The key reform of the international monetary system

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					The key reform of the international monetary system
Group of Twenty (G20) summit on the eve of the discussion on the dollar once again
heating up. Last week's most important background events, the U.S.
Federal Reserve Board (Fed) announced plans to buy 300 billion U.S. dollars
long-term bonds. U.S. monetary authorities in this essentially equivalent to
"print money" approach to support the Government to expand
the budget deficit to stimulate the economy. This raises concerns about the purchasing
power of the dollar market, driving the dollar and commodity price inflation, the
dollar hit last week, the largest since 1985, the weekly decline.
China has more than 2 trillion U.S. dollars of foreign exchange reserves, is also the
largest buyer of U.S. Treasury bonds (currently holds about 740 billion U.S. dollars,
not including a "quasi-national credit," the U.S. agency debt).
China's attitude on the impact of the dollar goes without saying, on the
other hand, developments are also related to China's vital interests.
Following the March 6, Chinese Premier Wen Jiabao publicly expressed the huge U.S.
debt held by China "are actually worried", the March 23 central
bank governor Zhou Xiaochuan at the official web site "On the
international monetary system Thinking "article, and immediately attracted
wide attention.
Although the wording of the implicit, Zhou Xiaochuan more than 2,000 words in this
article, two important viewpoints expressed. First, China recognized that the current
international monetary system has serious flaws, and its systematic risk is magnified
by the current financial crisis, China believes that this situation must be changed;
second, Zhou Xiaochuan made to reform the international monetary system, his
specific the idea that the creation of a sovereign state with the separated and can keep
the currency long-term stability of the international reserve currency, replacing the
current U.S. dollar to play. Specifically, Zhou hoped that the International Monetary
Fund (IMF) special drawing rights and its management (SDR) of the transition to
SDR-based construct a new international monetary system.
Zhou Xiaochuan, the view before the article is clear on the current situation and
impact of "diagnosis", the second point is even more difficult to
close a currently effective under the "prescription."
Zhou clear that the currency sovereign credit (such as today's dollars) as an
international reserve currency is inherently flawed, because the monetary authorities
of sovereign states (such as today's Federal Reserve) can not
simultaneously take into account the different goals at home and abroad, and can not
for the the world to provide liquidity while ensuring currency stability. For example,
the current deficit of the United States needs to be expanded to stimulate the economy,
while China and other U.S. creditors will need to control the size of the deficit the
United States to maintain U.S. dollar. This is called "Triffin
dilemma" (Triffin's Dilemma) contradictions, shows a lot of
dollar reserves accumulated behind the vulnerability model, once the currency crisis,
creditor and debtor countries will pay a heavy price. For China, its holdings of the
dollar will face the huge depreciation of the United States, losing money in China, the
deficit will be difficult to maintain, and expensive (U.S. Treasury was forced to pay
higher interest rates).
However, the article proposed to SDR-based program to reform the international
monetary system, avoiding an important question: what kind of exchange rate regime
implemented. If the Chinese central bank intervention in exchange rate does not
change the current policy (that is, the foreign exchange market by buying U.S. dollars,
foreign exchange reserve accumulation, restrictions on RMB appreciation space), is
still difficult to solve China's foreign exchange reserves of the risk and the
structural imbalance of China's economy. In the presence of exchange rate
intervention, the dollar reserves will be converted according to certain exchange rate
for the composition of the SDR basket of currencies reserves. But the SDR reserves
itself remains the risk of depreciation, by the world's major economies the
impact of monetary and fiscal policy, if there is no flexibility in the exchange rate,
from a basket of currencies consisting of sovereignty, the value of SDR is still likely
to be overestimated, but will concentrate in the United States over the past risk into a
number of countries. For example, the Bank of England is practicing
"quantitative easing" (Quantitative Easing) to buy bonds with
the Fed's policy no different - have diluted the local currency's
purchasing power. And that is without the aid of SDR, such a goal China has been
through the diversification of foreign exchange currency partial implementation.
Solution to the currency sovereign credit risk as an international reserve currency,
current conditions, the most realistic approach is to implement a floating exchange
rate system, rather than creating a new international currency.
Historically, non-sovereign monetary gold, silver and so have played a role in the
international currency. However, the functions of central bank gold standard of the
times there is a huge difference with today. At that time, the central bank is only
responsible for the stability of the currency (such as the 19th century, the Bank of
England), but not to monetary policy (to regulate the money supply) to promote
economic and employment growth functions. The latter is in the 30s Great Depression
and Keynesian economics was developed and evolved gradually after approval. Once
the central bank to assume the functions of regulating the money supply, monetary
policy objectives of its national sovereignty and international monetary unit stability
requirements are not compatible with the attendant problems.
It is precisely because of this reason, the 70's, faced with deteriorating
balance of payments of the U.S. government abandoned the Bretton Woods system
(Bretton Woods System) core principles - 35 dollar 1 ounce of gold. The international
monetary system is based on the Fed's commitment to central banks by the
"official price" offer gold value of the dollar as a benchmark
issue, while national currencies pegged to the dollar. After that, Western Europe,
Japan and other countries have abandoned or partially abandoned (such as Japan) the
practice of their currencies pegged to the dollar, turned to the current market
transaction-based floating exchange rate system, no longer hold large foreign
exchange reserves. However, 90 years since the last century, including
China's rapid economic development in emerging market countries, in
order to maintain export competitiveness, these countries are more likely to rate the
central bank to intervene (namely underestimating the local currency) accumulated a
lot of dollar-denominated foreign exchange reserves. This situation is similar to 70s of
last century in Western Europe and Japan, only the United States today, the budget
deficit, trade deficit and foreign debt are much larger, or that there is a greater
depreciation of the dollar risk.
Reconstruction of the international monetary system is not a short-term goals can be
achieved, IMF set up for decades, in the role of the world economy is rather limited.
1997/98, IMF economic crisis in developing countries in aid of the conditions
encountered by the country's strong relief rally. National political and
economic interests vary widely, as the euro zone monetary policy can be as
sovereignty to supranational organizations, but still Ji minority within a global
monetary policy coordination-lasting implementation. (Historically, the establishment
of the Bretton Woods system, with the United States after World War II in the Western
world's political, economic, and military superiority are closely related.)
China faces dilemma is at what time in what ways the end of the practice of
large-scale reserves in U.S. dollars. Realistic option is to give up on the foreign
exchange market intervention, to allow the yuan to float freely. 80s of last century, the
Japanese yen after "Plaza Accord" (Plaza Accord) and other
sharp appreciation of the process, to the impact of the Japanese economy is still
controversial. At the same time, taking into account the depreciation of the existing
stock of foreign exchange reserves and exchange rate appreciation on the real
economy, China must take similar steps to a high degree of caution. In fact, since
2005, China allowed the yuan to appreciate against the U.S. dollar exchange rate has
begun to approach this goal, since the intensity of central bank intervention in foreign
exchange markets remains high. Today's situation, two options,
market-oriented reform of RMB exchange rate remains a goal can not be avoided.