Zhang Zhixiang: Meeting with AMRO

2015-06-09 IMI

Zhang Zhixiang: Former Director General, International Department, PBoC; Former Executive Director for China in IMF It is a great pleasure to participate in today’s discussion with AMRO representatives. This meeting has also reminded me of similar meetings I had when I was at the People’s Bank with IMF representatives for annual consultations. Recently there are quite a number of meetings in some cities in China to talk about the issue of reform of international monetary system, taking advantage of commemorating the 70th anniversary of Bretton Woods System. About two and half weeks ago, Mr. Yoichi Nemoto and Mr. Zhang Xiangzhi and myself attended a meeting of this kind in Hangzhou. I appreciate that AMRO raises this issue for discussion as it is both important and timely. 1.On the reform of the international monetary system, ever since the breakdown of the Bretton Woods System trigged by the new economic policy in August , 1971 to delink the US dollar and gold relation by Nixon Administration, IMF amended its articles of agreement in 1973 and floating exchange rate system began in existence. During this period of 40 years, we have seen as many as more than 100 financial crisis of world wide including the Mexican financial crisis in early 1980s, the Asian financial crisis in 1997 certainly the most severe one, 2008 global financial crisis trigger by sub-prime crisis in the US. Therefore, the international community wishes to see that a sound international monetary system can provide an ideal environment for world economic development, which can also provide an early warning mechanism and can perform the role of lending of last resort so that damages caused by crisis can be mitigated. According to IMF articles of agreement, there are six purposes for the existence of the institution. The most important one is the No. 3 purpose, which says that “ to promote exchange stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.” If we try to analyse the causes of the financial crisis, disorderly movement of exchange rate has played the worst role. What is more, the current international monetary system has never given any early warning to the international community. Indeed, soon after the breakout of the 1997 Asian financial crisis, the necessity and urgency to reform the international monetary system was already made crystal clear. The international community also emphasized the importance to avoid systemic global crisis. The 2008 global financial crisis has definitely provided much bigger and severe lesson. Even though the US economy has recovered to some extent from the worst time of crisis, yet, efforts for reforming the international monetary system should never be relaxed. 2.Regarding what are the main policy issues that need to be addressed for a more efficient international financial architecture, (A)I believe that the legitimacy and governance are the most important policy issue for international monetary system reform. The Bretton Woods System has been in existence for 70 years. The economic output of the developing economies has already reached 50.4% (from IMF source ), however their share of quotas in IMF is only about 39 per cent. The communiqué of the G20 Finance Ministers and Central Bank Governors issued on October 23, 2010 reads that the G20 finance minister and central bank governors have reached agreement on an ambitious set of proposals to reform the IMF’s quota and governance that will help deliver a more effective , credible and legitimate IMF and enable the IMF to play its role in supporting the operation of the international monetary and financial system. These proposals will deliver on the objectives agreed in Pittsburgh and go even further in a number of areas. Key elements include: ---shifts in quota shares to dynamic EMDCs and to underrepresented countries of over 6 percent, while protecting the voting share of the pooest, which we commit to work to complete by the Annual Meetings in 2012. -a doubling of quotas, with a corresponding roll-back of the NAB preserving relative shares, when the quota increase becomes effective. -continuing the dynamic process aimed at enhancing the voice and representation of EMDCs, including the poorest, through a comprehensive review of the formula by January 2013 to better reflect the economic weights, and through completion of the next regular review of quotas by January 2014. -greater representation for EMDCs at the Executive Board through 2 fewer advanced European chairs, and the possibility of a second alternate for all multi-country constituencies and -moving to an all-elected Board , along with a commitment by the Fund’s membership to maintain the Board size at 24 chairs, and following the completion of the 14 General Review, a review of the Board’s composition every 8 years. However, it is very unfortunate that the above-mentioned decisions have not been implemented up to this day due to US congressional rejection to implement. The international community has already seen a long delay of more than two years as the 2010 G20 communique pointed out. The recent communiqué of Twenty-Ninth Meeting of the International Monetary and Financial Committee on April 12, 2014 declares: “We are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms agreed to the in 2010 and the 15th General Review of Quotas including a new quota formula. We reaffirm the importance of the IMF as a quota-based institution. The implementation of the 2010 reforms remains our highest priority and we urge the United States to ratify these reforms at the earliest opportunity. We are committed to maintaining a strong and adequately resourced IMF. If the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and develop options for next steps and we will schedule a discussion of these options. . Therefore, we must try our best to see what will be the better and ideal options for solving issue of international monetary system reform.“ In this connection, the original plan for 15th General Review of Quota to start from January 2014 has also been very much postponed. The IMF is well known for its quota-based institution. However about 50 percent of the financial resources employed by the IMF is not from quotas but from arrangement to borrow from member countries. This situation will great hurt the ability and effectiveness of the institution as the lending operations supported by borrowed resources should follow different arrangement. (B) Reform of current reserve currency practice is another important element in reform of the international monetary system. Avoidance of abrupt and sharp fluctuation of exchange rate and violent movement of capital flows is very essential for promoting economic development and stability of financial market. The Special Drawing Rights (SDR) is a reserve asset created by the IMF in 1969 which can provide much stable exchange rate environment. For instance, the exchange rate between SDR and US dollar fluctuated between 0.61 to 0.69 from November, 2003 to September 2013. Only in November and December, 2005 and February, 2006, the exchange rate between SDR and US dollar was 0.70. Therefore, SDR can be used for this purpose. Due to various reasons, it has been very unfortunate that SDR has not been given a chance to develop. It is hoped that SDR can develop in width and depth. Firstly, it would be helpful if the SDR basket of currencies can expand and allocation of SDR can also accelerated so that SDR can well play an important role of reserve assets. When SDR was first created and established, there were 16 currencies in the basket. The requirement of currency to be included was the member countries should account for at least 1% of total world trade. Today, we can well consider factors such as flexible and wide use as well as weight in world trade.(C) It is of great importance and necessity to enhance the role of surveillance by the IMF. Let me quote again the International Monetary and Financial Committee Communique of April 12, 2014 which reads monetary policy settings in major countries should continue to be carefully calibrated and clearly communicated, with cooperation among policymakers to help mange spillovers and spillbacks. It is particularly vital to monitor the movement of exchange rate and capital flow during the process of normalization monetary policies. 3.The 3rd question in the questionnaire reads what role can RMB play? I believe that with regard to the important issue of international monetary system reform, it is the member countries who can play the vital and unique role for promoting the reform. Therefore, it is necessary to know what our Asian counties can do together, particularly in the context of AMRO. The following table shows the quota shares of 10 plus 3:

A.10 plus 3 together with other Asian nations can really play an important role in pushing forward the international monetary system reform. On the issue of seeking an early completion of decision for reform of international monetary system agreed upon in 2010, all the member countries of 10 plus 3 reached the consensus supporting the call for early completion and the time limit has been set to the end of the current year. At this juncture, I wish to mention that among some 3,000 international staff working for IMF, staff , especially staff of higher level in the institution, staff from 10 plus 3 countries are of very small percentage. With rise of EMDCs in the world economy, it is very necessary and important to have staff of all levels working in the IMF from EMDCs, so that demand and aspiration as well as interests of EMDCs can be well represented. The IMF has been criticized for using same formula to handle all economic issues in various countries. It should be emphasized that more qualified staff especially staff of higher levels from EMDCs are recruited in the international financial institutions. B.Serving as 2nd best, 10 plus 3 together with other Asian countries could take lead to work out viable and efficient regional arrangement. The 1997 Asian financial crisis has definitely provided profound lessons and experiences for all of us, which has given rise to the Qingmai Initiative followed by the birth of AMRO and other arrangement such as efforts to build Asian bond market. As exchange rate and capital flow are the essential elements for promoting stable economic growth, 10 plus 3 have also made great efforts to build financial safety net. However, it is equally significant if further efforts can be made to seek great unity of financial and monetary collaboration among 10 and 3, even in Asian area. C.China has joined hands with a number of 10 plus 3 countries to build up currency swap arrangements which can provide not only a safety net but also a mechanism for stable exchange management to promote trade and economic development. Following is a incomplete table showing the currency swap arrangements between China and a number of 10 plus 3 countries. Thailand 2 billion US dollars swap agreement signed in December 2001 Japan 3.1 billion US dollars , swap arrangement signed in March 2002 Korea 2 billion US dollars, swap arrangement signed on June 24,2002 Malaysia 180billon RMByuan/40billion Ringgit, signed on Feb.8,2009 Indonesia 100billion RMByuan/175trillion Indonesian rupee, signed on 23 March 2009 Singapore 300billion Rmbyuan/60 billion Singapore dollar, signed on 7 March, 2013 Korea 360billionRMB yuan/64trillion Korea won, signed on 26 Oct.2011 Thailand 70billionRMByuan/320billionThai Baht signed on 23 Dec.2011 It is believed that stronger financial collaboration among 10 plus 3 countries can not only provide stable environment for economic development in our region but also form a positive factor to promote international monetary system reform. Thus, we wish to commend AMRO for its efforts and greater achievement in its future endeavors.

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Zhang Zhixiang: Meeting with AMRO

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