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Zhang Monan (China Daily): “Towards new financial order”

Zhang Monan is economics researcher with China’s State Information Center and frequently appears on China Daily with her “big picture” takes on the global financial system. She is worthwhile following if you wish to understand how China sees the jostling of control between the now currently dominant developed countries and the emerging developing countries for a fairer share of wealth. In her 2010-07-05 article, “Towards new financial order,” she summarizes the inevitable competition (or “cooperatition” if you will) from developing countries in reshaping our worlds financial institutions. Below are snippets from her article:

In the aftermath of the financial crisis, emerging economies, showing expanded domestic demand and government spending, have played a major role in leading the recovery.

For example, China’s economy registered a year-on-year increase of 11.9 percent in the first quarter of this year. India’s economy expanded 8.6 percent and Brazil 9 percent, all of which were faster than that of the developed world.

The rapid rise in the stature of developing countries and simultaneous decline of the wealthy economies provide an opportunity to break the traditional governance framework dominated by the rich club.

Against this backdrop, the G20, after three successful summits, has finally replaced the G8 and stepped into the center of global governance.

. . .

Developing countries mainly depend on booming industrial production and trade, while developed[edited] countries rely on virtual financial transactions.

. . .

Such an increasingly interdependent global division system has made global production more efficient and contributed much to the 20-year prosperity of the global economy. But it has also aggravated the global wealth distribution imbalance.

Judging from a variety of standards, the US dollar is still the world’s most important currency. The current utilization rates of dollar in international trade valuation, foreign exchange reserves and international financial transactions are 48 percent, 61.3 percent and 83.6 percent respectively.

. . .

On reforming the international financial system, the US is willing to accept only minor changes to international financial institutions, such as moderate tightening of financial oversight and symbolic increase in developing countries’ voting power in the IMF and the World Bank.

The US has set two benchmarks on the issue – that no country be allowed to weaken its dominance over the international financial system and no reform should alter the dollar’s status as the world’s leading currency.

. . .

While pinning their hopes on emerging economies to sustain recovery, developed countries should show more respect for the long-term interests of developing countries.

  1. raventhorn2000
    July 6th, 2010 at 07:07 | #1

    I believe it is important to realize that the US dollar may cease to be “owned” by US in the future.

    What do I mean? Consider the collapse of the Roman Empire. Rome existed for nearly 1000 years. As it subjugated people and tribes around it, its currency was used all over its ’empire’, and even accepted by its many trading partners. Roman currency became the most important currency in the known Western sphere of civilization.

    EVEN when Rome collapsed, the Roman military no longer existed, the Roman state and government fell apart, its currency was still in use for more than several centuries by the former conquered people of Rome. These non-Romans saw no need to change the currency. As long as they could agree on the value of the currency to goods and services, there was no problem. (They only slowly changed over to their own currencies, for probably other reasons.)

    Similarly, I believe, US has already lost a great deal of control of its own currency, which is now held in large portions by other nations, who can cause great havoc to US currency control.

  2. raventhorn2000
    July 6th, 2010 at 07:10 | #2

    So, I don’t expect the Yuan or any other currency to become the replacement dominant currency in the world. There is no need for such a transition.

    In economic terms, the mere fact that China has so much US dollars is enough of a dominance on world economic policies.

  3. July 6th, 2010 at 10:59 | #3

    Hi RV,

    Very thought-provoking comments.

    Being a dominant currency indeed has its rewards and problems. Some say it’s the ability to borrow cheaply. Others argue, we are humans, the ability to borrow cheaply allows for out of control spending, which is what we are seeing in the U.S..

    But I would argue the greatest direct control is still within the U.S., because the U.S. can simply “print” as much of it was it wants as an option. Nobody else on this planet can do that.

  4. raventhorn2000
    July 6th, 2010 at 11:31 | #4

    I don’t think US is naive enough to actually “print” more money to solve its problems. It does borrow too much, some have equated that to “printing money”, but it’s not the same thing.

    “Printing money” floods the market with cheaper currency, but “borrowing” puts one into heavier debt.

    “Borrowing” gives more power to the lenders, because the “LENDERS” can control when or if they want to devalue the currency. So in practice, if China or Japan never dumps the US dollar holding, the Dollar holds most of its value, but now China and Japan both have the control to seriously cause devaluing of the dollar, thus they have control.

    In theory, US can print money and destroy its economy, but it would hurt US more than its lenders.

    “he who can destroy a thing, controls the thing.” – Frank Herbert.

  5. Dragan
    July 9th, 2010 at 23:38 | #5

    Raventhorn,

    there is really no control over dollar by China , Japan or other lenders as simply, should they offload their dollars, they will be hurt as well – the rest of ther dollar reserves would lost the value and american ecomony would become weaker which would hurt economic exchange with them – for example, there would not be so much us investment in China, as it would become very expensive with weaker dollar or there would not be so much consumptionin US which would hurt chinese exports. Just holding them does not give them any mean of control over it – exactly opposite is right as we could see when China rushed to continue buying US government debt even at the height of crisis fearing the consequences of weakening dollar and american economy. So US still dominates global economy – despite the huge debts it has.

    Chinese solution is to move away from dollar in international transcations – as much as it is realistic now. For example, the deals are put in place recently with number of asian and south american countries that allow for settling transactions in RMB or local currencies. This is only one part of the financial reform, others are more complicated as they require creation of new mechanism and institutions / substantial refor of existing ones that would give more prominent role to developing countries and establishment of new rules that would increase sovereignity of countries vis-a-vis global economic system. That is process that will likely take many years, but China now certainly have a say.

    Other questions that Monan’s article does not touch upon but is very important is the quality of the post-crisis recovery of China – which has been sucesful short-term, as she is quick to point out, but may lead to problems in the future – for example, capital spending did boost economic output but was it job-generating exercise? Have the loans given out as the part of the stimulus package utilized well and will they be serviced by borrowers? There is also danger of overheating in some industries, most notably real-estate..etc

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