Roundtable Speech to the Shanghai Forum

•The 2008/2009 global crisis revealed considerable weaknesses in the International Monetary System (IMS). In particular, under the current IMS, financial interconnectedness has become more pronounced and capital flows have become more volatile.

Moreover, the dominance of the US dollar in the global financial system together with financial integration has constrained domestic policy choices.

Furthermore, weaknesses in financial oversight allowed vulnerabilities to increase. Against this background, it is fair to say that international monetary system have failed to prevent the build-up of financial and external imbalances, which ended up the worst global financial and economic crisis since the great depression.

•On the other hand, the center of global economic ’gravity’ has also continued to shift over the last two decades.

The global economy has become more multi-polar with the rising weight of China and other emerging market economies in the global economy. And more importantly, long-term trends indicate that axis of the global economy and power will consistently shift to the emerging countries.

•The global financial crisis and fundamental changes in the global economy and financial markets have fueled the debate on the need to develop a new IMS with multiple currencies and make the IMS more inclusive, flexible and efficient.

•In response to these challenges, several steps were taken by International Monetary Fund, Financial Stability Board and G20 to reform and strengthen the IMS. Most notably, conclusion of the 14th general review of quotas of the IMF and inclusion of the Renminbi (RMB) in the IMF’s SDR basket are two major breakthroughs achieved recently.

At the same time, incorporation of new initiatives and institutions such as the Asian Infrastructure Investment Bank (AIIB) has been instrumental in addressing some of the existing gaps in the IMS.

•I see the Renminbi’s inclusion in SDR basket as an important and welcome step that can strengthen the SDR’s representation.

It is also an evidence of China’s opening and reform efforts.

I commend the Chinese authorities for having embarked on a path to make the RMB convertible, taking the necessary steps to open the capital account and leading the efforts to establish the AIIB.

•Inclusion of RMB in the SDR basket will certainly lead to a steady increase in the use of the RMB for international financial and trade transactions. RMB internationalization will definitely create a great deal of monetary efficiency and integrate China more deeply into the world economy.

As China is the largest trading country in the world and an important supplier as well as recipient of foreign direct investment, China’s more integration with the world economy will significantly support global trade and investment activities.

In this context, I also see a strong synergy and complementarity between Internationalization of RMB and initiatives launched by China such as “The One Belt One Road Initiative” and “the “16+1” Cooperation”.

Internationalization of RMB will clearly facilitate a more efficient and smooth implementation of these initiatives.

Progress in these initiatives will in turn support a more rapid and sustainable internationalization of Chinese currency, thereby creating a virtuous circle between these two processes.

•That being said, I should also point out that internationalization of Renminbi will bring important challenges and responsibilities for Chinese policymakers.

It is clear that a key reserve currency-issuing country is responsible for keeping the international financial and monetary system in order. Any reserve currency-issuing country must be very careful about its policies.

It is more important to remember that any persistent misuse of macroeconomic policies by a reserve currency issuing country will lead to a significant depreciation of a currency, and sooner or later that country will lose its currency privilege.

Under the multipolar reserve currency system, such a risk could be much greater than in other situations. I am confident that Chinese policy makers are well aware of those challenges and will take necessary steps in a timely manner to fulfill their responsibilities.

In this regard, I commend Chinese regulatory and supervisory authorities for their efforts to deleverage the financial system.

This is particularly important for the long-term health of the Chinese financial system, economy and also for the global economy given China’s systemic role.

Thank you!