The 3rd International Finance Forum (IFF) Leadership Dialogue took place in Beijing on June 24th with Mr. Jean-Claude Trichet, IFF Co-chairman and Former President of the European Central Bank, as the keynote speaker. Other distinguished speakers include Cheng Siwei, Chairman of International Finance Forum (IFF); Dai Xianglong, President of IFF; Li Ruogu, Executive Vice President of IFF and Chairman and President of Export-Import Bank of China; Jiang Jianqing, Chairman of Board of Industrial Commercial Bank of China (ICBC); Wei Benhua, Member of IFF Academic Committee and Former Deputy Director, State Administration of Foreign Exchange (SAFE); Huo Xuewen, Member of IFF Academic Committee and Party Secretary of Beijing Municipal Bureau of Financial Work; Song Min, Member of IFF Academic Committee and Director of Centre for China Financial Research, the University of Hong Kong; and Zhang Liqing, Member of IFF Academic Committee and Dean of the School of Finance of the Central University of Finance and Economics. Experts from all professions came together to hold in-depth discussion on topics of the reasons, functions, existing problems and the prospects for development of Euro; the fundamental cause and dealing measures of European debt crisis; the prospects of economic development of European Union (EU) in the following 5 years; inspirations of the integration and reform in the new Europe on Chinese current all-round reform and etc.
Dialogue 1: Challenges of Euro and the European Economy
With the dust settled from the 2014 European Parliament election, the new parliament faces the challenges of increasing influence from the eurosceptics, slow growth in economy and difficulties in business operations, etc. Meanwhile, Euro zone is facing the greatest risk that once it falls into the deflation trap, its economy might repeat Japan and be in long time stasis. How would Europe react to the challenges?
With the exploration of the origin, function, problems and perspectives of the Euro, we would thorough discuss the root cause of the European debt crisis, response to the crisis, and the prospects of the EU economic development in the next five years.
Dialogue 2: Expand the China-EU Exchanges and Cooperation
At present, China's economy and finance has entered into a new stage of deepening reform. How to gradually promote the internationalization of RMB? How to strengthen the exchanges and cooperation in economy and finance between China and European Union? The process of the comprehensive integration of the European countries and the current reform in the government, public service and society would provide inspiration to further China's comprehensively deepen reform.
Here are some issues on Europe that have been discussed for some time:
First, what has Europe been through during the crisis started from 2007 till now? Second, why the crisis centre would transfer from America to Europe and develop into a European Debt Crisis? Why the sovereign debt crisis took place at euro zone, instead of any other places?
Third, are the measures taken by euro zone countries against the crisis appropriate? Can they prevent new crisis? In the long run, what we can do to ensure a stable, prosperous, resilient and sustainable economic framework in the future?
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To address the reasons why the crisis centre has moved from America to Europe, from private departments to public departments, I would like to say that there are 6 problems existing in the eurozone :
1. Lack of federated organization and corresponding budgets
2. Lack of monitoring index for economy competitiveness
3. Lack of banking Union and bank rating
4. Lack of an evaluating system to assess before a financial crisis
5. Lack of a unified market with flexibility and elasticity
6. Lack of a series of powerful structural reform measures
Personally, I believe in the prospect of Euro-RMB direct trading. The objective for China should be the realization, at some point, of free convertibility in its capital account. For RMB to become one of the SDR currencies, it is necessary to take China's impacts in the international community into consideration, and view RMB as one of the supports to strengthen the global (financial) system. The reason that RMB cannot be added into Basket of SDR currencies is because it does not meet one of the prerequisites, which is to possess credibility in some degree to become a completely free curency. RMB is undergoing rapid structural reform currently, therefore, it should be added into SDR, which, however, requires rate stability and anchoredness. The Centre Bank of each SDR curency must stabilize the CPI at 2% orbelow. And that, is a very vital point that RMB has to realize if plans to join in SDR.
The problem exposed from European Debt Crisis is that the wealth created failed to match the high welfare, government expenditure and individual consumption. Therefore, it is important for China to maintain its social welfare, government expense and labor capacity appropriately. High productivity is always the key for boosting economic growth, through expanding consumption as well as improving purchasing power.
Moreover, the internalization of RMB is estimated to be realized in about 10 years by realizing the following criteria: first, improving RMB's internalization index. second, application of RMB as international investment currency; third, promoting RMB as one of the reserve currencies. We should reform exchange rate regime and realize convertibility and openness under capital account in order to meet the internalization of RMB.
To promote international currency diversification, an international monetary system, leading by dollar and composed with major currency like euro, RMB, Japanese Yen, pound sterling etc., should be constructed to maintain exchange rate in an appropriate level. The internalization of RMB involves convertibility of current-account and capital account. It is believed that RMB will become one of the world major settlement and capital investment currencies within certain years, while it requires our foreign exchange reserve to take up more than 5% of the global economy volume before RMB becoming an international reserve currency. Meanwhile, we need to increase the world confidence in RMB. Undoubtedly, the RMB internationalization is not only for the need of China's real economy, but also for the growth of the world economy.
European recovery is not fast, and varies from country to country in terms of speed. At the same time, Europe is facing deflation, high unemployment rate, huge amount of NPL, and the problem in reforming the high welfare system. Although Europe has constructed emergency mechanisms like EFSM (The European financial stability mechanism), EFSF (The European financial stability fund) and etc, their action is comparatively slow, due to the lack of united government within EU. Additionally, the European central bank had been dealing with deflation for about 10 years. It is worth special attention to find out why the long-time easy monetary policy has not brought inflation.
I am optimistic towards the internalization of RMB. Since the year of 2010, the global need for RMB has been rising sharply, which has driven the needs for cross-boarder RMB business. RMB has been acting as not only settlement currency, but investment currency and has gradually become reserve currency. ICBC has accepted commissions from several central banks to transfer part of their foreign reserves into RMB and help with the management of these reserves.
Former Deputy Director, State Administration of Foreign Exchange (SAFE)
China is the largest trading nation, and second largest economy in the world. The increasing needs in RMB will influence China's monetary policy for sure. Therefore, proactive monetary policies are needed to facilitate the internationalization of RMB. I think we need to have in-depth discussion and studies in the following five aspects of RMB internationalization: first, the proportion; second, its influence on China's monetary policy; third, its impact on employment; forth, the impacts on global trade balance; fifth, the implication on RMB's engagement as SDR currency.
There are three questions need our attention:
First, the relationship between RMB internalization and China's monetary policy; if we look back, the rising German didn't actively push forward Deutsche Mark's internalization with concerns of its impact on their monetary policies. Is this the problem for euro zone? Had the European Central Bank thought about the impact of euro to other economies and nations?
Second, the openness of capital account, which has been one of the major blocks for RMB internationalization; If the openness of capital account could be reached within five years, we would see non-linear increase in the use of RMB in overseas market. However, the question is do we have to accelerate the process of opening capital account for RMB internationalization.
Lastly, what type of overseas assets are RMB assets? Are they loans or other properties? If the openness of capital account could be reached basically in 5 years, China's first-class large financial institutions would have full engagement in the global competition. Will this be the very key to promote the internalization of RMB ?
The n preliminary stage of RMB internalization means that RMB as foreign reserves held by central banks amount to 5% of their total foreign currency reserves, so as to fulfill the need for asset allocation, diversification, and offset the need for dollar, euro and yan as a supplementary currency.
We should keep an open mind to manage an open currency, namely push forward a currency's internationalization with the concept of "currency zone". Dollar zone is a good example. it is inevitable to bridge domestic and overseas RMB zones. And it is also inevitable to liberalize investment with RMB, as liberalization is the key to stability. We would definitely need a global vision to manage the process of RMB internationalization.
My working experience at the people's Bank China for many years leads me to believe that, the more open capital account is, the more liberalized the exchange rate would be, and the more independent and effective the monetary policy would become. Consequently, speaking from the perspective of promoting independence and effectiveness of China's monetary policy, the discussion we had today is of tremendous significance. The convertibility of Chinese capital account and interest rate liberalization should be promoted to facilitate the RMB internationalization.
There are three questions confronting us that need consideration:
First, with the direct trading of RMB and pound sterling has been realized, when can we realize the direct trade of RMB and euro?
Second, Should France and German, core countries in euro zone and EU, take the lead in using RMB to denominate commodities and settlements to facilitate the spread of RMB in euro zone. Third, will it be possible for RMB to be added into SDR Basket of currencies in the year of 2015? This will be a milestone not only for China but for the whole international monetary system.