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UPDATED: November 24, 2010 Web Exclusive
The Financial Tsunami: Its Origins and Prevention
A financial crisis that originated in the U.S. in the latter half of 2008 has swept the world like a tsunami. What led to this crisis?
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It is estimated that in the future, the global reserve currency system may feature a combination of three currencies: the U.S. dollar, Euro and RMB competing, counterbalancing and communicating with each other. With the mechanism of competition and preferential selection, risky currency will be sold while stable currency will be purchased; governments of international reserve currency issuers will be able to adopt stable monetary policies to maintain their sovereign credit. This is the best way to defend against international financial risk and to prevent global financial crises from happening again.

The 21st century should be a century for peaceful development and a harmonious world. The realization of global economic sustainability calls for cooperation among various countries. The prerequisite for risk-free development is the establishment of global financial stability.

Therefore, with an aim of preventing financial risk and promoting risk-free development, we should further expand international cooperation. Through communication and negotiation at government and civil society levels, we should create a positive environment for international cooperation, in order to ease the conflict between economic globalization and country-based decision-making.

Information asymmetry is a tough issue in the process of global financial risk prevention. In terms of economic activities related to global financial safety, international financial institutions and economic research institutes should strengthen their information collection and analysis, reinforce monitoring and scientific prediction of potential financial risk, as well as guarantee the timely release of risk warning reports.

For domestic financial activities related to other countries' financial safety, information transparency should be institutionalized. In particular, the world's major reserve currency issuer should proactively submit information about its financial activities to international financial institutions and relevant countries. Focal monitoring and analysis should be conducted in those areas with high financial risk such as stock markets, bond markets, foreign exchange markets, and housing markets. Hedge funds' speculative activities must be followed, monitored and restricted appropriately.

With the increase of developing countries' economic strength, credit and debt relations between developed and developing countries have seen great changes. Foreign exchange reserves held by developing countries exceeded those held by developed countries for the first time in 2005. The top 15 countries listed in the 2008 Global External Debt Ranking are all developing countries.

Major debtor countries' credit risk and financial risk must be assessed objectively and revealed in time. Major debtor countries' debt capacity variation must be monitored to ensure the safety of creditor countries' financial assets. Major debtor countries should change their high consumption lifestyle that relies upon indebtedness and strive to achieve a balance. They should also enhance their debt capacity, maintain currency stability, ensure the safety of domestic and foreign investors' assets and maintain the country's credibility.

In recent decades, some developing countries have quickly turned into emerging industrialized countries. These countries have made significant contributions to global economic growth and set good examples for other developing countries to follow. More capital flow should be introduced into developing countries worldwide to release their huge potential demands in the process of industrialization and urbanization. According to statistics from 2008, 90 percent of international capital flowed into developed countries, while only 10 percent of that went into developing countries. This pattern has to be changed.

Currently, developed countries' infrastructural and industrial investments have significantly slowed down. By increasing output to developing countries and combining developed countries' capital and technologies with developing countries' labor and resources, new ways can be created to realize reciprocity and mutual development. Developing countries should be aided in improving their investment environments.

It should be admitted that emerging economies have become major creditor countries and their credit has been enhanced significantly. The unfair treatment toward them in terms of financing requirements as well as market economy status should be changed.

The expansion of domestic markets by developing countries will further strengthen their capacity to import goods and services from developed countries, which will eventually create more and more employment opportunities for developed countries.

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