In two essays posted recently on the website of the People's Bank of China, PBOC Governor Zhou Xiaochuan has made an important contribution to the international effort to address the global financial crisis.
Some international commentators have focused exclusively on aspects of his essays, such as the idea of creating "a new reserve currency" over the long run.
This narrow reporting misread Zhou's key messages and under-appreciated his and other Chinese experts' intellectual contributions to coping with the most severe crisis since the Great Depression.
Zhou's contribution is two fold - in identifying the root causes for the crisis and, on this basis, outlining solutions. It is widely accepted that this crisis is the combined consequence of a cyclical downturn and disorderly unwinding of massive global financial imbalances built up over the past decade, that is the lowering or de-leveraging of unsustainable debt in the US and parts of Europe. It is also widely accepted that regulatory lapses exacerbated market failures while expansionary monetary policy of the Fed under Alan Greenspan inflated asset bubbles.
The contribution made by Zhou (and indeed by Li Ruogu in an earlier essay) is to point out that the institutional drawbacks or limitations of the existing international monetary system are also a contributing factor. Simply put, under the current system, the monetary policy of key reserve currency countries has serious global consequences (or externalities, in economists' term). As the relevant monetary authorities do not take into account these externalities, in pursuing their legitimate domestic policy objectives, their policy may be globally de-stabilizing.
In addition, the existing international monetary system is out of date, in the sense that it does not reflect the profound changes in the world economy of recent years and hence is no longer workable. Joint interventions of the G7 or G3 central banks were enough to move the key reserve currency exchange rates to facilitate international adjustment in the 1980s, but no more at present.
The essence of Zhou's essays, as far as I understand, is first, in the near-term, finding appropriate mechanisms to ensure that the monetary policy of the key reserve currency countries takes into account their global effects; and second, to encourage, in the long term, moves to a global monetary system conducive to sustainable growth in the world. In this endeavor, the International Monetary Fund, with accelerated governance reform, has an inescapable responsibility in crisis prevention and resolution, particularly in ensuring that the key reserve currency countries' fiscal and monetary policies are leading to sustainable financial imbalances.
We are witnessing a rapid accumulation of debt by the official sector and even more rapid increase in the monetary base of the key current account deficit country, the phenomenon that got that country into trouble in the first place. For the benefit of the world community, the G20 summit in London must correctly identify the root causes for the crisis and find appropriate solutions accordingly. Intellectual input from emerging and developing countries are as valuable, if not more important, than these countries' financial contributions.
The author is the chief economist of the Export-Import Bank of China.
(China Daily March 27, 2009))