Times call for action
China Daily Global

Central banks are by necessity  and choice at the forefront of advancing the green and digital  transition through cooperation and collaborations


Environmental sustainability is clearly one of the biggest challenges  of the 21st century. The conclusion of extensive research and dialogue  is that the necessary actions need to be taken both on national and  global levels, in a coordinated and timely manner to fulfill climate  policy goals. As part of these actions, central banks must address the  issue of the green transition which has clear implications for their  core mandates, i.e., meeting inflation targets and safeguarding  financial stability. And when central banks embrace the concept of  sustainability, the digital revolution must also be taken into account.  Digital solutions are inevitable for a sustainability turnaround. They  not only provide smart tools for the circular economy, but they can also  change the very form of money itself. It is thus obvious that central  banks must actively shape the green and digital agenda.

This mission requires a comprehensive policy framework going beyond  the traditional interpretation of central banking (that is, a narrow  focus on price levels). Inflation continues to be the number one  priority; however, central bankers cannot avoid considering a wide  variety of factors to tame inflation. These factors include the ongoing  green and digital transition of the economy, as well as supply-side  shocks, pressures in energy markets and similar structural issues, which  are also strongly related to geopolitics.

Recent proof of the very complex environment that central banks  operate in has come from the energy sector. Many monetary authorities  are now seeing that an unsustainable energy mix can have a serious  impact on prices and inflation. In the long run, a decrease in fossil  energy intensity and a reliance on renewable energy sources can be the  solution for our current problems. But such a transition must be carried  out through strengthening domestic innovation capabilities and  nurturing effective cooperation in the field of cutting-edge  technologies. We must correct the mistakes of the past when excessive  reliance on conventional external energy sources and the lack of  well-embedded know-how left many countries over-exposed to exogenous  shocks. International collaboration must deliver major developments in  this respect. Sharing knowledge and best practices could be the primary  channel to developing win-win investments and a robust global network of  the 21st century. This is equally true for manufacturing and hard  infrastructure, as well as less tangible elements of the economy:  services and the digital infrastructure. The distinction between  "tangible" and "intangible" is becoming less meaningful nowadays.

No wonder that financial cooperation is also heading toward higher  levels of joint added value. Central banks are pioneers of this new  collaborative approach. It has been the People's Bank of China (PBOC)  which ventured to create a central bank digital currency (CBDC), with  wide-scale real-payment pilots having already been underway for three  years. The PBOC has also been supporting international cooperation in  this respect, which is essential because this new form of central bank  money might have the most revolutionary impact on cross-border  transactions. Such payments still lag behind domestic transactions in  terms of speed and cost efficiency. While many countries have already  introduced instant payments at home, international bank transfers  usually still need time to be settled. Of course, this lags behind the  pace of the "turbo charged" world.

Central banks are acting quickly and forming international  partnerships to revamp the foundations of cross-border finance. They are  leveraging groundbreaking technologies such as distributed ledgers,  non-fungible tokens, smart contracts and other innovations. Initiatives  such as the m-CBDC Bridge (a joint pilot of the People's Bank of China,  the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank  of the United Arab Emirates and the BIS Innovation Hub Hong Kong  Centre) and Project Dunbar (also under the auspices of the BIS  Innovation Hub) are gaining ground. European central banks are now  getting onboard and have begun engineering test transactions with their  Asian counterparts. This is good news because there could be no  sustainability turnaround without renewing the global financial system  and putting it on a sustainable path, too.

The Magyar Nemzeti Bank (MNB, the Central Bank of Hungary) is an  institution advocate of multilateral cooperation in the various fields  of the digital and green transition. Our past decade has seen extended  partnerships with Eurasian central banks, financial institutions, think  tanks and the academia to promote knowledge sharing, best practices and  other joint activities. The MNB has announced its Green Program, the  Central Bank Renminbi Program and the Budapest Renminbi Initiative, as  well as the Budapest Eurasia Forum and an own Technical Assistance  Program, which all have direct links to the international community.

In a nutshell, the Green Program aims to reduce the central bank's  own carbon footprint, but it goes well beyond that. It is a  comprehensive scheme to incentivize green financing for the real  economy, i.e., channeling more funds to carbon neutral, sustainable  investments and the renewable energy industry. Furthermore, financial  institutions are encouraged to detect climate-related risks in their  balance sheets and operations with an eye to measuring their  environmental (or more generally, ESG) performance.

Green finance and future-oriented macro policies are nowadays at the  heart of the MNB's engagement with its international partners.  Sustainability is the core concept of our flagship event, the annual  Budapest Eurasia Forum, which — in addition to regular staff-level  dialogue — is a primary platform for solidifying our professional  contributions on an international level. We are especially proud to have  the Boao Forum for Asia, as well as the Fudan Development Institute and  the Shanghai Forum among the distinguished partners of our event  series.

Another similar platform is the MNB's Budapest Renminbi Initiative  which provides a more specific opportunity to discuss the international  role of the renminbi, its cross-border use and contribution to financing  future-proof investments.

All in all, a successful digital and green revolution can only be  achieved in a collaborative way. Let us not forget the words of the  famous Hungarian poet, Sándor Petofi: "Time is right, and it decides  what is not."


The author is governor of Magyar Nemzeti Bank, the Central Bank  of Hungary. The author contributed this article to China Watch, a think  tank powered by China Daily.

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