At the G20 London Summit, opening on April 2, reform of the global financial framework and international monetary system and the influence of the IMF in supervising global finance will be high on China’s agenda.
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Besides promoting the IMF to take a stronger role in supervising and stabilizing international currency issues, China is also seeking a way to diversify and more securely operate its forex reserve assets, such as buying bonds issued by the IMF, instead of merely continuing to accumulate US national debt. This would be conducive not only to China’s forex asset security, but also to the IMF exercising influence in the current financial crisis.
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People’s Bank of China (PBoC) Governor Zhou Xiaochun offers a prescription for the reform of the international monetary system: to avoid the flaw of a sovereign currency as reserve currency, create an international reserve currency with long-term stability that is independent of sovereign nations. Zhou Xiaochuan especially emphasized the fuller use of Special Drawing Rights (SDR).
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How to make full use of IMF, especially how to guide capital to where it is in greatest need, will be one of the focuses of the meeting. Zhou Xiaochuan said letting the IMF manage parts of its members reserves would enhance the ability of the international society to cope with crisis and maintain the stability of the international monetary and financial system, and reinforce the influence of SDR.
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Zhou Xiaochuan offered detailed suggestions. The IMF should establish an open-ended fund according to market rules to operate the reserve currency of its members, set the smallest fund unit calculated by SDR, allow investors to buy into the fund with reserve currency and redeem the reserve currency when necessary. He said this would promote the development of SDR-dominated assets, and partly realize the regulation over the global liquidity of current reserve currency. It could even lay a basis for more SDR issuance and its gradual ascendance as a reserve currency.
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According to PBoC Vice-Governor Hu Xiaodong, issuing bonds is a way for the IMF to raise funds in the short-term. If the IMF issues bonds, China will positively consider purchasing them. She added that China would continue to buy the US government debt, and thinks its overall credit risk is quite low.
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China expects that, due to the many topics needing consideration, the possibility of the IMF’s bond issuance may claim short attention, and the details anyway need to be decided by the IMF itself.
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China is also considering increasing the IMF’s fund through loans. Some countries such as China and Japan may lend money to the IMF with low interest which the IMF may then lend to other countries. Problems such as types of the acceptable loans and interest rates would need to be addressed.
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But China still hopes to promote the use of SDR to diversify the risk of its foreign exchange assets. Zhou Xiaochuan said countries should positively promote the use of SDR calculation in international trade, pricing of bulk commodities, investment, and enterprises�financial reports, promote the establishment of SDR-dominated assets, and further perfect the valuation and issuance of SDR.
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