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Expert's View
Special> G20 London Summit> Expert's View
UPDATED: March 30, 2009 NO. 13 APR. 2, 2009
OBSERVER: 'Tripod' Monetary Structure

Debates and negotiations are going to be intense at the G20 London summit. Zhang Ming, an international finance expert at the Chinese Academy of Social Sciences, wrote an article in Shanghai Securities News in which he argues that discussions focusing on market salvation cost-sharing, economic growth stimulus and international monetary system restructuring will help form a tripod structure for the international monetary system. He also contends that emerging markets such as China have two pressing tasks at the summit: One is to urge developed countries to give up protectionist trade policies, and the other is to demand that the U.S. Government guarantee the market value of dollar-denominated assets. Edited excerpts follow:

PLAY THE ROLE: The IMF is expected to play a much more important role in fending off the current financial crisis (XINHUA)

The G20 London summit will provide a platform for major economies to negotiate their core political and economic interests against the backdrop of the global financial crisis. Yet, as all parties involved have too many expectations for this London summit to yield some results on these issues, this could eventually become an "unbearable heaviness" for the summit to carry. It is possible that the participants will reach no concrete consensus on crisis salvation or international monetary system restructuring during this summit.

More blood, please!

The U.S. Government has a keynote message to deliver that it hopes all major economies worldwide ally with each other to implement fiscal or monetary stimulus plans to rescue the global financial market and real economy from the crisis. Also, it may hope to urge other countries to continue to transfuse blood into its anemic economy, without impairing its domination of the international monetary system.

The U.S. Government has spared no effort to salvage the market through a string of liquidity injection measures and fiscal stimulus plans. As a result, the size of the Federal Reserve balance sheet has witnessed a two-fold increase in the quarter following the bankruptcy of Lehman Brothers Holdings Inc. It was predicted that the U.S. fiscal deficit for 2009 would hit a record high of $1.75 trillion, more than 12 percent of U.S. GDP.

However, if it wants to stabilize the U.S. financial market and real economy as soon as possible, the United States has to coordinate with other developed countries and emerging markets to push expansive fiscal policies and rescue troublesome financial institutions, respectively, within their countries. This is conducive to the recovery of the global financial market's investment and financing functions, and to stabilizing international trade and capital flows. If the economic recession in the euro-region countries and Japan continues, for instance, the United States cannot achieve the goal of getting the economy back on growth track through boosting exports.

One more challenge the U.S. Government faces is how to pay the bill for all these stimulus plans. At present, it has no alternative other than issuing more treasury bonds and printing more dollars. Although issuing treasury bonds will have less of an impact on the economy than printing more dollars, the U.S. Government has to consider whether major creditor nations, including China, Britain and the Middle East countries, are willing to buy more. The Obama administration has been persuading the above-mentioned countries to buy more. U.S. Secretary of State Hillary Clinton, for instance, made East Asian countries the destination of her first official overseas visit, which has been interpreted as a trip to market treasury bonds. It is imaginable that the United States will continue to persuade other countries to buy U.S. treasury bonds at this summit.

Euro's chance

The euro-region countries may take this global financial crisis as an opportunity to shake the dominance of the United States in the international monetary system. France and Germany, in particular, will propose some restructuring strategies to weaken the dominance of the U.S. dollar and strengthen the status of the euro.

Also, the U.S. dollar will face challenges from the speeding up of monetary cooperation among East Asian countries. The Chiang Mai Initiative, which aims to create a network of bilateral swap arrangements among the ASEAN countries and China, Japan and South Korea to address short-term liquidity difficulties, is making progress and has put the establishment of an Asian monetary fund on the current agenda for the countries involved.

But for euro-region countries, the most pressing job is how to cope with the impending financial crisis in central and eastern European countries. The 1997 Asian financial crisis may reappear in some of these countries, because of their large debts and persistent trade deficits as well as the exodus of foreign capital. The euro-region countries declined their requests for large-scale aid, which was deemed as a fraud and the failure of the eastward expansion of the euro.

It is the euro-region countries' wishful thinking that East Asian countries and petroleum exporters can be mobilized to enrich the IMF's capital stock with their affluent foreign exchange reserves, and thus offer a helping hand through the IMF to central and eastern European countries, easing the pressure on euro-region countries to rescue their neighbors. But emerging countries such as China demand a reallocation of IMF shares (voting power) according to the amount of funding each country contributes to the IMF, which means a weakening of euro-region countries' voting power is inevitable.

The crisis has run deep in euro-region countries largely because they did not introduce expansive monetary and fiscal policies in a timely manner. Quite a few analysts believe the eruption of the global financial crisis did not win European countries a greater stake in negotiating the dominance of a new international monetary system, because the crisis landed a heavier blow on euro-region countries than it did on the United States. The euro region countries have failed to introduce a pan-regional fiscal stimulus scheme until now. The differences between euro region countries' economic cycles and structures are increasingly obvious today, and against this backdrop, the monetary policies for this euro-region serve mostly the interests of major countries, which is the root of the fact that the region has lapsed deeply into the crisis.

Fending off protectionism

Emerging markets-and China as a representative-have two pressing demands at the summit. Their top priority is urging developed countries to give up protectionist trade policies. Overseas demands are cooling off, and protectionism looms large, both of which have forced export-oriented emerging markets to seek changes.

Undoubtedly, the countries involved will reach hardly any concrete commitment to fighting global protectionism at the G20 London summit, and the global free trade system will suffer apparent damage from protectionist practices in the coming few years.

The other task is to demand that the U.S. Government guarantee the market value of dollar-denominated assets, especially U.S. treasury bonds, and have this commitment as a condition for it to sell more dollar-denominated assets. Chinese Premier Wen Jiabao made this stance clear when he answered questions at a press conference after the closing ceremony of the Second Session of the 11th National People's Congress. He demanded the U.S. Government peg the value of treasury bonds to the inflation rate, issue convertible treasury bonds and allow creditors to convert bonds into shares of U.S. commercial banks at reasonable prices.

In addition, emerging countries will demand favorable reallocations of IMF shares and voting power if they are required to inject capital into the IMF.


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