequency of funding portfolio theory to provide reasonable and technology designed to execute repetitive
45 238 250 customized asset management solutions. The work by stimulating human interactions.
221 intelligent risk management could identify
39
40

191 195 Figure 2-10 Application Scenarios of AI Finance

200
35 208
30
30
27
150
25
120

20
100
15
15 13
62

10
7 7 50

5 Source: IFF Institute

0 0 10 The circles in the figure represent the number of patent applications in the field of AI, and the thickness of the lines
2015 2016 2017 2018 2019 2020 2021
indicates the number of patents cited by China from other countries. Due to the large disparity between the values, the
Data source: CB Insights, IFF Institute original values are logarithmically treated in this report when plotting.

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RPA will assist the financial industry in Artificial Intelligence, predictive analytics, Figure 2-11 Smart Chaser AI-powered Prediction Tool Workflow
transforming of intelligent operation and and natural language processing as well as
make it possible that the forerunners in the smart modules such as Subscription Monitor,
banking industry will build an intelligent Spend Path, FICO Score Updates, and Bill
ecosystem together. ICBC launched the Reminder. In collaboration with Better Money
RPA technological research and platform Habits, the financial education platform of
development in early 2019, and now has BOA, Erica could provide financial advice
realized scale application in various business based on customers' spending habits. Erica
areas to support the automatic and intelligent was officially launched in March 2018 after an
customer service and marketing, operations internal pilot in 2017. Erica now can respond
management, risk prevention and control, to 200,000 different kinds of financial
and other businesses. By the end of 2021, questions.
more than 60 institutions around the world
have applied the RPA “digital employees” • Case 3: BNP Paribas Smart Chaser, a Source: IFF Institute

to handle nearly 700 business scenarios in financial transaction risk prediction tool
the headquarters and branches across the p ro c e s s o f t ra d i n g w i l l b e c o m p l e t e d could be provided by AI companies and
entire banking business, saving the workload In order to prevent losses caused by the automatically by further combining trade governments to cultivate more technological
of more than 1,000 people for one year. fa i l u re o f t ra n s a c t i o n , m a j o r f i n a n c i a l analysis and automation technologies. talents.
RPA could take effect in the four scenarios, institutions need to build up an early-
including the daily business processing warning system to ensure the success rate. 4.2.2.3 Outlook for AI Finance In addition, ChatGPT, a brand-new chatbot,
e f f i c i e n c y s t a t i s t i c s , d a i l y co nve r s i o n However, if the financial staff spend too development was released by OpenAI at the end of 2022.
download, daily exchange rate download, much time in checking the information of Unlike previous language models, ChatGPT
and daily exception report query. And it has a single transaction, the efficiency will be is pre-trained and large-scale, and is capable
realized automatic query and push of reports affected adversely. BNP Paribas estimates Looking ahead, AI technology will continue to of generating data such as text, images, and
and data, and has improved the level of that up to 30% of the transactions require play an important role in the financial sector audio. It adopts deep learning methods and
refined management. The RPA could double manual intervention to fulfill it successfully. in the portfolio optimization, risk assessment has stronger natural language processing
the working efficiency of each employee and So, BNP Paribas developed Smart Chaser, a and fraud prevention. At the same time, more capabilities and can be utilized in a wider
save 200 hours for a year. smart predictive analysis tool, and employed attention will be paid to issues such as data range of fields. ChatGPT also incorporates
it in the trading process services to identify privacy, security and explainability to ensure the reinforcement learning based on human
• Case 2: Bank of America: Erica, AI- problems and risks. Smart Chaser analyzes that the development of AI technology meets feedback (RLHF) strategy in the training
powered virtual assistant data of thousands of trade failures and 100 the needs and expectations of the society. process to ensure that the output of the AI
correlates based on intelligent algorithms and In particular, the “algorithmic black box” model in accordance with human common
Banks are committed to improving customer identify patterns. Then it matches the current makes it difficult for financial institutions sense, cognition, and values, which greatly
service. Online banking service is more trading elements with the historical data and to explain their decision-making processes enhances the user experience. As the new-
co nve n i e n t b u t n o t a l l c u s to m e r s c a n analyzes the results, including trading time, due to opaqueness, and thus will dent the generation conversational natural language
navigate through the websites or software value, counterpart, and broker transaction trustworthiness from the customers and model, ChatGPT has unique advantages in
to meet their requirements. So, banks have history. Thereafter, Smart Chaser will actively regulators. So, it’s reasonable to make the the fields of intelligent investment consulting,
been working on simplifying the customer pick up those transactions which need to be algorithmic decision-making process more risk assessment, intelligent customer service
interaction experience. By introduction of AI handled manually and then it would send an transparent and explainable in the future. and information processing. AI like ChatGPT
technology, Bank of America devotes itself email to brokers so they could take action Fairer and more comprehensive datasets will assist financial institutions providing more
to serving its 25 million online customers timely to avoid the trading failure. will also be needed to train the models, such efficient, convenient and personalized service
with more intelligent skills. It launched According to BNP Paribas, the accuracy ratio as collecting more sample data and using to its customers in the future.
Erica, a financial virtual assistant, to serve of the Smart Chaser has reached around 98 diversified data sources. The development
its customers via voice orders. A variety of percent. Smart Chaser will be installed widely of AI Finance also faces a challenge of
tasks such as searching for past transactions, as the first step in the AI Finance process of talent shortage. Measures should be taken
accessing additional information, analyzing BNP Paribas. For the next stage, BNP Paribas to cultivate and introduce more talents,
spending habits, and providing guidance on plans to figure out automatically the potential and increase their mobility. For example,
financial decisions could be done by Erica trading warnings from counterparties and universities can set up cross-disciplinary
as long as voice orders are given. Erica give responses without further manual majors combining Artificial Intelligence with
also incorporates technologies including intervention. In the third stage, the whole finance. More Internships and talent policies

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4.2.3 Blockchain Finance the investment amount in Europe is twice Figure 2-13 Distribution of Blockchain Equity Investments by Country 2021
more than that of Asia which also showcases
Number of equity financing Amount of equity financing
the Blockchain industry in Europe was
4.2.3.1 Current situation of Blockchain supported more than in Asia (see Figure 2-12). 1400
Finance 1167.73
1200
In terms of the number of Blockchain equity
• Blockchain Finance attracts most of investment, the United States ranked first 1000
investment while China has been left far with 484 deals, accounting for 89.3 percent
behind by U.S. in this field. of that in the American continent, and 29.1 800
percent of total global deals. China came as
second with 97 deals. As for the amount of 600 484
According to 01Thinktank, the investment in
Blockchain worldwide reached up to 1,786 investment, the U.S. has got 116.773 billion
400
deals or 1,546 projects with worth of 308.815 yuan, followed by the U.K. with 21.118 billion
211.18
billion yuan. Due to its natural financial yuan. The amount of China was 11.285 billion
200 97 112.85 91 88 73.65
attributes, global Blockchain investment yuan, with nearly 10 times less than that of 50.98 37 32 31.71

focuses on financial application companies. U.S. (see Figure 2-13). However, as the policy 0
Specifically, there were 1,174 deals with environment of the Blockchain industry is US China Singapore UK Canada India
worth of 234.94 billion yuan of investment improving in China, the Blockchain industry Data source: 01Thinktank, IFF Institute
in financial applications which accounted for may gain momentum and develop rapidly in
65.7 percent, 76.08 percent respectively of the future. According to IDC, the Blockchain
five consecutive years, and the Depository scenarios including supply chain finance,
the total Blockchain related global investment. market would expand with amount of $4.279
Trust & Clearing Corporation (DTCC) dropped cross-border payment, digital currency and
From a regional point of view, the America, billion in 2026, with a CAGR of 32.3% from
out of the list for the first time since 2019.
15
DeFi .
Europe and Asia are the most active in global 2021 to 2026.
Ant Group is the only Chinese company on
Blockchain equity investment. The continent the list for 5 consecutive years. 34 companies Digital supply chain finance refers to using
of America in 2021 completed 542 deals, one • U.S. Blockchain companies keep ahead
from U.S., accounting for 68 percent of total B l o c kc h a i n a n d o t h e r te c h n o l o g i e s to
third of total deal numbers with 128.975 billion globally
50, are selected while 7 and 4 companies empower supply chain financial companies to
yuan, 56 percent of the whole and 2.3 times from China and EU respectively. In addition realize online business operation, information
more than that in Europe. The Blockchain According to the list of “Blockchain 50”
to its sound innovation ecosystem, relaxed interaction, trust transmission and risk
equity investment deals in Asia and Europe r e l e a s e d by F o r b e s i n 2 0 2 3 , o n l y s i x
legal environment and excellent technical warning. Blockchain technology is also
accounted for 18% and 15% respectively. But companies have kept names on the list for the
talents, the rich financial resources contribute utilized to enhance the security, settlement
to the development of Blockchain industry speed and capital utilization rate of the cross-
in the U.S.. Blockchain technology has great border payment by establishing trustworthy
Figure 2-12 Worldwide Blockchain Equity Investment in 2021
potential in the financial field. The United and direct interaction, and bypassing transit
Number of equity financing Amount of equity financing States, as the world's largest financial b a n k s t h ro u g h p e e r - t o - p e e r p ay m e n t
0.6 0.56 market, attracts a large number of financial networks, which reduces transit fees as well.
institutions and investors to participate in the Digital currency is one of the important
0.5 development and investment of Blockchain products with Blockchain technology in
projects. financial field. It initially emerged in the form
0.4
of private digital currency with different form,
0.33 0.32 circulation and payment models comparing
4.2.3.2 Blockchain Finance with the traditional currencies. And its design
0.3
0.24 application scenarios and cases varies, it generates different intrinsic values.
0.18 With the advent of private digital currencies,
0.2 0.15
0.12 Blockchain technology has taken effect many central banks tried to unveil their
0.07 widely in different financial practices. This sovereign digital currencies, with purposes
0.1
report has studied the four typical application of reducing the cost of issuing currencies,
0.01 0.01 0.01 0
0
Americas Asia Europe Australia Afica Other

Data source: 01thinktank, IFF Institute

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Figure 2-14 Application Scenarios of Blockchain Finance

Source: IFF Institute

enhancing convenience and safety, improving of Zhejiang Province to create the first “anti-
the efficiency of payment and clearing and fraud alliance chain” in China, which empower
settlement, and elevating the control of the full chain ecological governance by
currency supply and circulation. The term linking data and risk control capabilities of
decentralized finance (DeFi) refers to an multiple parties. According to the Zhejiang
open financial infrastructure that is built on Provincial Blockchain Technology Application
the basis combining cryptocurrencies such Association, the anti-fraud alliance chain delt
as Bitcoin and Ethereum with Blockchain and with 2.4 million pieces of warning messages, November, 2015. The platform was developed issuers log in to find a cap-table management
intelligent contract. DeFi provides financial defended capital accounts for 1,380 times, in collaboration with blockchain startup dashboard complete with valuation, the
services and products such as decentralized blocked the capital transition about 13.4 Chain, and represented the first-ever financial price of shares issued in each investment
lending, algorithmic stablecoins, million yuan involving fraud and marked ten s e r v i ce p l a t fo r m b a s e d o n b l o c kc h a i n round and the percentage of available stock
decentralized exchanges (DEXes), and millions of sensitive or illegal messages in technology in the world. The process of the options. So, issuers and investors can better
decentralized derivatives. cooperation with the police, the central bank traditional security issuance and transaction track and manage securities information.
and telecommunication providers. for those unlisted companies was labor- The blockchain technology replaces the
• Case 1: Typical Blockchain application of intensive, manual and paper-based involving conventional record method with paper-
China’s Ant Group In addition, AntChain has also launched paper stock certificates, option grants and and-pen and spreadsheets, and significantly
the Ant Double-Chain Pass to incorporate convertible notes that requires attorneys upgrades the efficiency of the transaction
AntChain, the focus of Ant Group's accounts receivable into the blockchain manually checking spreadsheets, which and management.
blockchain research, has won more than supply chain finance model to realize the can cause a lot of human errors and make
2,000 patents and applied to over 50 confirmation and circulation of assets and it difficult to have an audit trail. Issuers can • Case 3: U.S. Ripple cross-border payment
scenarios. AntChain ranks the No.1 globally financing.Through the Ant Double-Chain digitally represent a record of ownership settlement solution
in the number of patents referring to the p l at fo r m , t h e e n te r p r i s e s o f u p st re a m using Nasdaq Linq, which significantly
privacy-preserving computing, and has a n d d ow n st re a m o n t h e s u p p l y c h a i n , reduces the settlement time. Founded in 2012, Ripple has achieved global
served more than 200 large businesses and financial institutions and banks are able to success as a provider of Blockchain-based
tens of millions of merchants. Two cases communicate, share information and process Chain notes that this use of blockchain could financial solution. The XRP Ledger, flagship of
from Antchain have been chosen by “the businesses. The model has successfully reduce trade clearing and settlement time Ripple, is an open-source payment network
2022 Blockchain Typical Application Cases” operated in Chengdu and fulfill the from the current standard of three days to based on distributed ledger technology.
published by China's Ministry of Industry and integration of the supply chain and finance about 10 minutes, and could lower the risk Its key objective is to provide financial
Information Technology. chain as well as risk control. exposure by up to 99 percent and effectively institutions with a real-time, reliable and low-
saving the costs and mitigating systemic risk. cost cross-border payment solution. The
One of them is the “trusted public data • Case 2: U.S. Nasdaq Linq uses blockchain Moreover, the platform also gets rid of the On-Demand Liquidity (ODL), one of core
flow anti telecom fraud platform based to reshape its private market paper stock certificates, while both issuers products of the company, uses XRP as a
on blockchain” is a typical application of and investors have the ability to complete bridge currency for cross-border payments.
blockchain in financial risk prevention. Nasdaq Linq, a platform for private security and execute subscription documents online, With ODL, financial institutions are able
AntChain assisted the Anti-Fraud Joint Office transaction, was officially launched in alleviating administrative burden. Linq share to complete cross-border transaction in

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4.3 Risk and regulation by other users. This non-competitive attribute

of nature is very likely to make it beyond the
effective regulation of the traditional legal
4.3.1 Risks of Big Data, AI and framework, burying hidden risks.
Blockchain Finance
From the dimension of data rights protection,
New technologies as well as new forms and the unclear delimitation of data rights,
models of business have brought new vitality co u p l e d w i t h t h e l ow co st o f n e t wo r k
and vigor to the traditional financial market, data replication and the invisibility of data
but a number of problems and risks were secondary utilization and transmission,
accumulated in the process of its emergence problems such as excessive data collection
and development. Many illegal behaviors and illegal data transaction by practitioners
are swinging on the fringe of traditional often occur in the field of digital finance, and
regulation, difficult to be timely detected traditional protection methods have failed
and effectively controlled. This results in the to work. From the dimension of data use, if
aggregation and proliferation of financial the credit information obtained during the
risks, thus affecting the safety and soundness information collection process is inaccurate
of the financial system. The development or is copied or tampered with during the data
of Big Data, Artificial Intelligence and transaction, it will lead to a large deviation in
Blockchain Finance all revolve around data the subsequent analysis of the information,
seconds, significantly reducing the cost and mechanism in the financial field. However, collection, storage and analysis, which are which not only reduces the value of the
time of remittances. due to the defects on the technology and essentially new financial patterns driven by credit information, but also may impair the
regulation, illegal tax evasion and fraud “data + technology”, and the related risks industry's decision-making, thus generating
According to Ripple, the financial agencies remain frequent and cause customers’ asset are steadily on the increase with the growth huge financial risks.
have saved billions of dollars with ODL losses and bring adverse impact on the of the data value as well as the evolution
system. Ripple therefore has won partnership credibility and popularity of the encrypted and development of information technology.
4.3.1.2 Technical risk
with well-known financial institutions across assets. The prices of encrypted assets This report will explore the potential risks of
the world such as the Bank of America, crashed in 2022 which also displays the risks digital finance from the perspectives of data
• Emerging information technology and
Standard Bank and MUFG Bank. According of cryptocurrencies and the importance of and technology.
systemic financial risk
to R i p p l e ' s l ate st re p o r t , R i p p l e N e t , a protection for the investors.
global payment solution driven by XRP, has
While the extensive use of information
processed nearly 20 million transactions Related laws and regulations on encrypted 4.3.1.1 Data risk technology improves the operating efficiency
worth of nearly $30 billion. These cases assets are enacted by the European Union,
of financial institutions, it also makes the
fully showcase the potential of Blockchain the United States, Hong Kong SAR of China, Data is the core element of digital finance. As complexity, contagiousness, invisibility
technology in cross-border payments. Ripple and other regions in 2023 and the chaos of a data-intensive industry, the financial market and suddenness of systemic financial risks
also faces some challenges such as lawsuit the market thus vanished to some extent. possesses a huge amount of data, which not more prominent, with endogenous risks
filed by the U.S. Securities and Exchange However, it is still a dilemma for regulatory only generates great value but also lays itself accumulating within the system. From the
Commission (SEC). At the same time, Ripple authorities around the world to balance wide open to cyber attacks. The formation perspective of its characteristics, digital
is still growing rapidly by developing and innovation and risk management. In addition, of data starts from digital encoding, that is, finance is the product of the integration
providing innovative Blockchain solutions to Blockchain-based cryptocurrencies face 0 and 1. With the continuous advancement of finance and S&T, in which high and new
financial institutions around the world. technical risks such as forgery and double- of communication and chip technologies, technology may bring new risks, while
spending. Quantum-currency is expected to as well as the increasing popularity of the the original financial risks still exist. The
address the above problems but more time Internet infrastructure, massive amounts of
4.2.3.3 Outlook for Blockchain and research still need before the quantum
superposition of technical risks and financial
information can be transmitted to all corners risks may further amplify the risks.
Finance development money finally takes effect as the technology of the world at extremely fast speeds.
is still in its early stage. Information, once on the Internet, can be At the same time, as the role of the Internet
Wi t h t h e a d va n t a g e s o f t ra n s p a re n c y, shared over and over again by countless accelerates the speed of risk transmission
tamper-proof timestamps, and consensus people, which means that the use of data by and presents significant characteristics
rules, Blockchain technology could be a single user does not exclude the use of data across industries and regions, it makes it
applied broadly and will reshape the credit

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easier to induce systemic financial risks. For and users but also raised questions about departing from the fairness attributes of banking industry’s market position, business
example, when facilitating more effective Blockchain security among users. Smart inclusive finance, and in the most extreme model and systemic risk, as well as the
value delivery and resource allocation in the contract vulnerabilities themselves are rarely cases, these black-box algorithms exacerbate challenges of FinTech to banking regulation;
financial industry, Blockchain technology caused by the underlying Blockchain virtual financial discrimination by categorizing, and the Financial Stability Board (FSB)
also provides an ideal approach for financial machine, and most of them are problems sorting, and labeling human beings in the focuses on the potential impact of FinTech
risks to spread, thus leading to a higher with the code written by the smart contract name of “optimizing resource allocation”. on financial stability by setting up a working
transmission rate and more serious cross- developers. In 2016, the decentralized The second one is the risk of algorithm group of the Financial Innovation Network
t ra n s m i ss i o n o f r i s k s . I n a d d i t i o n , t h e financial platform Badger DAO was hacked, convergence. The pre-input algorithmic (FIN), which is mainly in charge of FinTech-
decentralized nature of Blockchain gives and the attackers stole more than USD 60 programs used by AI make them similar in related research.
rise to a financial market without financial million worth of cryptocurrency by exploiting general, which can lead to near-consistent
i n te r m e d i a r i e s a n d g ove r n m e n t c re d i t a vulnerability in the smart contracts that analyses and decisions by different financial At the country level, China, the United
endorsement. Systemic risks then ascend manage the DAO. In short, the asymmetric firms based on similar data. Therefore, it States and the EU have continued to explore
against the current immature technology and encryption mechanism used in Blockchain in turn reinforces the impact of the same effective data circulation mechanisms,
regulation mechanisms. will be severely challenged by the rapid market signals and leads to deviations from gradually pushing harder in the areas of
advancement of related disciplines such as market norms. The third risk is the abuse and data security, information protection and
• Cybersecurity risks of Blockchain mathematics, cryptography, and computing malicious use of AI. With the development of the prevention of data monopolization.
technology technology. AI technology, the use of this technology for Overall, Europe has demonstrated the EU’s
financial fraud is also increasing. Fraud gangs ambition to become a global leader in digital
Security is the primary issue facing the • The risk of “rule of code” with Artificial take advantage of deepfake techniques to regulation by adopting comprehensive and
development of Blockchain Finance. Intelligence create fake videos or voices for fraudulent harmonized regulatory policies, with relevant
According to the 2022 White Paper on activities such as false authentication, false legislation emerging more forward-looking
Blockchain Security published by the SAFEIS In the traditional “rule of man” model, transactions and false money transfers. and stringent globally. The U.S., instead of
Security Institute, Blockchain security d e c i s i o n - m a k i n g a n d m a n a g e m e n t a re formulating an all-encompassing unified
incidents involved more than USD 75.3 billion mainly done by human decision-makers and data protection regulation like the EU, has
in 2022. managers, while in the “rule of code” model, 4.3.2 Global regulatory policies adopted a divisional decentralized legislative
Artificial Intelligence technology plays a more model, where relevant laws and regulations
for digital finance
First of all, there is a 51% attack on a important role, by analyzing and processing are formulated separately at the federal level
Blockchain, i.e., under the Proof of Work a large amount of data, generating models based on the condition of specific industries.
(PoW) consensus mechanism, owning 51% and algorithms, automating decision-making 4.3.2.1 Policy review (2022 Report) In China, through a combination of top-down
of the nodes or computing power within and management tasks, and significantly and bottom-up legislative principles, relevant
the network gives the controlling parties improving the forecasting, decision-making Confronting the regulatory challenges posed policies, ranging from lenient to progressively
the power to tamper with and falsify the and risk management capabilities of financial by digital finance, international financial tighter, were enacted in a more flexible form,
Blockchain data. Although the benefits of a institutions. However, in the process of re g u l a to r y o rg a n i z a t i o n s a n d n a t i o n a l which has been an important factor in China’s
successful attack are far less than the cost of transforming the “rule of man” into the “rule financial regulators have responded positively “curved-road overtaking” strategy in the field
controlling 51% of the network’s computing of code”, new risks may also arise. by studying from different perspectives of digital finance. Most of the relevant policies
power, this does not mean that the threat the evolution of digital finance, its risk links have been detailed in the 2022 Report (see
is completely gone. If an attacker somehow The first risk is the “algorithm black-box”. and its impact on the financial system and Table 3-1).
controls more than half of the Blockchain The opacity of algorithms exacerbates regulation, and have explored various ways to
network’s computing power and uses that the information asymmetry in AI Finance, improve the regulation of digital finance on
advantage to rewrite transaction history, and some may conceal biases and impure this basis.
the so-called “double-spending problem” motives behind the algorithms, creating new
can occur. The second is the vulnerabilities issues of unfairness. For example, Amazon’s At the international organizations level, the
in smart contracts. Both the smart contract recruitment algorithm was accused of IMF released The Bali FinTech Agenda, which,
system represented by Ethereum Virtual gender discrimination in 2019, favoring male while encouraging countries to actively
Machine (EVM) and the smart contract candidates. In addition, algorithmic black- embrace FinTech, also provides a basic
system represented by EOS WASM virtual boxes can exacerbate financial discrimination framework for countries to formulate relevant
machine have been exposed to different and hinder the development of inclusive regulatory policies; the Basel Committee on
types of smart contract vulnerabilities in one finance. The refinement of data labeling Banking Supervision (BCBS), through the
way or another. These vulnerabilities have not achieved by AI algorithms may result in establishment of a working group on FinTech,
only caused heavy losses to project owners more targeted label-based discrimination, focuses on the impact of FinTech on the

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Table 3-1 Regulatory Policies in Digital Finance of China, the US and the EU 4.3.2.2 Focus of digital financial 16, 2023, making the EU the first major
regulation in 2023: crypto-assets jurisdiction in the world with a crypto
Purpose of Legislation Region Relevant Laws and Regulations licensing regime. MiCA defines crypto-assets
In 2023, the regulation of crypto-assets as a “digital representation of a value or of
Cybersecurity Law (2017)
appears to be the dominant trend. In May a right that is able to be transferred and
China
Data Security Law (2021) 2022, the Luna crash reduced the total global stored electronically using distributed ledger
market capitalization of crypto-assets by technology or similar technology.” This broad
Clarifying Lawful Overseas Use of Data (CLOUD) Act (2018) more than 30% from USD 1.8 trillion to USD definition emphasizes two key elements of
1.2 trillion. Immediately following in June, the crypto-assets: (1) a digital representation of
National Security and Personal Data Protection Act of
Network and data US bankruptcy of Three Arrows Capital led to a value or legal status with no intrinsic value;
2019 (2) the underlying technology is a distributed
security further drop in market capitalization to less
National Cybersecurity Strategy (2023) than USD 0.8 trillion, another drop of more ledger (e.g. Blockchain). Meanwhile, crypto-
than 30%. Although there was a brief rally assets are also categorized into three types
Cybersecurity Act (2023) in the bear market before FTX’s bankruptcy based on their specific purpose: (1) asset-
in early November, with the total market referenced tokens; (2) e-money tokens; (3)
EU Network and Information Security (NIS) Directive (2022)
value recovering to USD1 trillion, Binance other crypto-assets not covered by existing
Directive on the Resilience of Critical Entities (2022) CEO Changpeng Zhao’s selling of FTT once EU laws, such as utility tokens. According to
again pushed the market value down to a MiCA, companies issuing and trading crypto-
China Personal Information Protection Law (2021) assets, tokenized assets and stablecoins in
low of USD 0.8 trillion. Then, when rumors
of Genesis’ bankruptcy were released in the 27 countries of the EU are required to be
American Data Privacy and Protection Act (Draft) (2022)
late November, there was a slight panic in licensed and stablecoins issuers are required
US California Privacy Rights Act / Virginia Consumer Data to hold corresponding reserve assets. The
the market, resulting in a drop of about
Personal information Protection Act (2023) introduction of MiCA is of great significance
5%. In January 2023, Genesis, the world’s
protection largest cryptocurrency lender, declared in achieving harmonized regulation across
Digital Single Market Strategy (2015) Europe, curbing money laundering in Europe,
bankruptcy, causing huge losses to a wide
range of investors. The four crashes, involving and protecting the euro.
EU General Data Protection Regulation (2018)
project owners, exchanges, and investment
Data Governance Act (2020) institutions, covered almost all the major • The United States

American Innovation and Choice Online Act (2022) tracks in the crypto industry. As of the end
of 2022, the total market capitalization of Th e U. S . h a s n o t ye t fo r m e d a u n i f i e d
US
Open App Markets Act (2022) cryptocurrencies was about USD 830 billion, regulatory framework for cryptocurrencies,
Data anti-monopoly down 64% from the beginning of the year. It showing a trend of “multi-regulatory”, and
Digital Markets Act (2020) is jointly supervised by the federal and state
is urgent to develop appropriate and feasible
EU levels. Where digital currencies and related
Digital Services Act (2020) regulatory responses.
activities are similar to traditional financial
The collapse of crypto-asset prices in 2022 products and services, state and federal
Source: Public information, IFF Institute
has revealed the risks of cryptocurrencies financial industry regulators have adopted
while highlighting the importance of investor existing frameworks and regulations. As
protection. Currently, there are differences a result, regulators may consider digital
Figure 3-1 Total Global Cryptocurrency Market Capitalization since 2022
in the regulatory stance on crypto-assets assets as securities, commodities, or
(including stablecoins) in major countries currencies, as appropriate. However, this
and regions around the world, and the also led directly to different positions on
c o r re s p o n d i n g re g u l a t o r y f ra m ewo r k s cryptocurrency regulation by different
and legislation are at different stages of regulators, and this fragmented regulation
development. has slowed the development of the crypto
market. For example, on April 3, 2019, the
• European Union U.S. Securities and Exchange Commission
(SEC) issued a guide entitled “Framework
The Markets in Crypto-Assets (MiCA) was for ‘Investment Contract’ Analysis of Digital
Data source: CoinMarketCap, IFF Institute adopted by the European Council on May Assets”, which is designed to assist issuers

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or other entities engaged in the digital asset and Technology for the 21st Century Act P reve n t i n g a n d H a n d l i n g t h e R i s k s o f Currently, digital finance is the growth point
business in analyzing whether their digital and the Blockchain Regulatory Certainty Speculation in Virtual Currency Transactions of global finance as well as the high ground of
assets are “investment contracts” and should Act, the former of which seeks to create a and the Notice on the Rectifying of global financial competition. However, Hong
be included in the definition of “securities,” comprehensive regulatory framework for Vi r t u a l C u r re n c y M i n i n g Ac t i v i t i e s , t o Kong, China is lagging behind in FinTech
and thus subject to the SEC’s regulations digital assets, granting the Commodity comprehensively crack down on virtual- development, as the latest report released
and compliance obligations. On June 6, F u t u r e s Tr a d i n g C o m m i s s i o n ( C F TC ) currency-related illegal financial activities by the Global Financial Centers Index (GFCI)
2023, the SEC sued digital cryptocurrency j u r i s d i c t i o n ove r d i g i t a l c o m m o d i t i e s , and virtual currency mining activities. The shows that Hong Kong’s FinTech development
exchange Coinbase in Federal Court of New clarifying the jurisdiction rights of the former points out that virtual currencies do is ranked 14th in the world, lagging behind
York. The indictment alleged that since U.S. Securities and Exchange Commission not have the same legal status as fiat money Shanghai (7), Shenzhen (12), and Beijing
2016, Coinbase has been letting Howey Test- (SEC), and establishing a process for the and cannot be circulated in the market, (13) in Chinese Mainland, while its ranking in
compliant crypto-assets be used for trading, sale of digital assets, which were originally and that virtual-currency-related business the international financial centers index has
despite verbalizing its willingness to comply considered securities, as commodities; the activities are illegal. It is also considered an dropped to the fourth place. Therefore, there
with applicable laws. On the other hand, latter clarifies the legal status of virtual illegal financial activity for overseas virtual is an urgent need for Hong Kong to develop
there were reports that executives of crypto currencies and formally defines them as “any currency exchanges to provide services for digital finance if it is to maintain its status as
companies such as Coinbase and Ripple form of intangible personal property that domestic residents via the Internet. Virtual an international financial center.
have made it clear that they may shift their can be exclusively owned and transferred currency investment and trading activities are
businesses to other countries if the SEC from person to person without relying on an subject to legal risks, and those suspected of In this regard, on October 31, 2022, the Hong
continues to enforce such harsh regulations intermediary”, i.e., “digital assets”, setting out disrupting financial order and jeopardizing Kong SAR Government officially released
on the crypto industry. Therefore, how to act clear guiding principles for the regulation financial security shall be investigated the Policy Declaration on the Development
to manage risk without stifling innovation o f s u c h a ss e t s . Th i s n o t o n l y p rov i d e s and dealt with by the relevant authorities of Virtual Assets in Hong Kong, which is
is a pressing issue for U.S. policymakers to consistency in the regulation of virtual and departments in accordance with the an important initiative of the Hong Kong
consider. currencies within the U.S. and eliminates the law. The latter made it clear to strengthen Government to set out comprehensive
previously confusing regulatory environment, the regulation of the whole upstream and planning and layout of the development
In 2023, U.S. crypto legislation sees but also has the potential to positively downstream industry chain of virtual currency of virtual assets, demonstrating the
s i g n i f i c a n t p ro g re ss a s t h e re g u l a to r y impact the definition and regulation of virtual “mining” activities, strictly prohibit new HKSAR Government’s vision to promote
framework becomes clearer. In April, the U.S. currencies globally. virtual currency “mining” projects through the development of Hong Kong into an
Congress released two milestone discussion measures such as strengthening credit international virtual assets center, as well
drafts of the stablecoin bill, known as the • Chinese Mainland supervision of data centers, accelerate the as its commitment and determination to
“2023 U.S. first draft” and the “2023 U.S. orderly withdrawal of existing projects, and explore financial innovations together with
second draft”, which are currently under In recent years, China has taken a tough promote the optimization of the industrial the global assets industry. On May 23,
co n s i d e ra t i o n . A m o n g t h e m , t h e m a i n line on cryptocurrencies and successively structure and help to achieve the goals of 2023, the Securities & Futures Commission
contents of the first draft include: (1) a introduced a number of related policies. The carbon peaking and carbon neutrality as of Hong Kong (SFC) released the
detailed definition of stablecoins used for most important one is the Announcement scheduled. Consultation Conclusions on the Proposed
payments; (2) the object of licenses is the on Preventing Token Issuance Financing Regulatory Requirements for Virtual Asset
issuer of stablecoin, and non-bank issuers Risks issued and implemented in September As technology advances and digital finance Trading Platform Operators Licensed by
must be licensed; (3) differentiated treatment 2017, formally categorizing ICO as an illegal continues to develop, cryptocurrencies will the Securities and Futures Commission
of different types of algorithmic stablecoins; public financing scheme and banning all ICO become a trend, while better management (hereinafter referred to as “Consultation
(4) asset segregation requires more focuses financing trading platforms. As one of the and regulation are in need to achieve greater Conclusions”). Considering that a large
on protecting customers’ rights and interests first countries in the world to take restrictive benefits, and risk control should not be number of cryptocurrency investors suffered
from creditors’ claims; (5) issuers must measures, the Chinese government ’s overlooked while realizing value transfer huge losses last year as a result of repeated
disclose the composition of their reserves on announcement of a ban on the operation a n d we a l t h g row t h . B y s t re n g t h e n i n g crashes due to the lack of standardization in
their websites monthly, and the certificator of cryptocurrency exchanges has attracted the regulation of cryptocurrency trading the regulation of virtual trading platforms,
must be the issuer’s CEO. The U.S. Congress widespread international attention. platforms, strictly controlling ICO financing the SFC has made a point of clarifying in
has indicated that a third version of the draft activities, and enhancing the monitoring the “Consultation Conclusions” about the
bill will be introduced within two months and In 2021, China continued to strengthen and tracking of cryptocurrency transactions, qualification of the virtual asset platforms,
believes it is highly likely to receive bipartisan its regulation of cryptocurrencies, with the Chinese government aims to maintain their financial soundness, and insurance/
support and be formally adopted. the People’s Bank of China, the Ministry financial order and protect the rights and compensatory arrangements for the risks
of Public Security and more than a dozen interests of investors. related to the custody of clients’ virtual
On July 26, the House of Representatives other departments issuing two consecutive assets. Immediately on May 31st, HKVAC, a
approved two bills, the Financial Innovation documents, namely the Notice on Further • Hong Kong, China virtual asset rating agency in Hong Kong, was

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promoting the landing of digital currencies quality of patents needs to be improved. For
and digital payments; on the other hand, a example, patents applied from China topped
prudent regulatory approach has been taken the global application list, but the share of
to digital currency-related activities, with Chinese patents among the total granted
a series of important legislation in digital was only 16.6% and did not reach the global
currency-related areas, including Securities average (21%). In addition, companies such as
and Futures Act, Payment Services Act, A Internet technology companies and financial
Guide to Digital Token Offerings, and the institutions have led the development of
Consultation Paper on a New Omnibus Act digital finance globally, with a 78% share
for the Financial Sector (draft for public of patent applications. In the development
c o m m e n t ) , c ove r i n g t h e f u l l ra n g e o f of the three tracks, banking technology,
regulations on ICOs, taxation, anti-money- insurance technology, and asset management
l a u n d e r i n g /co u n te r - te r ro r i s m , a n d t h e technology, is still dominated by major global
purchase/transaction of virtual assets. economies such as China, the United States,
the EU, Japan, and South Korea. However,
On June 21, 2023, the Monetary Authority thanks to the extensive financial demand,
of Singapore (MAS) released a white paper technological progress and growth potential,
proposing general guidelines to regulate Asian countries, such as India and the
the use of digital currencies. It stipulates the Philippines, have achieved rapid development
conditions for the use of digital currencies i n b a n k i n g t e c h n o l o g y a n d i n s u ra n c e
such as central bank digital currencies, technology. In terms of asset management
officially announced. The platform is designed However, the current stringent measures in tokenized bank deposits, and stablecoins technology, given the long-existing dominant
to reflect the reliability of trading platforms this area in the Chinese Mainland seem to on distributed ledgers. Meanwhile, MAS position of the U.S. securities industry, early
and promotes transparency in the virtual run counter to this. Hong Kong, as a testing announced on July 3, 2023, that in order transition and high investment by U.S. asset
asset trading market by providing credit ground for early and pilot implementation, to protect the rights of cryptocurrency management organizations in recent years,
ratings for virtual platform exchanges and is expected to accumulate more experience investors, it is about to introduce a the U.S. has maintained an absolute leading
virtual products. On June 1, the Guidelines for for the future introduction of virtual assets series of new measures that will require role in the field.
Virtual Asset Trading Platform Operators and into the Chinese Mainland as well as for the cryptocurrency exchanges to segregate the
the Anti-Money Laundering Guidelines issued development of China’s digital economy, custody of customer and company funds by Second, the report discussed the differences
by the SFC were formally implemented. The especially in terms of the construction of the end of the year and keep customer assets and connections between Big Data, AI and
SFC began accepting license applications virtual asset centers. in separate trust accounts, as well as prohibit Blockchain Finance (BAB) and clarified
from virtual asset trading platform operators the provision of cryptocurrency lending and the internal logic of digital financial
and allowed retail investors to access licensed • Singapore pledging services to retail investors in order empowerment from the perspective of
virtual asset trading platforms. However, to provide stronger safeguards. “technology + finance”. Big Data Finance
virtual asset trading platforms need to As an important financial and trade center focuses on discovering valuable information
comply with regulations and put in place a
series of proper investor safeguards covering
in the Asia-Pacific region, Singapore is
renowned worldwide for its comprehensive
4.4 Summary from massive data to support the decision-
making process of financial institutions. In
the establishment of business relationships legal and regulatory system. According to other words, it goes for results. AI Finance
The report consists of the following main
with clients, governance, disclosure, and investment platform Funderbeam, Singapore focuses on creating the intelligence through
sections:
token due diligence review and incorporation. has become the third-largest ICO financing data processing, i.e., in response to the needs
market in the world. Singapore paid early of different business scenarios. It involves
F i r st , t h i s re p o r t a n a l yze d t h e c u r re n t
Looking ahead, Hong Kong’s virtual asset attention to the development trend of digital technologies such as machine learning, deep
development of global digital finance from
trading industry will gradually move towards currency trading and introduced relevant learning, and natural language processing to
the perspective of patents. From 2017 to
standardization, which is expected to attract policies on digital currency regulation. form a kind of intelligent financial solution
2022, the overall applications of digital
more traditional financial institutions and Legally, Singapore provides a neutral system t h ro u g h l e a r n i n g a n d s e l f - a d a p t a t i o n ,
financial patents worldwide have grown
institutional investors to enter the virtual for transactions and investment activities gradually replacing human decision-making
tremendously, increasing by 10 percent
asset market and strengthen Hong Kong’s involving digital currencies. On the one hand, and task execution. The application of AI
annually. However, the proportion of granted
competitiveness in the global FinTech sector. the Singaporean government is actively Finance has a game-changing advantage in
patents is relatively low, showing a bubble in
On the other hand, virtual assets are crucial exploring the benign impact of Blockchain improving the efficiency, precision and level
digital financial patent applications, and the
to the development of the digital economy. te c h n o l o g y i n n ovat i o n o n s o c i e t y, a n d of smartness of financial services. Blockchain

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Finance focuses on decentralization and As for AI Finance, the emergence of the new
increasing transparency. Blockchain may generation of conversational natural language
help to create the latest business model of generation models, such as ChatGPT, will
finance from 0 to 1, which will form a trust further promote the digital transformation
mechanism between completely untrusting of financial institutions, improve customer
nodes, thus reconstructing the financial trust experience and optimize business operations.
system and solving the information-related However, at the same time, market players
problem fundamentally. Although BAB has need to pay more attention to important
different focuses, these technologies are issues such as data privacy, security and
all important directions for digital finance interpretability to ensure that the application
development. They are mutually integrated of AI meets the expectations of society and
and reinforcing. For example, Blockchain the requirements of laws and regulations.
technology can provide a more secure and Blockchain Finance is very promising thanks
reliable way of data storage and sharing to its natural attribute of finance. However,
for Big Data Finance, thus improving the security is an urgent issue that needs a
efficiency and quality of Big Data Finance. solution. In 2022, frequent security incidents
In addition, from the point of the digital in the cryptocurrency market have brought
financial empowerment pathway, since digital huge losses to a wide range of investors,
technology has not fundamentally changed and how to take action to manage risk
the essential characteristics of the financial without stifling innovation is an issue that
industry, digital finance still plays its role policymakers in all countries should consider
based on price discovery, resource allocation with a high priority. challenges. The application of cutting-edge by studying the evolution of digital finance,
and risk management. technologies represented by Big Data and risk links and impact on the financial system
Fourth, the report also explored the Blockchain in financial service scenarios is and regulation from various angles and
Third, the report systematically summarized main risks currently in digital finance and highly segmented and intersecting in their exploring to improve the regulation of
and considered global BAB development reviewed the latest regulatory policies businesses, which will blur the boundaries FinTech on this basis. In recent years, China,
f ro m d eve l o p m e n t s t a t u s , a p p l i c a t i o n of major countries. Tackling information of different financial institutions, and at the U.S. and the EU have continued to explore
scenarios, case studies, and future outlook. asymmetry between financial institutions the same time, the emerging new business effective data circulation mechanisms,
Due to the continuous growth of investment and the outside world has always been an forms in the financial industry and new gradually pushing harder for data security
and financing, policy support and innovation issue of the financial industry. Driven by trading behaviors are hard to be effectively and information protection and preventing
breakthroughs, the global BAB market digital technology, the amount of data (e.g., regulated under the existing legal framework; data monopolization.
increased rapidly, with gradually enriching Internet, IoT, etc.), algorithms (e.g., Big Data On the other hand, the role of the Internet
application scenarios and many successful analysis, AI, etc.) and computing power has accelerated the transmission of risks, However, the existing regulatory policies
application cases in regions such as China, the (e.g., cloud computing, 5G, etc.) have made showing significant cross-industry and cross- focus on technology and data compliance,
U.S., and the EU. However, the development revolutionary advances, which is of great regional characteristics. Therefore, while and systematic and effective regulatory
of digital finance is still in the primary stage, and far-reaching significance to alleviate the extensive use of information technology policies on digital finance have yet to be
and there are a series of problems waiting information asymmetry. In addition, people improves the operating efficiency of financial formed, especially for Big Data, AI and
ahead. In terms of Big Data Finance, to once regarded the Blockchain technology as institutions, it also makes the complexity, Blockchain Finance. As a result of the
realize penetrable and accessible regulation a breakthrough in reconstructing the trust contagiousness, invisibility and suddenness dramatic volatility of the crypto market in
of financial data, the most pressing issue, mechanism and took it as a fundamental of systemic financial risks more prominent, 2022, there has been a breakthrough in the
at present, is to deal with the proprietary solution to the information-related problems. with endogenous risks accumulating within regulation of Blockchain Finance. Since the
rights of data. Although all countries are But the application is still in the exploration the system. The massive use of advanced beginning of this year, the EU, the U.S., Hong
strengthening the protection, development and development stage. technology in finance also requires Kong and other countries and regions have
and utilization of data security, and China, systematic transition and improvement of introduced effective regulatory policies
the U.S. and the EU are constantly exploring From another perspective, digital technology the management approach and capability of for crypto-assets, eliminating the previous
effective circulation mechanisms and more has not fundamentally changed the essential regulatory personnel accordingly. chaotic regulatory environment to a certain
efforts on data trading and circulation and characteristics of the finance. Traditional risks, extent, which will promote the healthy
preventing data monopolization. There is such as credit risk, liquidity risk, maturity and In this regard, international financial and orderly development of Blockchain
currently no legislation on data ownership, currency mismatch risk, etc., would remain re g u l a to r y o rg a n i z a t i o n s a n d n a t i o n a l Finance. With the further development of
which is also an issue called for in this report. in the industry and may evolve into new financial regulators have responded positively digital finance, the financial regulators of

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 IFF GLOBAL FINANCE AND DEVELOPMENT REPORT (IFF GFDR) 2023 CHAPTER 4: GLOBAL DIGITAL FINANCE DEVELOPMENT REPORT 2023

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About the International Finance Forum (IFF)
The International Finance Forum (IFF) is an independent, non-profit, non-governmental
international organisation founded in October 2003, and established by financial leaders from
more than 20 countries and regions, including China, the United States, the European Union,
emerging countries and leaders of international organisations such as the United Nations, the
World Bank and the International Monetary Fund (IMF). The IFF is a long-standing, high-level
platform for dialogue and communication and multilateral cooperation and has been upgraded
to F20 (Finance 20) status.

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