OPINION> Commentary
New monetary policy key to curbing crisis
By Zhou Xiaochuan (China Daily)
Updated: 2009-02-12 07:43

The global economy is being severely tested by the ongoing financial crisis. Conflicting viewpoints have emerged among the international community about the root cause of the crisis that originated in the United States. The high bank deposit rate in emerging Asian economies and oil-rich countries has been blamed by some Westerners as one of the factors that triggered the latest global economic recession. It has provoked musings on what pushed up the high depositing ratio of a nation and how to lower it.

As part of their long-cherished national and cultural traditions, people in East Asian countries usually choose to save their money in banks rather than overspend like their US and Latin American counterparts. Also, the family structure, a unit with broader social responsibilities, and the rapid economic growth of recent years have contributed greatly to high savings.

No doubt a serious imbalance in global bank deposits exists because of varying factors along with a country's exchange rate policy. But it is impossible as well as impracticable to expect such imbalances to be changed within a short period of time. Comprehensive formulas should be worked out for their fundamental settlement. First, the long-developed custom of overspending and saving little in certain countries should be changed or discarded given that this situation cannot last long. But for the US, now seems not the best time to raise its long held low-depositing policy. The world's largest economy should make a balance between its much-needed measures to increase domestic bank deposits and its actions to stimulate consumption in order to reinvigorate itself. For the part of East Asian nations, a package of reforms including their economic growth model, industrial structure and pricing system, should also be adopted to achieve a good medium-term effect in lowering exchange rates. That also makes it necessary to advance sweeping reforms on the exchange rate-making system. As the world's third largest economy and most populous nation, China has taken a series of moves in this direction. To stave off the economic slowdown, the Chinese government has done its utmost to expand slackened domestic demand and boost consumption to consolidate sustainable economic growth. To this end, a $586 billion stimulus package was announced late last year aimed at expanding investment, promoting employment and improving people's livelihoods. All nations should further strengthen coordination and cooperation with international organizations in this regard in an effort to effectively monitor the movement of speculative international capital. The outbreak of the global financial crisis stressed the necessity of such a move. It also makes it particularly important to improve transparency of international capital movement.

At the same time, international organizations and relevant countries should try to help developing nations set up a scientific and vigilant warning mechanism to stop profit-pursuing speculative capital from damaging the global economy.

For this purpose, a quick-response international aiding system is also needed. International assistance with as few preconditions as possible should come to the aid of some suffering emerging economies as soon as an international payment crisis emerges. The effective implementation of all these measures is expected to help encourage these countries to reduce foreign reserves and expand domestic demand.

Workable measures should also be taken to encourage the flow of the world's foreign reserves and bank deposits to developing countries and emerging markets.

It is not US-led developed countries' expectations that international capital excessively converge in their own countries. The concentrated flow of bank deposits from emerging economies to developed countries is an unreasonable capital distribution model and also against the developed nations' aspirations to increase domestic deposits. We cannot expect East Asian countries to adjust their long-controversial exchange rate policy completely according to the demands of certain developed nations. At a time when no drastic decline is expected to the world's oil prices, oil-rich countries will likely continue to maintain their saving at a comparatively high level.

Under these circumstances, global deposit imbalances are expected to still exist for a certain period of time. Now, a key problem is how to promote a reasonable flow of worldwide deposits and how to improve their distribution efficiency. It is high time to consider how to push for movement of more international capital to developing and some emerging countries given that they will serve as new global economic growth points.

International efforts should also be made to push forward the reforms of the long-controversial international monetary framework. Currently, worldwide trade and deals are mostly conducted in dollars, the most international currency. According to the International Monetary Fund (IMF), 63.9 percent of the world's foreign reserves are in dollars. That inevitably leads a country's dollar-held foreign reserves to the US if its foreign reserves increase.

The ongoing global economic crisis still makes it necessary for the capital-hungry US to expect the inflow of international capital. However, this is not the goal wanted by the largest economy in the long run due to expectations it will adjust its long-established consumption-driven economic growth model.

The excessive concentration of the world's foreign reserves on a single currency also leaves a potential financial risk. Along with a strengthened international monitoring system, and reasonable capital flow, the international community should also push for reforms of the current international currency system to advance the development of a multiple international monetary system.

The author is governor of the People's Bank of China. This is part of his speech delivered at a senior seminar held by the Malaysian Central Bank on Tuesday.

(China Daily 02/12/2009 page8)