Today, most people believe that China can play an important role in global financing restructuring, but why and how can China do it? It really needs more discussion.

I. The crux of the current global imbalance

Many people think the recent financial crisis basically resulted from the global economic imbalance. But what does that imbalance mean? Does it refer to the trade surplus and deficit? Or does it refer to the gap in current accounts? On the surface the answer is yes, but in a deeper sense, no. Why?

First, in a globalized world economy, it is very natural that some countries have a surplus and some have deficit. In general, it is a perfect balance. It’s the well-developed division of labor.

Second, a country with a trade surplus is not necessarily the most competitive country. In many cases, it is the opposite. We can divide the trade surplus countries into four groups. Oil exporters (mainly the Middle East countries) belong to the first group. Then, there are the newly industrialized countries, such as countries in East Asia, including China, because they export a lot of manufactured goods.

The third group is Japan and Germany, the industrialized countries that mainly concentrate on manufacturing. These countries are not very advanced countries because they are not very competitive in terms of service industries and other new industries. The last group includes Switzerland, the Netherlands, Sweden and German-speaking countries. They have very advanced service industries and high surpluses. These four groups are very different. Therefore, a surplus does not necessarily mean competitiveness in all cases.

Third, more importantly, a current account deficit country is not necessarily in shortage of money. On the contrary, the largest deficit country has suffered many years from too much capital. The United States is a typical case in which the country has very high level of deficit in current accounts that once accounted for 6 percent or 7 percent of its GDP and now 3.3 percent. It does not lack capital, but rather it suffers from the oversupply of capital.

Therefore, the present world economy has several peculiar features:

(1) There are two groups, savings providers and money spenders.

(2) Large creditors are less competitive, and the largest debtors are most competitive. The United States and the United Kingdom are typical examples of the latter; Japan, Germany and China are creditors but are not so competitive in high value-added service industries as debtors like the United States and the United Kingdom.

(3) Borrowers are always in a superior position — even in the current internally caused financial crisis — because in the end the countries with surpluses will have to send all the money back to the international markets that is dominated by the U.S. dollar and euro. In the past years, these currencies have undergone some inflation. For example, in the past 25 years, the U.S. dollar experience inflation of about 40 percent. And we also see a bubble in all property and capital markets.

So the crux of the imbalance is that only a minority of the most advanced countries enjoy extremely oversupplied financial resources. At the same time, the overwhelming majority of developing countries suffer a shortage of capital. I mean most developing countries are in lack of capital, while some most advanced countries enjoy an oversupply.

The minority countries possess knowledge, innovation, flourishing service industries and hard currency that enable them to achieve supremacy. It is rooted in the modern economy, the post-industrial economy or the post-capitalism one. The production mode in general has changed and we’ve entered a new era. Globally speaking, an economy characterized by reliance on the manufacture of goods has been transformed into an economy based on knowledge, ideas and services. Manufacturing is done in China, Japan and other trade surplus countries, but research, design, innovation and creative services are all done by other countries.

Therefore, this capital balance or imbalance presents a new phenomenon. No force can change it now, and, to some extent, there is no need to change it, because it results from division of labor. The only problem is that the United States and a few most advanced countries consume too much, or to be precise, waste too much. Then we are trapped in a financial crisis, an energy crisis as well as climate change and environmental damages.

II. The special position of China

China is the biggest net savings provider in the last five years and the second largest economy in the world in terms of GDP as calculated in the current exchange rate. If in terms of the PPP, it will be doubled. The trade scale of China accounts for 10 percent of that in the world. Oversea Direct Investment from China last year amounted to USD 56.5 billion, which is No. 5 in the whole world and No. 1 among developing countries. The stock of total investment in foreign markets is No.15. China is a big player in investment and trade, but it is still a developing country.

In the monetary field, China is a prominent player too. As I mentioned, China is the largest net savings provider or capital exporter. Roughly speaking, China had total exports of more than 2 trillion U.S. dollars in the past five years. China's International Investment Position is more than 4 trillion U.S. dollars now. The number for the United States is twice as much, but China is growing very fast.

This phenomenon has never been seen before. As in history, capital exporters were often very advanced countries. For example, the United Kingdom was the major capital exporter in the 19th century, and for most of the 20th century, it was the United States. In 1985, the United States became a net debtor, while Japan, the Four Asian Tigers, and Germany became the major capital exporters. We began to see some differences from then on.

China is very special because it is still a developing country with a per capita GDP of 4,000 USD, and in PPP of 8,000 USD, but China has become the largest capital exporter. It’s very strange. China’s economy, savings and investment are big in scale and in substance. The technology in some areas is also developing very fast.

Talking about savings and investment, in the coming five years, there will be a smaller surplus in current accounts, about 200 billion U.S. dollars to 300 billion U.S. dollars per year, and 1 trillion U.S. dollars or 1.5 trillion U.S. dollars in total. That means China will still quite likely be the largest capital exporter.

It is a big challenge or pressure for China because we need to think all the time about how to invest with so much money. People say it is a big risk to have too much money when you face a wildly fluctuating market and have very limited options. It is also a big challenge and a big opportunity to the world with so much capital outflow.

 III. The basic target of the international financial restructuring

The basic target of the international financial restructuring is to provide more funding services to the real economy instead of the financial economy and to cut virtual or fictitious financial transactions as much as possible.

That means low leverage ratios, simple and transparent products, and closing to customers activities rather than complex structured products and self circulating financial business. It also means to promote free trade and FDI around the world.

The United States' proposal to limit current account imbalance and set a fixed figure target for major economies does not make any sense. Actually it is not important to divide countries into deficit and surplus groups. The economic structures are different and in the globalization era, differences between countries can help them complement each other. In the past twelve months the surplus in current account for China is nearly 300 billion U.S. dollars, which accounts for 4.9 percent of its GDP.

The ratios of surplus to GDP for Germany, Norway, Switzerland, Malaysia and Singapore are 5.2 percent, 14.3 percent, 11 percent, 14.7 percent, and 18.4 percent, respectively. I do not think we need to change that. The ratios of the United States and the United Kingdom are both negative 3.3 percent at the moment, much smaller than before. If we set a limit for how much a country can export, it would be bad for the division of labor.

China does have huge potential for overseas investment. We have more than 4 trillion U.S. dollars in IIP, but 70 percent of which, or 2.7 trillion U.S. dollars, is the central bank’s reserve. Overseas direct investment is only about 6 percent, and the net assets are around 250 billion U.S. dollars. So there still remains huge potential for China to increase its direct investment.

Chinese enterprises are really willing to invest in other countries all over the world.

It is strange there have been so many tangible and intangible constraints to direct investment, especially for Chinese enterprises. It is very difficult for them to invest in the United States and European countries. And even when the Chinese companies invest in developing countries, the behavior is criticized as new colonialism. That is very odd.

China has so much money that needs to be put into portfolios. Therefore, China will continue to buy government bonds and treasuries. I think China should do more direct investment. It is also surprising that though there are no incentives to do foreign direct investment, and we are encouraged to carry out risky leveraged financial activities. But that is the reality.

All countries can cooperate in foreign direct investment, especially developed countries with their technology, capital and sophisticated financial services industry. They can do more. Yesterday I read a piece of news that a French Industrial Bank began to finance Chinese companies investing in Africa. It is a really good phenomenon.

Also we can see the World Bank and other regional development banks invest in developing counties in South America, Africa and Asia. China can be more active to involve in financing and we can increase our share in the World Bank and other regional banks. China can play a better role in providing funding in these areas.

 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.

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