Thursday, April 02, 2009

The Answer for Zhou Xiao Chuan

The Answer for Zhou Xiao Chuan

The answer for Zhou is already written here - as advocated by Prof Stephen NS Cheung and I recapped some 3.5 years ago. All issues Zhou raised are addressed in this system, which Zhou lamented for its being shelved some 70 years ago. China can go ahead with this solution alone while persuading G20/IMF/WB to follow suit. This is an area where China can and should lead, by doing it first, because China does not have the legacy of the developed nations. If China does so, it would surely be first joined by most nations which are now pegging their currencies to the USD or Basket (eg the gulf nations, ASEAN, some Eastern European non-Euro countries including Russia, may also follow suit)

Zhou's said, in an essay (in Chinese original here)
  • 国际储备货币的币值首先应有一个稳定的基准和明确的发行规则以保证供给的有序;其次,其供给总量还可及时、灵活地根据需求的变化进行增减调节;第三,这种调节必须是超脱于任何一国的经济状况和利益
  • an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
  • 超主权储备货币的主张虽然由来以久,但至今没有实质性进展。上世纪四十年代凯恩斯就曾提出采用30种有代表性的商品作为定值基础建立国际货币单位"Bancor"的设想,遗憾的是未能实施
  • Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted.
  • 超主权储备货币不仅克服了主权信用货币的内在风险,也为调节全球流动性提供了可能。由一个全球性机构管理的国际储备货币将使全球流动性的创造和调控成为可能,当一国主权货币不再做为全球贸易的尺度和参照基准时,该国汇率政策对失衡的调节效果会大大增强。这些能极大地降低未来危机发生的风险、增强危机处理的能力
  • A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
  • 改革应从大处着眼,小处着手,循序渐进,寻求共赢
  • he reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all
(English recap from AP, and WSJ  seems to have missed some key points above)
  • Zhou said the proposed new currency also should be used for trade, investment, pricing commodities and corporate bookkeeping.
  • "A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity," Zhou wrote. "This will significantly reduce the risks of a future crisis and enhance crisis management capability." Zhou also called for changing how SDRs are valued. Currently, they are based on the value of four currencies — the dollar, euro, yen and British pound. "The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies," Zhou wrote. "The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value."
The Economists spelled out what China's objective really is (we all know it is neither practical or feasible to replace the USD in the medium term, as most media reported superficially, or the Chinese wishfully)
  • Mr Zhou's proposal is China's way of making clear that it is worried that the Fed's response to the crisis—printing loads of money—will hurt the dollar and hence the value of China's huge foreign reserves, of which around two-thirds are in dollars.
The key issue is how to make the transition "gradual" (大处着眼,小处着手,循序渐进) to minimize potential risk. And the only way to a first step is to (i) shift the RMB peg from USD to a basket of currencies then (ii) to a basket of commodities. China did the (i)  in 2005 but it needs to do (ii), perhaps but making a gradual shift, by, e.g. first with a 90% currency b. basket + 10% commodiy basket, then lowering the weight of currency basket smoothly

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Rodrigo González Fernández
Diplomado en RSE de la ONU
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