A Practical Approach to International Monetary System Reform.ppt
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1、A Practical Approach to International Monetary System Reform: Building Settlement Infrastructure for Local Currency Internationalization,Changyong Rhee and Lea Sumulong Asian Development Bank11 December 2012 Hong Kong, China,1,The views expressed in this document are those of the author and do not n
2、ecessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.,Outline,Introduction The RMB trade settlement system Expanding the regional currency settlement system: A practical approach to international monetary system reform
3、Relation with other initiatives Conclusion,2,Introduction,3,Need for international monetary system (IMS) reform,Weaknesses of IMS manifest in persistent and recurrent crises, global imbalances, exchange rate and capital flow volatility, growing reserves Reforms undertaken: G20 agreement to reduce pe
4、rsistently large current account imbalances New perspectives on role of capital controls against speculators Enhanced IMF toolkit Flexible Credit Line improved, Precautionary Credit Line established Chiang Mai Initiative Multilateralization bolstered But not much progress on international financial
5、architecture reform dependence on US dollar grew as eurozone problems exacerbated,4,Status quo means rising risks to Asia,Asia suffered from 2 crises in 1997 and 2008, which revealed structural problems: heavy reliance on trade high growth requiring high investment and foreign borrowing Vulnerabilit
6、ies persist despite strong fundamentals due to dollar dependence; as Asias economic power increases, vulnerability will not dissipate Proposed solutions: Build global safety net resource size insufficient; stigma effect Shift to system based on special drawing rights political constraints Move to mu
7、lti currency system high transaction costs Regional internationalization of Asian currencies can be an interim solution, provided proper infrastructure is put in place renminbi (RMB) trade settlement scheme is the best example,5,A chicken and egg issue,High bilateral transaction costs between non-US
8、 dollar currencies encouraged triangular transactions through the US dollar But once infrastructure is built, transaction costs will go down RMB trade settlement scheme promoted offshore RMB business due to existing infrastructure in Hong Kong, China Proposal to expand bilateral into a regional trad
9、e settlement scheme as practical solution to IMS reform Markets will then determine which regional currency will be internationalized,6,The RMB trade settlement system,7,Background,Objectives of RMB trade settlement scheme: Promote RMB internationalization Reduce exchange rate risks Shrink trade tra
10、nsaction costs Improve funding efficiency of financial institutions Diminish need to hold US dollar as medium of exchange and store of value Introduced in July 2009 and subsequently expanded several times Initiated as a cross-border trade transaction settlement but contributed to the development of
11、offshore RMB business and regional internationalization of RMB,8,The trade settlement framework,9,RMB trade settlement has grown rapidly,Increase in mainland designated enterprises from 365 in 2009 to over 67,000 be end-2011 Monthly cross-border trade settlement expanded from RMB 42 billion in 2010
12、to RMB 228 billion as of Sep 2012,10,RMB offshore business has also expanded,Outstanding RMB deposits in Hong Kong, China,Number of RMB bond issuance in Hong Kong, China,11,Due more than just to RMB appreciation expectations,Initially, RMB trade settlements were import-oriented RMB receipt-to-paymen
13、t ratio was 1:5.5 in end-2010, but now stands at 1:1.7 (as of end-Jun 2012) RMB trade settlement continues to grow (33% expansion in first 9 months) This is in spite of weaker RMB appreciation expectations and tapering cross-RMB market arbitrage opportunities,12,Lessons learned (1),Infrastructure ca
14、n generate demand and liquidity High transaction costs is evidence that Asia has not invested on financial infrastructure yet Chicken and egg question proper infrastructure can reduce transaction costs and generate new demand Full capital market liberalization or deregulation may not be a prerequisi
15、te for internationalizing currencies RMB trade settlement is restrictive and controlled but can still contribute to reducing US dollar dependence and diversification of settlement currencies Risks inherent in capital market liberalization exist even without the RMB trade settlement scheme (e.g., NDF
16、 market),13,Lessons learned (2),Better to have payments and securities settlement system together to secure sufficient business Availability of other RMB investment opportunities (e.g., “dim sum” bonds, RMB CDs, synthetic offshore bonds) encouraged holdings of RMB deposits Success of RMB trade settl
17、ement scheme partly due to efficient securities trading and settlement system (e.g., RTGS / CMU) in Hong Kong, China,14,Expanding and deepening the regional currency settlement system,15,Expansion of bilateral trade settlement system,Option 1: Expedite capital market liberalization and allow more re
18、patriation of RMB in Hong Kong, China to PRC But deregulation will complicate exchange rate and monetary policy management, and risk capital volatility Important in long-run but process will take time Option 2: Expansion of trade settlement scheme to neighboring economies Gradual approach of expandi
19、ng bilateral agreements with other regional economies More politically feasible and practical Huge potential for reducing US dollar usage if intra-Asian trade is settled in local currency (Intra-regional trade has risen from US$284.9 billion in 1990 to US$4.2 trillion in 2011),16,Combining regional
20、trade and government bond settlement system,Bilateral links between central banks Similar legal arrangements as RMB trade settlement scheme (e.g., guaranteed convertibility of local currency proceeds into US dollars), but with addition of government bond settlement Adds dimension on custodians and c
21、entral securities depositories for government bonds, which is excluded in trade transactions Central banks to provide custodian services and be central securities depositories of government bonds directly or indirectly,17,The proposed system,18,Future Asian Payments Bank,RTGS Asian currency B,Member
22、 bank,Member bank,CLS Bank,RTGS Asian currency A,Central Bank A,Central Bank B,Investor,PvP settlement bridge,PvP settlement links,Investor,RTGS Euro (ECB),RTGS USD (Fed),“Asian time“ USD Euro,CSD A,CSD B,Investor,Investor,DvP settlement,DvP settlement, Effective way of hitting 2 birds with 1 stone
23、reducing US dollar dependence and promoting local currency denominated bond markets in Asia,Why add government bond trading and settlement? (1),Local currency bond issuance has rapidly increased, but mostly government bonds Outstanding bonds have risen from US$126.1 billion in 1995 to US$6.1 trillio
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