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International monetary system under changing conditions and China's policy options / Wei Jianing ; Wang Tong - [E-mail-version, electronic ed.] - [Bonn, 2000] - 31 KB, Text & Image file . - (Studies on international financial architecture ; 2000,5 : e-mail-version)
Electronic ed.: Bonn : FES Library, 2001

© Friedrich-Ebert-Stiftung


International Monetary System under Changing Conditions and China's Policy Options>

Wei Jianing / Wang Tong


The Asian financial crisis has demonstrated that the existing international monetary system can no longer meet the demands of the international economic and monetary development.

The stability of the international monetary market could be improved by a third strong international currency besides the US-dollar and the Euro.

In spite of the of the turmoil caused by the Asian financial crisis, a rapid economic development in Asia is to be expected in the near future. Therefore the option

of an Asian currency to fulfil the function of a third currency comes into view. As neither the Japanese yen nor the Chinese RMB satisfy the requirements of an international currency at the present date, the project of a single Asian currency seems to be the most feasible.

The project of an Asian currency could be carried out within the framework of the Asia-Pacific Economic Co-operation. However it must be taken into account, that the Asian countries are still recovering from the crisis and that the levels of economic development need to be brought more in line yet.

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What will be the future course for the international monetary system?

The international financial market has been operating under a turbulent situation since the outbreak of the Asian financial crisis. This in turn has acted as an incentive for various countries to accelerate their exploration of the international monetary system and its practices.

On the European continent, turmoils at the international monetary market have served to strengthen the determination of the European countries for the realization of a single currency, and to accelerate the process of the integration of European currencies. Eleven countries including Germany, France, Austria, Netherlands, Luxembourg, Belgium, Finland, Ireland, Italy, Spain and Portugal have taken the "first Euro bus".

On the American continent, under the constant attacks of financial crises, "dollarization" has entered the vision of policy options of the financial authorities of Latin American countries and has become a fairly strong political and economic undercurrent. Up to now, Argentina, Salvador and Mexico have publicly advocated replacement of their currencies by the US dollar.

On the one hand, judging from the actual situation, advocacy of "dollarization" stems from the lack of confidence of the domestic residents and foreign investors in the local currencies and the monetary policies of those countries. With the economic globalization, the constant expansion of international capital, the acceleration of the flow of international capital and the financial crises at the newly rising markets, the international financial institutions find themselves incompetent in fending off or dealing with financial crises, which in turn reduces peoples' effective confidence in the independent minor currencies and the monetary policies concerned. Therefore, when those minor currencies suffer external attacks and tremendous pressures, "dollarization" might be a simple and practical choice for these Latin American countries to avoid exchange rate risks, resist financial storms and guard against speculations. [ Zhang Yanyu: "The US Dollar: Reality, Theory and Policy Implications", "World Economy", No. 9, 1999.]

Furthermore, the Latin American governments are facing a difficult choice between three contradictory goals, which are: the implementation of an independent monetary policy, the maintenance of a fairly stable exchange rate and the guarantee of complete convertibility of the currency. Theoretically the dollarization might be the best choice in this conflict. Actually it would mean the realization of a stable money value and free flow of capital at the expense of the goal of an independent monetary policy.

Although a financial crisis did take place in Asia, most people believe that in the next century Asia will be a major area of rapid economic development in the world, because of the great potentials in this area. It is imperative that Asian countries strengthen their financial cooperation-operation to ensure stability of their financial markets so as to guarantee a sound and rapid economic development. The Asian financial crisis has only emphasized the urgency of this task. The role taken by the Chinese government in the crisis deserves special attention. Because of the enormous contributions and sacrifices in resisting the effects of the Asian financial crisis, its financial authority carries an increasing weight concerning the reform of the current international monetary system.

On October 8, in the debate at the Second Committee (economy and finance) of the 54th General Assembly Mr. Shen Guofang, Deputy Permanent Representative of China to the UN, pointed out that the establishment of a new international economic order, which should be just and rational, is a guarantee for the realization of common prosperity in the new century.

The developing countries represent an important part of the world economy, but they are not in an advantageous position in the global economy. Therefore they are apt to suffer from fatal attacks and cannot fully participate in the process of economic globalization, not to speak of benefiting from it. However, it will be impossible to realize global prosperity without the participation of the developing countries that hold over 80% of the world's population.

Developing countries were the first to bear the brunt of the Asian financial crisis, in which the fixed remedy prescribed by certain international institutions brought about grave disasters to a number of countries. In order to avoid repeating the same mistake again, profound lessons must be drawn:

  • the speed and degree of the opening of capital accounts must not exceed the capacities of the financial system of a given country;
  • it would not do to oblige only the developing countries to bear the responsibility in fending off or handling international financial crises, the developed countries must also bear responsibility;
  • while strengthening and perfecting the domestic financial system, the international financial management system must also be strengthened and developing countries should have the right of full participation in its management.

On September 26, 1999, Mr. Dai Xianglong, Governor of the People's Bank of China, stated at the 53rd Conference of the Ad Hoc Committee of the International Monetary Fund that financial crises, which have taken place during the 90s, especially the Asian financial crisis, have clearly demonstrated that the existing international monetary and financial system can no longer meet the demands of the international economic and monetary development, and that a relevant major reform must be carried out.

He pointed out that for a long time the credit currencies of a few countries have acted as reserve currencies, therefore the international monetary system is imbued with inherent factors of instability. The fluctuations in exchange rates have brought about uncertainty for trade and investment and increased opportunities for speculation. They have also given rise to different kinds of derivative tools and wide-spread high-leverage operations, exposing the international monetary system to constant grave dangers. Moreover, the current system cannot effectively solve the problem of imbalance in international payment, which has given rise to international financial crises many times.

Mr. Dai Xianglong held that in order to solve the problems existing in the international monetary system the international community should create conditions for greater distribution and practice of the special drawing rights and strengthen the international mobile supply ability of the International Monetary Fund (IMF). The major developed countries should assume the responsibility for effective cooperation and coordination in their macro economic policies, and establish a new cooperative mechanism for stabilizing the exchange rate. The process of reform and the operation of the international monetary system should not be controlled by a few countries alone, the voice of the developing countries should be heard and the developing countries should be able to participate in decision-making. Furthermore the standards of the developed countries should not be imposed upon the developing countries. In the transformation of their economic structure, the reality and capabilities of the developing countries should be given consideration in order to contribute to the stable development of the world economy.

Talking about the role and reform of the IMF, Mr. Dai Xianglong stressed that the Ad Hoc Reform Committee should give full and all-round consideration to openness, representation and effectiveness so as to guarantee a good coordination-ordination of the proposals on major reforms of the international monetary and financial system. Especially the representation and the right of expression for the developing countries in the IMF should be guaranteed.

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Which currency will become the third international "hard currency"?

What kind of monetary mechanism should be established in Asia in view of the major readjustment of the international monetary pattern?

The international monetary market can remain comparatively stable only if a third strong international currency - beside the Dollar and the Euro - emerges, which helps to shape "a triangular balance". Which currency will become the third international currency in the course of establishing the America-Europe-Asia tri-polarity in the international monetary system? Will it be the Japanese yen, the Chinese renminbi (RMB) or an "Asian currency"? Up to now, there are various proposals, but none of them is convincing.

The possibility of the Japanese yen becoming the third international currency.

Japan began to discuss the internationalization of the Japanese yen and the question of establishing a Japanese yen economic sphere since the 70s. The argument about a Japanese yen economic sphere became prominent along with the constant revaluation of the Japanese yen in the middle of the 80s. Internationalization of the Japanese yen became once more a heated point for discussion when the Asian financial crisis broke out. Since the end of 1998, Japanese government leaders have stressed again and again the importance of the question of internationalization of the Japanese yen and efforts have been made to promote the international standing of the Japanese yen.

Judging from these tendencies, it is likely that Japan has identified the fatal week point of the present international monetary system and tries to grasp this opportunity to achieve certain goals. Of course, it is not without reason that, as the most developed economic power in Asia, the Japanese government tries to promote internationalization of the yen.

However, there are the following restraints for a currency of a given country to become an international currency:

  1. the actual economic strength and the trend of development of the given country;
  2. the international character of the macro economic policy of the given country, that is the due considerations of the adjacent countries in the formulation of domestic economic policies;
  3. the political stability of the given country;
  4. the stability of the currency of the given country;
  5. the convertibility of the currency of the given country and its full international circulation, which can reduce transaction fees.

Firstly, with regard to the actual economic strength and trends of development, Japan has in recent years been in the most difficult economic decline since the end of the Second World War. Although the situation is improving at present, the financial regrouping is bound to lead to industrial regrouping, therefore, new turmoils are not out of the question. Compared with the US dollar and the Euro, the supporting ability of the Japanese yen is not stable enough. This is indicated by the sharp ups and downs of the exchange rate of the yen in recent years.

Secondly, concerning the macro economic policies, the formulation of the economic policies by the Japanese government in recent years has disappointed the Asian countries to a large degree.

Thirdly, considering the political stability, it is known to all that the political situation in Japan has been full of turmoils.

In fourth place, as regards the stability of the currency, the exchange rate of the yen has suffered sharp fluctuations, especially since the outbreak of the Asian financial crisis. As a result, those fluctuations have frightened investors who hold the yen. Therefore, as long as people can expect the emergence of a more trustworthy currency, they would prefer it to the yen.

In fifth place, compared with other developed countries, the Japanese financial market is comparatively closed. It will take some time before genuine internationalization will be realized.

From what has been said above, one can see the yen has serious defects in several major aspects. In any case the time does not seem to be ripe for it yet.

Possibility of the RMB to become the third international currency.

China is the country with the largest population in the world. Its economic achievements have attracted attention from the whole world. Available data demonstrates that the average growth rate of Japan during its high speed development period was 9.2% in the 50s and 10.7% in the 80s whereas in China the average annual growth rate maintained 10% during the 20 years of reform and opening to the outside world. Relevant experts estimate that China will be one of the countries in the world that will enjoy the most rapid economic development in the future 10 years. Moreover, foreign currency reserves held by China have exceeded US$ 140 billion at present.

The credibility of RMB has been enhanced in Asia as well as in other parts of the world as a result of China's economic achievements and the stability of the value of RMB. The relevant policies adopted by the Chinese government for maintaining stability of the exchange rate of RMB at the time of the Asian financial crisis represented a great contribution to the prevention of the spreading of the Asian financial crisis and to the stabilization of the international monetary market. Thus China has won high appreciation from the international community, in particular from the Asian countries.

However, the restructuring of China's foreign exchange system has only covered half of the way so far. Although convertibility of RMB under current accounts has been realized, the capital accounts are not open yet.

The flow of capital, especially short term capital with its great mobility and aptness to speculation, can have a tremendous impact on the economy of a country. Therefore, the domestic economy of a given country is likely to suffer from fluctuations on the international market and from the attacks launched by speculators when the country is lacking a sound banking system and a market-directed interest rate mechanism, when strict regulations for foreign exchange control and standardized operations are absent and restrictions over capital inflow and outflow are abolished, in short when the necessary conditions are not mature. The Asian financial crisis has provided us with profound lessons in this respect. Before the RMB can become a competitive international currency it has to go through a gradual process of internationalization with the reform of the foreign exchange control as a long term goal.

Possibility of an "Asian currency" becoming the third international currency.

When the Asian financial crisis was spreading the Japanese authority proposed that an "Asian Monetary Fund" should be established, and promised to supply US$ 100 billion for the Fund. However, this plan was not realized.

The idea was put forward again by some officials and experts in Asian countries during the low of the Asian crisis. Some scholars hold in their essays that one of the ways for the Asian community to start preparations for the establishment of an Asian Monetary Fund would be within the framework of the Asia-Pacific Economic Cooperation forum. The function of the Fund lies in macro guidance - specialized in the maintenance of stability on the Asian financial market and the strengthening of supervision over the financial institutions in the region. It is expected that the Fund could play a positive role in stabilizing and coordinating the financial markets in the region in the following four aspects: as the research center of the regional financial markets, as the executor of financial laws, playing the role of the insurance company and acting as a lender of last resort in times of crisis. [ Mr. YU Qiao, a Chinese scholar staying in the United States, proposed in his speech delivered at the East Asia Research Institute of the National University of Singapore that China should take an active part in the preparation for the establishment of an Asian Monetary Fund as an effort to take up her place in important international economic and monetary institutions and gain room for greater economic and political operations for the promotion of the realization of a multi-polarity world in the next century.]

In the long run, the integration of Asian currencies with an "Asian Monetary Fund" at its basis seems to be the most promising concept. The successful formation of a suitable currency sphere in a region depends on the following three conditions: the degree of economic integration, the similarity of the economic structures and the coherency of policy objectives of the countries concerned. At present, however, the economic development of the various Asian countries stands at different levels with various degrees of market liberalization and they are in the process of recovery and readjustment after being heavily wounded in the financial crisis. Therefore, the integration of the Asian currencies will take time.

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What should be China's choice?

As mentioned above, monetary integration in Asia represents the main trend of development, and the international monetary system can be stabilized only when the US dollar, the Euro and an Asian currency form a "tripartite balance". Therefore, we should adapt ourselves to the process of the monetary integration in Asia and actively promote such a process, in which China should seek her maximum state interests.

Concerning the general process of the monetary integration in Asia, the establishment of a "sub-region monetary sphere" could be considered in the near future. Separate realization of monetary integration in various sub-regions can proceed, building on the closeness of economic contacts and Cupertino, the similarity of economic structures and policy objectives as well as historical and cultural factors.

As far as East Asia is concerned, (1) conditions are comparatively ripe and the voice for integration is louder among the ASEAN countries; (2) conditions are not quite ripe in China's mainland, Taiwan, Hongkong and Macao, but efforts can be made towards this end; (3) there has been little progress in this respect in the "Japanese Sea economic sphere" (including Japan and South Korea) due to opposition from South Korea. The process will depend on the future development of the relations between Japan and South Korea on the one hand and that between Japan and the People's Republic of Korea on the other hand.

Active support should be given to efforts made by ASEAN countries for the realization of a single currency.

After the outbreak of the Southeast Asian financial crisis, the ASEAN countries became aware of the fact that with the background of economic globalization the establishment of an international monetary cooperative regime is an important means to prevent financial crises and to fend off financial risks. When visiting Vietnam in February 1999, President Estrada of the Philippines clearly pointed out that it is necessary to establish a single monetary system within the scope of the ASEAN countries by following the example of the European Community. Before that, Malaysia and other ASEAN countries had put forward similar conceptions.

It should be noted that if the ASEAN countries can realize monetary integration, this would be helpful for the stability of the financial markets of the Southeast Asian countries and their economic recovery. Therefore, it deserves our support.

Work should be started on the monetary integration of the Chinese mainland, Taiwan, Hongkong and Macao for the realization of peaceful unification of China at an early date.

Firstly, with the acceleration of the process of economic globalization and the constant spreading of the financial crises, minor currencies will be eliminated one after another. Therefore, Macao, Hong Kong and Taiwan will face the issue of currency option sooner or later. Although the economic strength of the Chinese mainland, Taiwan, Hongkong and Macao has grown by large margins, none of these economic entities has the capacity to provide a major international currency.

However, taking the four economic entities as a whole, a study would show that the total economic strength of the "two sides and four localities" would exceed that of Japan in many aspects. See the table on page 6.

The 11 European countries with different ethnic groups, cultural and historical backgrounds and at different economic development stages have come together and established a unified monetary system - the Euro. In contrast to this, the inhabitants of "Greater China" are all descendants of the Chinese nation with common historical and cultural traditions, without language barriers, and their economies are supplementary to a large degree. Since the start of the reform and opening up, the foreign trade and the comprehensive strength of the mainland have grown considerably; a sound economic foundation has been laid down in Taiwan, one of the four small Asian dragons, during many years of development; Hong Kong as one of the international financial centers has accumulated rich experience in international financial business. The successful cooperation between the mainland and Hong Kong in resisting the adverse effect of the Asian financial crisis during the last two years has brought about and accumulated helpful experience for future financial cooperation. Therefore, one can see that a certain foundation has been laid for promoting financial cooperation of "Greater China", the realization of monetary integration and the establishment of a "monetary union".

Finally, the monetary issue is not a pure monetary and economic issue, it has always been linked with national unification. In fact, the establishment of the European Monetary Union is but an intermediate step in the realization "from economic union to political union". Mr. Santer, former President of the European Commission, emphasized that "the realization of the economic and monetary union is an important step for the realization of political union", the main aim being "not to be manipulated by others".

In order to realize peaceful unification of China, economic integration and monetary integration should be realized first. If the conception of monetary integration (or in other words "the China yuan conception") can be incorporated into the program of peaceful unification, it will demonstrate to the world China’s determination and sincerity for a peaceful unification of the Chinese motherland, which will be helpful also in calming down the mind of the Taiwan people.

Of course, the realization of monetary integration calls for painstaking efforts and a gradual process, it cannot be completed overnight. One of the practical plans is to establish a "monetary union" of the Chinese mainland, Taiwan, Hongkong and Macao by adopting "a double-track system". According to that conception the "China yuan" will exist at the same time with the RMB, the new Taiwan dollar, the Hong Kong dollar and the Macao pataca. After a certain period, the "China yuan" becomes the single currency of the two sides and four localities, whereas the RMB, the new Taiwan dollar, the Hong Kong dollar and the Macao pataca are gradually withdrawn from circulation.

Finally, with the identification of the single currency, the „China yuan" the Chinese mainland, Taiwan, Hongkong and Macao will enter the "Asian Monetary Fund". Then the „Asian yuan" will exist along with "the sub-region currencies" such as the „China yuan", the Japanese yen, the ASEAN currency etc.. In the end the "Asian yuan", as the highest form of the Asian monetary integration, will become the single currency in the Asian area.

Wei Jianing and Wang Tong work in the Department of Macro Economic Studies of the Development Research Center of the State Council, China

Comparison of economic strengths of Japan and Greater China:


Greater China


Hong Kong


(in 10000)







(in 100 million)






total import & export

(in 100 million)






foreign currency reserves

(in US$ 100 million)






© Friedrich Ebert Stiftung | technical support | net edition fes-library | Juli 2001