China's role in world monetary system positive

IV. Enhancing international financial supervision and regulation

In terms of financial reform in the international arena, it is very important to enhance international financial supervision and regulation. On this we have already come to a lot of consensus.

China will participate more actively in reform of international financial systems.

- Support all efforts and measures to stabilize the financial system. Chinese banks are very likely to follow Basel III very rapidly because our capital ratio is already high. The Chinese banks will take the step further as required by the regulation authorities. All the big banks will do refinancing to increase their core capital ratio from 9 percent to 11 percent. The core capital mainly comes from common shares, so its quality is higher than many other countries;

- China will also act as a most responsible and accountable player in world financial markets. In the foreign exchange markets and in the bond markets, China has been very responsible. Many people and politicians worry that China will use its financial power to further its political or military ends. I do not believe so because China loves peace, prioritizes development and cares most about global stability. To destroy the world financial market means a huge loss for us.

- China is also willing to cooperate with any country to monitor short-term capital flows;

- Exchange regulatory information;

- Promote IMF's efforts in setting up and improving a system serving as the global lender of last resort.

V. Promoting RMB as an international currency

China's role in the financial arena depends on how it will promote RMB as an international currency.

It is very significant.

(1) It is good and convenient for international trade and investment. According to the Ministry of Commerce of China, many neighboring countries now use RMB as a means for payment in trade.

(2) It will also make exchange rate reform easier if RMB becomes an international currency. Nowadays, the exporters worry about the exchange rate risk, but if RMB is directly used in trade these obstacles will become less.

(3) It will help to stabilize the international monetary system by adding one more international currency. Now the USD and euro are most commonly used as an international currency. I think we still need to add one or two other currencies. A triangle is stable and it is also good for diversification.

(4) It will strengthen the safety of all central banks’ foreign exchange reserves. As I mentioned, fewer choices means more risk. To achieve that China needs to do more.

What China should do?

(1) We should allow the use of RMB in trade payments and settlements. Actually in about 20 provinces we started to allow RMB to be used as a means of payment in foreign trade this year. The amount of these transactions is growing very fast.

(2) We should encourage RMB to be used for overseas investment.

(3) And in all foreign aid, the donation can be calculated in RMB.

(4) Opening more and more capital accounts for all transactions except derivative transactions across borders, which should be carefully controlled.

(5) Support Hong Kong’s RMB business. Hong Kong's RMB business will increase more than 100 percent this year. All the Hong Kong banks can do almost all the RMB commercial banking business.

(6) Welcome qualified foreign companies and institutions to raise funds in China. Because China is a big savings provider and capital exporter, we should encourage foreign companies to raise funds directly in China.

(7) Allow foreign central bank to buy and reserve RMB. Of course, this should be done on a voluntary basis.

(8) Share the exchange rate risk. Because when RMB is not fully convertible, its value tends to change dramatically. We should learn from Japan's lesson in the 1980s, when Japanese Yen was used in foreign aid and lending and appreciated against other currencies, which made it very difficult to pay back the Yen-related loans.

What can others in the international community do?

(1) The IMF should put the RMB into the SDR basket immediately.

(2) The World Bank can issue RMB bonds because it is doing business in China and other Asian countries that use RMB. It can also issue RMB bonds for the funding in regions that import from China.

(3) The U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan can buy some RMB as a reserve currency through an agreement because China has already held a large amount of currencies of these four regions and also because they believe yuan is undervalued very much now. It is good to build a mutual trust and support to each other.

(4) Major commodity exporters can accept RMB, especially the Middle East oil exporters.

(5) International organizations can accept RMB.

(6) Continue to restructure the IMF and the World Bank. After the most recent reform, China's share in the IMF was raised to about 6.3 percent, up from 3.9 percent and its share in the World Bank is above 4 percent. Compared with the scale of China’s economy, trade volume, especially the incremental contribution, the shares are still very low.

Some big countries keep saying that China should play a more active role, and should be more responsible. But when it comes to increasing China‘s say in IMF and World Bank, they become silent or even object to the idea. I think that if the international community expects China to do more, they should give China more power and position China in the right place.

Guo Shuqing is Chairman of China Construction Bank, the second largest bank in the world by market capitalization. He previously served as Vice-Governor of the People's Bank of China and Vice-Governor of Guizhou Province as well as the director of the State Administration of Foreign Exchange.