28 October 2016
Attendees pose for a group photo during the G20 finance ministers and central bank governors meeting in Shanghai on Feb. 27. Photo: Reuters
Attendees pose for a group photo during the G20 finance ministers and central bank governors meeting in Shanghai on Feb. 27. Photo: Reuters

China must grab the chance to set G20 agenda

The G20 finance ministers and central bank governors meeting in Shanghai last weekend has drawn a lot of attention from media, financial institutions and multi-national companies.

The foremost question on everyone’s minds is this: How will the leaders of the 20 major economies act in response to deteriorating global growth?

The first meeting of G20 finance ministers took place in 1999. But the gatherings began attracting more attention following the 2008 financial crisis.

This year marked the first time that China hosted the G20 summit. Beijing now has a bigger role in setting the agenda for such gatherings.

Renminbi depreciation and China’s economic slowdown were among the key issues recently.

In the era of globalization, a problem within a financial institution in one country can quickly derail the financial system in other nations and cause a crisis all over the world.

Given this, leaders at the first G20 summit signed agreements to overhaul the financial markets, through measures such as improving the transparency, increasing the supervision, enhancing international cooperation and reforming global financial institutions.

The studies on financial system stability conducted by the Basel Committee on Banking Supervision and Financial Stability Board have gained more support after the G20 summit.

This year, financial leaders of G20 nations are facing a number of issues.

Divergent interest rate policy between US and other nations has made the US dollar rally against most major currencies. And the real economy continues to struggle despite massive monetary measures.

Some nations are on the brink of technical recession, while central banks in Europe and Japan have imposed negative interest rates.

Both the IMF and UNDP have released reports ahead of the G20 summit.

In its Global Prospects and Policy Challenges report, the IMF urged G20 nations to use fiscal policy to boost public investment, push ahead structural reforms and make concerted efforts to stimulate demand.

Meanwhile, the UNDP, in a report titled Rebalancing Global Economic Governance, encouraged G20 nations to optimize global economic governance and deploy more resources to socially vulnerable groups. 

Under the current system, US dollar plays a dominant role. And US monetary policy moves usually cause turbulence in global financial markets.

Given this situation, Chinese central bank governor Zhou Xiaochuan had proposed, prior to the G20 London summit in 2009, the creation of a super-sovereign currency. 

China’s currency will be included in the IMF’s SDR basket, according to a decision taken by the IMF board at the end of November last year.

The US dollar, however, will continue to retain its dominance, even though its weighting will drop to to 41.73 percent.

If China can explore the topic of expanding SDR usage in the next G20 summit, through proposals such as testing some commodity trading with the IMF reserve currency, it would help the global monetary system transition from a dollar-centric one to a more balanced and diversified framework.

Also, it would reduce the single currency risk for global financial markets.

Nowadays, most developed economies are heavily dependent on monetary policy. Loose monetary supply could lead to heightened volatility in capital flows. And there are all kinds of arbitrage strategies for hot money.

But this has done very little to improve the livelihood of ordinary people.

China should use the opportunity as a G20 host nation to discuss ways of channeling the hot money into real economy. That will help create mobility opportunity for ordinary people and stimulate real economic growth.

That might be the best solution to avoid “black swan” events in financial markets.

This article appeared in the Hong Kong Economic Journal on March 3.

Translation by Julie Zhu

[Chinese version中文版]

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Associate Professor, Department of Finance, Chinese University of Hong Kong

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