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FOR A BETTER FINANCIAL ORDER – Chinese leaders and scholars suggest reforms to strengthen the international financial system

Posted by Gilmour Poincaree on November 26, 2008

November-26-2008 NO. 48 NOV. 27, 2008

by Ding Ying

As the international financial crisis plunges many countries into economic turmoil, China’s relatively stable economic growth is reassuring to the international community.

As a result, the world is paying more and more attention to China’s opinions about the ongoing crisis and possible solutions. Chinese leaders and economists recently made a series of suggestions for reforming the current international financial system.

China’s efforts

Chinese President Hu Jintao participated in the Group of 20 (G-20) Summit on Financial Markets and the World Economy held on November 15 in Washington, D.C., where he delivered a speech calling for international cooperation to get through this “difficult moment.”

In his speech, Hu clearly stated the Chinese stance on international financial reform. “Reform of the international financial system should aim at establishing a new international financial order that is fair, just, inclusive and orderly and fostering an institutional environment conducive to sound global economic development,” he said.

The Chinese Government has taken many measures to safeguard economic development and financial stability. After the crisis began, China made timely adjustments to its policies and strengthened macroeconomic regulation, Hu said. These adjustments included lowering the bank required reserve ratio, lowering interest rates and easing corporate tax burdens. Hu also promised to play a “constructive role” in restoring the international financial system and suggested four key reforms: increased international cooperation in financial supervision, reform of international financial organizations, increased regional financial cooperation and diversification of the international monetary system.

As the world’s most populous developing country, China would make an important contribution to international financial stability and world economic growth simply by maintaining steady economic growth, the president said. Several days before the summit, China announced a 4-trillion-yuan ($586 billion) economic stimulus plan. Observers believe that the plan, which concentrates on stimulating domestic consumption in China, may restore confidence in world economic development.

In a November 16 Xinhua report, Chinese Foreign Minister Yang Jiechi outlined five achievements that came from Hu’s participation in the financial summit. First, he met with other G-20 leaders to discuss the root causes of the financial crisis and possible solutions and reforms, which they described in a joint statement. Second, Hu introduced measures the Chinese Government has taken to safeguard economic growth and financial stability. Third, he helped guide the direction of international financial reform. Fourth, Hu called for international efforts to help developing countries. Finally, Hu promoted China’s bilateral relationships with several countries by meeting with their leaders during the summit.

Cooperation, not competition

Chinese economists also had opinions on the current world economic situation. They provided suggestions for reforming the international financial system and maintaining economic and financial stability in China.

Zhang Ming, a researcher from the Institute of World Economics and Politics, Chinese Academy of Social Sciences, said in World Affairs on November 16 that there were resemblances between the current international economic and financial situation and the Great Depression. The U.S. dollar has been greatly weakened by the subprime mortgage crisis, but the euro is struggling as well. “The supreme financial structure is on the edge of collapse,” he said.

The countries affected by the crisis have two options, Zhang said. One is to unite and cope with the crisis together by building new international financial and monetary systems, which could cushion the U.S. dollar’s fall. The other is for each country to look out for itself, which might cause discord and competition among the largest economies and lead the dollar system to collapse completely.

“The latter way further undermines the global economic and financial order. Then a new crisis, or even wars, will break out,” said Zhang, arguing the world must join hands to deal with the current financial crisis.

Regarding international monetary reform, independent economist Xiang Songzuo said in Elite Reference on November 16 that there is little possibility the International Monetary Fund will be recast as the world’s central bank. Instead, the crisis might cause new regional currencies to emerge. “Influential currencies, like the euro, yen and the renminbi, can play an important role in stabilizing regional economies,” he said.

Su Jingxiang from the Center for Globalization Studies, China Institutes of Contemporary International Relations, said in People’s Daily that since the financial sector is the weak point of the Asian economy, Asian countries must enhance both regional and global cooperation. He said that based on the foreign reserves held by China, Japan, South Korea and ASEAN members, Asia could become a leader in international financial fields. “Only through strengthened cooperation can China protect its interests well and perform its function better in the international cooperative system,” Su said.

“China’s top priority is to deal with the crisis with caution and run its own business well,” said Xiang Lanxin, an observer of world affairs, in Global Times. Xiang urged China to promote domestic demand over exports in its response to the crisis. Massive exports could push other countries into trade protectionism and make China a target of international criticism.

Highlights of the G-20 Financial Summit

Leaders attending the G-20 financial summit agreed on an action plan to combat the current financial crisis on November 15 in Washington, D.C. After discussing the reasons behind the current crisis, the leaders issued a statement pledging to “enhance our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.”

The leaders agreed that the current financial system has vulnerabilities such as weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage.

Further, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms and unsustainable global macroeconomic outcomes are the combined elements that resulted in the current financial crisis.

The leaders stressed that free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, well-regulated financial systems, are essential to economic growth.

They vowed to take “strong and significant actions” to reform current financial systems, stimulate their economies, provide liquidity, strengthen the capital of financial institutions, protect savings and deposits, address regulatory deficiencies, unfreeze credit markets and ensure that international financial institutions can provide critical support to the global economy.

The plan is based on five principles: strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets, reinforcing international cooperation and reforming international financial institutions. The principles have been broken down into immediate and medium-term actions to be taken by March 31, 2009.

The leaders also agreed to meet again by April 30, 2009, to review the plan’s implementation.

(Source: Xinhua News Agency)

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘BEIJING REVIEW’ (China)

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