Asia Needs to Spell Out Changes They Want in International Monetary System
At the recently concluded IMF-World Bank annual meetings, the addition of the yuan to the basket of currencies comprising the IMF's Special Drawing Rights (SDR) was one of the most popular subjects of conversation — not quite as popular, perhaps, as Brexit, Deutsche Bank and Donald Trump, but right behind them.
In this sense, the Fund-Bank meetings were the yuan's coming-out party. The currency's addition into the SDR basket was lauded as a step with great symbolic value. But that step raises the question of what kind of international monetary system China, and Asia more generally, need and how they should construct it.
Responding "We want a system in which the yuan plays a more prominent role" doesn't answer the question. China and Asia need an international monetary system that is stable. They should want a system that eliminates imbalances smoothly. They should want a system with the capacity to provide emergency assistance where it is needed.
These observations lead in turn to the question of whether the existing system possesses these attributes. And if not, what changes should be advocated by China and other countries in the region?
Start with the adequacy of emergency liquidity, referred to by cognoscenti as "the adequacy of the global safety net." Judged by the headline figures, there has been considerable progress on this front since the global financial crisis. IMF resources, regional financial arrangements, bilateral central bank swap lines and central banks' own foreign exchange reserves, which together are the four key components of the global safety net, have been expanded quite significantly since the crisis.
But the picture is less rosy when one looks behind the headlines. Asian countries still refuse to borrow from the IMF. They refuse even when its credits come free of conditions. Evidently, the problem of IMF stigma, originating in the Asian crisis of 1997-8, remains as potent as ever.
Meanwhile, the Chiang Mai Initiative Multilateralization, or CMIM, Asia's premier regional arrangement, has yet to be activated. The U.S. Federal Reserve has terminated the dollar swap lines it extended to four emerging markets in 2008, and most of the People's Bank of China's yuan swaps have never been used. In all these respects, the adequacy of the actual existing global financial safety net is less than meets the eye.
How should these problems be addressed? It is past due time for Asian countries to specify exactly what changes in the structure of the IMF are needed for them to conclude that IMF stigma is no longer a problem. Do they require further changes in the composition of the IMF Executive Board or in the process for selecting the managing director? Do they require specific changes in IMF policies and procedures? Criticizing the fund is fair and good, but better is to specify reforms that will make it acceptable for Asian countries in trouble to borrow from the IMF and for strong countries to sign up for its Precautionary Credit Line.
Similarly, Asian countries should find an excuse to activate the CMIM if only to prove that it is not just a paper tiger. The PBOC should actually disburse yuan through its bilateral swap lines to demonstrate that it means what it says.
What about a system that eliminates imbalances smoothly? The main mechanism for eliminating imbalances is the exchange rate, and the problem with the current system is that countries resist letting it operate. Countries with deficits don't want to allow their currencies to depreciate because doing so will increase the burden of servicing foreign-currency debts. Countries in surplus hesitate to allow their currencies to appreciate for fear of losing competitiveness.
There has been at least some progress on this front in recent years. Countries have adopted so-called macroprudential policies to limit foreign-currency indebtedness. Some traditional exchange-rate peggers like China have moved toward greater exchange rate flexibility, allowing the adjustment mechanism to operate more smoothly.
But other countries continue to intervene actively to prevent their currencies from appreciating despite the fact that they are running substantial current account surpluses. The IMF singles out these countries in its reports, but with little effect.
A stronger sanction would be that when a chronic surplus country buys foreign assets with its currency to prevent its exchange rate from rising, the IMF could sell foreign assets in exchange for that same national currency, neutralizing the inappropriate national intervention in the foreign exchange market.
Clearly, there would have to be strong support among IMF members for this kind of direct market action. Asian countries could exercise leadership by advocating just such a step.
China and Asia have expended more energy criticizing the international monetary system as dominated by the West than they have in offering constructive proposals for its reform. Coming up with a concrete plan for an international monetary system that meets the needs of China, Asia and the world should be the task at hand.
Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.
A professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund
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