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At present, the international monetarysystem has been led by the market. This means that the global financial marketdetermines the creation and distribution of international liquidity, as well asthe exchange rate of the main currency in the world. The global financialmarket is constantly changing the composition of the portfolio, seeking theoptimization of the risk return mechanism. But both the developed countries andthe emerging economies tend to respond to the economic and political situationin a unified way. Another feature of globalization is that the capital flows inand out of the main area the global economy, and led to the sharp contractionof the credit after the over-creation of the credit, as well as the financialasset price and exchange rate fluctuations.
The global financial crisis has a greatimpact on the international monetary system, which is dominated by the market.The global financial crisis led to a low growth rate and low inflation rateworld, followed by the long-term economic stagnation and deflation. In theaspect of the world's financial system, the biggest impact of the global crisisis reflected in the exchange rate movements. Through the adjustment of domesticfinancial and monetary policy system, as well as some mechanisms of theconstruction, hope such risks can be further addressed. And to deal with thiskind of risk, we must take expansionary monetary policy, namely quantitativeeasing, to promote the interest rate adjustment of marketization, reaching thelower bound, which is close to zero. When interest rates are close to zero,quantitative easing cast the main effect on the exchange rates, so domesticmonetary policy will have international spillover effects. Capital flows fromdeveloped countries and it will push up the currencies of emerging marketeconomies, and cause the emergence of "competition easing" and"currency war" risk.
Spillover effects of monetary, financialboom and bust, currency wars have become the main problems that are debated inthe forum for international cooperation (IMF and G20). The G7 countries andemerging market economies also have tried many different ways.
G7 adopted the strategy in order tomaintain the stability of the domestic financial order and avoid internal andexternal imbalances. They take the domestic monetary policy, instead of theexchange rate as the target, so that the liquidity of capital can bemaintained. To prevent large volatility of the exchange rate, measures aretaken to improve transparency and to better communicate policy stance. Inaddition, through more effective financial supervision and macro prudentialmeasures, the risk of financial instability is handled.
Emerging market economies take a differentstrategy. Countries, in addition to focusing on the financial reform measures,need to take a very powerful defense policy in case that the existing financialsystem and exchange rate system are influence by the external interference andexogenous policy interference factors. And the foreign exchange marketintervention measures must be able to effectively inhibit the currencydevaluation or appreciation uncertainty. The control of capital flow and theformulation, as well as the adoption of macro measures should also help tocontrol the inflow and outflow of capital, in order to balance the domesticbanking and financial system. At the same time, they accumulate a large amountof foreign reserves in order to prevent the outflow of capital risk.
Let me use a sentence from Lincoln¡¯spresidential speeches to illustrate a point of view: An institution, whosefragmentation is caused by the internal reason, must be unable to survive.There are different views on why the management of the international monetarysystem is not effective. Personally, I think that, at present, the cause of lowefficiency of management lies in the following several points: little influenceon the frequency and intensity of financial development cycle problems; theinefficient prevention of the risk of trade protection mechanism and financialfragmentation. For example, the United States could introduce some measures onexchange rate adjustment, easily leading to the emergence of retaliationrebound and countervailing measures. Macro prudential measures are also beingused to protect domestic banks and financial sectors, but attention must bepaid to its spillover effects. The accumulation of official reserves is forpreventive purposes, but also led to the tendency of deflation in terms of theworld economy.
So far, however, there is no positivemethod from G20 to coordinate the different approaches from differentcountries. For example, the reform of the international monetary fundmanagement and the corresponding share has not been implemented; nationalmacroeconomic policy coordination, especially the coordination of economicpolicy, has made less significant progress, as well as the lack of macroprudential measures and capital flow management policy support. At the sametime, the reform of the global financial supervision is not perfect, and theshadow banks and derivatives transactions are still difficult issues.
The conclusion is that new measures must betaken - G20 must strengthen the reform. Personally, I think that G20 shouldplay a key role to strengthen international cooperation in monetary andexchange rate policies, and further improve the status and role in the internationalmonetary system in the international monetary fund. Under the leadership ofG20, the Central Bank of major countries and the IMF should establishmultilateral consultation procedures. This mechanism of multilateralcooperation and consultation should include the consideration of financialstability and the international spillover effect of monetary policy. Thismechanism will also help to find effective measures to reduce exchange ratefluctuations due to changes in currencies of various countries.
In summary, the consultation process canprovide multilateral guidance for global financial markets. The guidance willcover two aspects: interest rate and exchange rate. And its purpose is tomaximally reduce the risk of instability of spillovers and financial cycle.
Personally, I think, in the mechanism ofG20, the key countries include the United States, Japan, EU countries, Chinaand some other Asian countries. These countries should strengthen cooperationrelationships between each other, and find the effective way to solve theproblem, continue the international cooperation that is mentioned before. G20can achieve its purpose only via the support and strengthening of themultilateral mechanisms that are operated under its framework. For example, theG20 held in London in 2009, through the International Monetary Fund and thefinancial stability of the Council, it stopped the collapse of the globalfinancial system. In addition, the regional arrangement also has an importantimpact on international fluctuations, and should be integrated into the globalstrategy based on the multilateral mechanism.
From the occurrence of the Europeaneconomic crisis, we can get the enlightenment that we should have moreintegration in the mechanism construction. The euro is set up to prevent risksthat may be brought by some of the key currencies. In addition, the Europeanmonetary stability mechanism, cooperation between banks and the most criticalmeasures in the aspect of investment, including investment in infrastructure,etc., have played an important role. From the experience of Asia, we can getthe enlightenment to implement a higher level of integration. Taking theestablishment of AIIB as an example, no matter in Europe or Asia, China ismoving towards a common direction to enhance investment in infrastructure.
Finally, it should be pointed out that theEU and China in the context of the G20 cooperation, will cast importantinfluence on four areas, including the reform of the international monetaryfund management and assessment of the basket of currencies for the IMF SpecialDrawing Rights (SDRs), as well as the Asian Infrastructure Investment Bank, theEuropean strategic investment fund cooperation, and the “One Belt and One Road”Initiative.
