Former IMF China chief: Forex policy change 'positive move'
- By Zhang Lulu
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E-mail China.org.cn, August 27, 2015
Dollar "will remain the world's dominant currency for a long time"
As the RMB steps up its international presence, it has been seen by some as the most promising challenger to the U.S. dollar, but Prasad believes that "the dollar will remain the world's dominant currency for a long time."
The strength of the dollar stems not only from the country being the world's largest economy and having a deep financial market, but it has accumulated a lot of "trust," Prasad argued, adding that the transparency in its government, a strong and independent central bank, and an independent legal framework has contributed to the global "trust" in the dollar.
As a matter of fact, he argued, the dollar has gained more trust in the aftermath of the global financial crisis as investors tended more to rely on it as a safe haven currency to keep value.
Prasad argued that it may take "one to two decades" for the RMB to become a reserve currency, but he said it is uncertain when the yuan will be a safe haven currency.
"What China is going to need is not just economic and financial reforms, but a much broader set of reforms, including a more independent legal framework, more transparency, better corporate governance -- all these are important for the Chinese economy to become a stronger economy and for the RMB to become a safe haven currency," he added.
Stock market volatility could "set back" reforms
The Chinese stock market tumbled in the past two months, with the benchmark Shanghai Composite Index falling from above 5,000 points in early June to below 3,000 this week. It nosedived 8.49 percent on Aug. 24, registering the biggest daily slump since February 2007.
The volatility is going to persist for a while, the seasoned economist said. "The problem is that the stock market is quite disconnected from the real economy; it went up a lot," he said, adding that listed companies are falling short of "good standards in terms of corporate governance, auditing, accounting, and transparency."
He is concerned that the volatility is going to "set back" all the other reform processes. "It could reduce the economic space and also the political support for the reforms," he said, suggesting that the Chinese government should better clarify policy intentions to reassure investors.
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