New monetary system needed to underpin B&R

Source:Global Times Published: 2017/6/1 22:18:39

Illustration: Peter C. Espina/GT

There is a need for China to establish a more sustainable monetary and financial system for its trade with the EU and with Central Asian and Eastern European countries amid the implementation of the Belt and Road (B&R) initiative.

Take China's trade with the EU as an example. From 1999 to 2016, China's imports from the EU grew roughly nine times, while its exports to the EU rose about seven times, with the Sino-EU trade surplus expanding by nearly six times. In 2016 alone, the EU's imports from China reached 340 billion euros ($381 billion), while its exports to China were around 170 billion euros, representing an EU trade deficit of about 170 billion euros against China. In the meantime, the euro's exchange rate has fluctuated over the 17 years, hitting an all-time high against the US dollar of $1.56 in 2008. Last year, the euro sank to $1.03. Generally, the euro has been depreciating against the dollar over the years, especially after the financial crisis, pointing to the need for a more sustainable monetary system for the bilateral trade between China and the EU.

There are several points of view I'd like to share with regard to China's trade and its monetary system.

First, in terms of dollar-denominated value, China's total goods trade was $20 billion less than that of the US in 2016. But if the yuan's depreciation against the dollar last year is factored in, China remained the largest goods trading nation. As such, when China's trade volume reaches a certain level, the internationalization of the Chinese currency will be gradually achieved.

Second, China's services trade has increased rapidly. In 2015, Chinese travelers made 120 million outbound trips, with outbound consumption totaling about 2 trillion yuan ($294 billion), including overseas Chinese students and various cultural cooperation activities. Against such a backdrop, I believe the yuan will naturally become internationally accepted, which should be in line with the laws of the market instead of being pushed by too much pressure.

Third, with the development of financial technology, including IT and mobile payment, there have been a lot of new business patterns and forms.

Fourth, the yuan's inclusion in the IMF's Special Drawing Rights basket requires further development of China's financial market. In China's financial market, the indirect financing sector, or the banking system, is too large. By the end of 2016, China's banking sector was worth 145 trillion yuan, accounting for 70 percent of China's financial system. China needs to strengthen its financial market construction to adapt to the internationalization of the yuan.

Chinese President Xi Jinping announced at the opening ceremony of the Belt and Road Forum on May 14 that China will step up financial support for the B&R initiative, including efforts from the China Development Bank (CDB) to set up a special lending plan worth 250 billion yuan to support B&R cooperation. It is through these projects that the CDB will promote cooperation between China and the rest of the world, also boosting exports of the yuan at the same time. For instance, during the Belt and Road Forum, the CDB granted a loan of $4.5 billion to a consortium of Indonesian and Chinese companies for building Indonesia's first high-speed railway connecting Jakarta and Bandung, and this is also expected to facilitate the yuan's internationalization to a certain extent. From the perspective of the CDB, we always adhere to promoting China in the world arena through an international approach.

In addition, I personally believe that like China's supply-side structural reform, Western economies should also make structural adjustments to their economies and every party should reflect on their roles in trade globalization.

The article was compiled based on a speech made by Liu Yong, chief economist with China Development Bank, at the Shanghai Forum 2017 Roundtable on May 27.


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