US-China Great Power Relations and World’s New Financial Pattern
2014-10-12 12:04:00    source:    click:

In the beautiful fall, a group of learned former political leaders and scholars gathered in Beijing to conduct profound and candid dialogues. This is one of the financial leadership dialogues held by International Finance Forum (IFF) in more than a decade. Themed ambitiously, this dialogue embraces both current and long-term significance. Here are some excerpts from the dialogue.


Keynote Speakers:
Mr. Kevin Michael Rudd, Co-chairman of International Finance Forum (IFF), Former Prime Minister of Australia
Mr. Dai Xianglong, President of International Finance Forum (IFF), Former President of People’s Bank of China
Mr. Zhang Ping, Vice President of Chinese People’ Institute of Foreign Affairs
Mr. Huo Xuewen, Member of IFF Academic Committee, Secretary of CPC at Beijing Municipal Bureau of Finance.
Mr. Song Min, Member of IFF Academic Committee, Dean of the Center for China Financial Research, University of Hong Kong.
Mr. Zhang Liqing, Member of IFF Academic Committee, Dean of School of Finance, Central University of Finance and Economics
Mr. Jin Zhongxia, Director of Institute of Finance, People’s Bank of China
Mr. Hu Hao, Director of China Center for Contemporary World Studies, International Department of the Central Committee of the Communist Party of China
Mr. Jin Canrong, Deputy Dean of Institute of International Relations, Renmin University of China
Mr. Ruan Zongze, Vice President China Institute of International Studies
Mr. Pang Zhongying, Director for the Center of Global Governance of Renmin University
Mr. Xiao Geng, Honorary Professor of Hong Kong University
Mr. Xu Changyin, Deputy Director of Research Center of the Council for National Security Policy Studies
Mr. Xu Chong, Editor in Chief of International Finance News
Mr. Yu Hongjun, Deputy Director of the International Department of the Central Committee of the Communist Party of China
Yu Hongjun: After the Cold War, the international situation has changed dramatically. The relationship among major powers have been restricted repeatedly and the international strengthen map is always changing. It is worldly recognized that the bilateral relationship between China and the U.S., significant and complex, is the most important of all and is based on a strong but fragile as well foundation. Last year, the leaders of China and the U.S. proposed to act in the same direction and to establish a new model of the relationship. Therefore, how to establish a new model, how to confront the changes of international situation and how to take the required international responsibilities are significant topics attracting the world attention. Today we will discuss on these topics.
After his tenure as the Prime Minister of Australia, Mr. Kevin Rudd has been specialized in US-China relationship. We look forward to his opinions on this issue and discussion with him afterwards.
Kevin Rudd:
China will play a “bigger role”
International Community should be prepared for it
I’ve been doing research on feasibility of US-China new great power relations. The concept of a new model of US-China relationship put forward by Chinese President Xi Jinping is beneficial for it centered on how to avoid two major powers’ conflicts or even war and how to build a future which is not only beneficial for the two countries, but also for the world. Generally speaking, new model of major power relation mainly has strategic and military indications, which is the precondition of all corporations. However, we should attach more importance to economic and financial corporation. Leaders’ communication began at the meeting in September 2013nin California. I hope that in President Obama’s visit to China this year, they will continue those active talks.
I will begin with the economic rise of China
In economic scale, calculated in any method, China now is the second largest economy in the world. According to IMF, in 5 years (2019), calculated by PPP, China will outweigh the US in economic scale. As far as I can see, my American friends are not ready for this because it was hard to believe for them when I talked about it in the US.
In economic growth, data of The Economists shows that in the fourth quarter in 2013, China took up about half of the world economic growth, and the US, only 1/5. China will certainly slow its growth in the future, but among the seven independent prediction reports I’ve studied, 5 assumed a growth between 5.7%-7.5% from 2020 to 2025, and another 2 assumed 4%-5%.
In international trade, China has surpassed US to be the largest trader in 2010-2012. According to 3 independent prediction reports, China will account for 18%-20.5% by 2020, and 19.6%-27% by 2030.
In outward foreign direct investment, great changes just get started. In the decade between 2000 to 2010, China is the largest emerging markets with foreign direct investment. And China’s investment in foreign countries grew rapidly from 8.6% in 2013. Hu Angang, a Chinese economist, predicted that China will become the largest investment destination with 20% of the world whole investment in 2020, and will become the largest investor in 2030 with 4.5-5 trillion US dollars.
Lastly, let us look at the capital flow. World Bank report 2013 pointed out that China will become the largest source of capital flow, like the Europe and the US. They said in 2030, China will account for 40% of outward flow and 30% inward flow. Another economist predicted that outward flow will surpass inward flow.
I listed the international statistics to tell friends from China, the US and the world that in 15 years ahead, we should be clever enough to get prepared for a bigger role China will play in the world economy and finance.
Kevin Rudd:
Fast Speed of RMB Internationalization in Prudential and Orderly Manner
Thirty years ago when I was in China, there still were foreign exchange certificate. But things are quite different now, which makes me wonder what it will be like in another thirty years.
RMB internationalization continued almost for a decade in various ways. In 2004, Hong Kong’s banks began to take RMB deposits and since then it never stopped. And in 2014, Hu-Gang Tong(Shanghai-Hong Kong stock connect) will be launched.
I think it’s speeding up. According to the Standard Charted Bank, RMB trade settlement will grow from 14% in the fourth quarter in 2013 to 28% in 2020, and that will be 30% according to HSBS. Statistics from SWIFT shows that in 2013 RMB has overtaken euro as the currency with the second largest user in traditional financial activities. In the meanwhile, by June 2014, RMB has become the 7th active currency and SCB predicted it will become the 4th payment currency in 2020. PBC shows that among all cross-border trade settlements in the first half of 2014, RMB has grew by 59%, reaching 3.27 trillion yuan. But by 2011, only 2.2% of world currency reserve is RMB. Some predict a 15.5% in 2020 and some others, 20.24%. And by then RMB will become the third major currency.
Many analysts hold that if China permits the complete free convertibility of RMB and opens capital accounts as well, China will see a rise of RMB’s position in world currency reserve. This will bring some consequences, some of which may be hard to live with.
Besides, in 2011 G20 conference, France suggested RMB in the SDR currency basket. I’m also in this. An enlarged basket will make world finance more stable.
Generally, experts will proceed from four aspects when it comes to currency internationalization, they are: economic scale, trade scale, flexibility of exchange rate and penetration of market. As to penetration, many analysts point out that China still needs more liquidity in financial market and broader opening. I’ve read the report of the third plenary session of the 18th central committee intensively and learned that China takes financial reform seriously. But we still have to see if China is willing to promote RMB internationalization by easing interest rate and exchange rate control, open capital market and ease capital account control. This is an important decision. We can tell from international experience that the pace and order are key to the reform, for instance, liberalization of domestic financial market should be prior to the liberalization of capital account. Eventually the interest rate and exchange rate is the market to decide.
From evidence before, we can see China will continue this process but in a prudential and orderly way.
We went through how China’s economy, trade, investment, capital market and currency are important to the world as key factors in US-China relations. Different opinions need time and effort to dissolve. If done properly, differences may become agreements.
We should remember that we rescue the world economy from financial crisis. We have seen this and involved in this as one. Back then it is China, the US and other major economies united as a team to respond effectively to the challenge. We need the same process in any challenge in the future, no matter it is bilateral, regional and multilateral. Speaking of bilateral relations, the US and China should sign bilateral investment agreement, which should draw more attention from the US. I’m concerned that this has been put aside. In regional relations, we should solve conflicts between TPP (Trans-Pacific Partnership) and RCEP (Regional Comprehensive Economic Partnership, initiated by Asean countries and China, Japan, Korea, Australia, New Zealand and India are invited). In multilateral relations, through G20, we should join efforts to welcome China into the global financial system. Meanwhile, we should also figure out what role RMB is playing in the future.
Success in these fields will not only help China and the US build new relation pattern but also enable us to foster a stronger world economy and financial system.
Dai Xianglong:
“Eight points” Came to the Point
International Finance Forum (IFF) mainly focuses on finance and I’ve been working in the financial sector, so I want to take this opportunity to offer eight points.
First, the current financial system needs a reform of relative stability. The current financial system centers on the USD, and it is formed through history. But the defects became obvious with the decrease of US proportion in world economy. The conflict between being domestic currency and being a international drew more attention and the negative effect of spill-over of monetary policy, which brought turbulence and fluctuation to the international financial system, became more obvious.
This system is also not to the US’s benefit. I think the financial crisis in 2008 may have something to do with it. If the USD were not the major international currency, the Americans might not have spent so heavily and triggered the financial crisis. In the G20 summit in November, 2008, China put forward direction, principle and process of financial reform and also the diversification of international monetary system. Many countries held that current system should be reformed in relative stability. But the reform could only proceed from reality, that is, we could not adopt neither gold standard system nor a super sovereignty currency system. So at the same time of increasing the SDR of IMF, we should focus on diversification of international currency. I think this is a consensus of international financial reform, which the US should also admit.
Second, the international financial reform should be preceded step by step. We aim at a diversified monetary system including the USD, the euro, RMB and other international currencies, with coordinated exchange rate. This coordination means that among major countries. Some from the Europe said the USD, the euro and the RMB should be fixed interest. Besides, emerging economies and developing countries should have bigger say in major issues but instead of changing the whole system, we should “increase” and take a gradual manner.
Third, the USD should still act as the leading role. The US still takes up 24% of the world economy, with its strong technology, military power and mature market system. Among global long-term foreign exchange reserve, 65% are the USD, and that is 80% in world trade. We all can see this as an objective thing. Stable USD is in the interest of China because most of China’s foreign exchange reserve is USD. At the same time, the US should be responsible for the stability of exchange rate. It can be justified that exchange rate in ordinary countries are decided by the market, but as international currency, this will result in some problems.
At the same time, I hope that the US can reduce the deficit and debt ratio, at least to the average of developed countries and emerging countries. The USD is both the domestic currency and the international currency, which I proposed 5 years ago and still insist.
Fourth, we hope it will promote the stability of euro. Euro made a good start for international currency diversification. European debt crisis broke out after the American financial crisis. It resulted from fiscal problems and the lack of prompt rescue, instead of problems of euro itself. From its birth to the American financial crisis, the inflation rate of euro has been kept at 2%, and economic growth rate at the level before the euro zone was established. After this crisis, euro was not broken down or narrowed down to several core nations. In spite of some institutional flaws, the emergence of euro is inevitable and its mechanism will be improved. So I expect a more stable euro.
Fifth, we should promote RMB internationalization, but not to challenge the USD. Some say whatever China has done was to challenge the US, and that is wrong. Instead of a challenge and an initiative to reform international monetary system, RMB internationalization just promotes the reform in an objective way, but not an engine for us to do this. RMB internationalization is imperative in the highly opening of Chinese economy and is pushed by the international monetary system. For instance, if we go into liquidation in USD, we should convert other currencies into the USD, in which we should be charged 2% fees. China is not to challenge the USD, to your observation, China has never used the term of “RMB internationalization”. The goal of foreign exchange system reform is to promote RMB convertibility and the cross-border trade settlement, which is realistic indeed.
Then, how to internationalize RMB? First, it should be preceded through market, in which the RMB is allowed to trade with other currencies. Now only part of currencies can be traded with RMB, like the USD, pound, yen, Australian dollar, New Zealand dollar. But the trade with euro is against the USD. Moreover, the RMB offshore market and offshore center should be formed through market.
Then, the governments should do their part, that is, expand scale by effective currency swap between central banks.
Last, regional corporations should be strengthened in this. For instance, the currency swaps among BRICS countries. In this sense, setting up New Development Bank BRICS and the contingency reserve arrangement are general tendency. Because it related to the IMF, and once it has any problem, the IMF will likely make up 70% of the losses and the BRICS countries, 30% from the contingency reserve. This is a complement to international monetary system. Many elites from financial sector in the US told me that they were for the RMB internationalization and I think with proper propaganda and explanation, it will be recognized by the world.
Sixth, US-China financial corporation should set foot on serving and expanding trade and investment corporation. Trade value of China has already surpassed that of the US, and it becomes the largest trader. China is the US’s second largest trading partner, third export market and largest import source. Statistics from China’s Ministry of Commerce shows that the bilateral trade value of the two countries reached a historical high of 521 billion USD in 2013. By the end of 2013, bilateral investment value has gone over 100 billion USD. But the mutual investment value only surpassed the respective investment value by 3%. As major countries for mutual benefits, they should develop trade as well as investment and currency. With these developments, they can build corporation in politics and global issues.
Seventh, we should expand financial opening between the US and China, which is critical. The US should open to China and vice versa. Before joining WTO, foreign assets took up 2% of all assets in national banks, 3% in security companies and 5% in insurance companies. That was after the Asian financial crisis and we were not sure the extent of opening up. The opening up at that time was not so small, yet we have lived through it. So I think we should take a bolder opening up towards foreign countries, especially the US. In short, I believe in the great potential in financial opening between the US and China.
Eighth, China and the US should strengthen coordination and corporation in the global arena and solve hot issues concerned by both sides properly. In G20 conferences, we coordinated in solving major global issues. From early 1994 to late 2013, the mid-point of yuan to dollar has been increased by 43%. So the exchange rate of RMB should be controlled reasonably, but it is impossible for the PBC to leave it alone because of tremendous fluctuations. Moreover, we hope that US government will pass legal procedures soon and approve the IMF share reform and increase China’s share of SDR.
So, in general, in the new model of US-China relations, problems in financial sector are supposed to be discussed. I think, once discussed, they can reach an approval.
(After keynote speeches by Kevin Rudd and Dai Xianglong, panelists and keynote speakers have inspiring interaction. We are sorry that dialogues are cut out due to length limit. This article is edited and reported by Sun Shilian and Liu Lina with Xinhua and Yu Xuefei with International Finance News)

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