OMFIFOMFIF BULLETIN Official Monetary and GlobalFinancial Insight Institutions on OfficialForum Monetary and Financial Institutions May 2010 G20 reform process runs into the buffers European disarray spills over to wider grouping Stewart Fleming, Board of Contributing Editors he G20 reform process bringing Early on 10 May, members of the Officials within the Group of 20 say Ttogether the world’s powerful European Union and the 16 nation euro many divisions are opening up, not advanced and emerging market area, together with the International only between richer and not-so-rich economies has run into the buffers. Monetary Fund, followed up their 2 G20 members but also among the Although the leaders of the Group May announcement of a €110bn loan emerging economies. India and Brazil, of 20 are scheduled to meet again plan to help Greece with a monster for example, last month lined up with in June in Toronto, the chances of €750bn package of initiatives to the US by signalling publicly their significant breakthroughs in creating support threatened euro members. This dissatisfaction with China’s failure to a more stable financial system and was coupled with a crucial decision allow the renminbi to appreciate. The world economy have diminished from the European Central Bank that G20 can now be seen as too diverse dramatically. it would take the momentous step of a body, with too many competing intervening to support ‘dysfunctional’ interests, to make a real difference to Until a decision by euro area finance euro area government and private the workings of the globalised world ministers on Monday 10 May, just as sector bond markets. economy. Asian markets were about to open, Europe’s response to its emerging The package bears the hallmarks of Important emerging economies are sovereign debt crisis triggered in long-standing French efforts to create an excluded and there are too many Greece had been dilatory and ‘economic government’ for the euro, an participants, especially Europeans, at incoherent. If even the culturally and ambition of Dominique Strauss-Kahn, the table. Considerable differences, economically relatively homogeneous the IMF managing director and former too, are emerging on financial market region of Europe, with 50 years of French finance minister. [See article on regulation, including over President economic cooperation behind it, is p.23.] However, the ECB move was Barack Obama’s drive to separate struggling to coordinate its decision- clearly opposed by the Bundesbank, commercial banking from investment making, then why should we expect whose president, Axel Weber, said it banking activities. much from the G20? involved ‘considerable risks’. (continued on page 4 ...) Contents Renminbi road-map Asia savings flow into infrastructure Zeti Akhtar Aziz 3 US-China funding needed West should prepare for China debate John Nugée 5 Songzuo Xiang, Advisory Board Caution remains watchword on China Jonathan Fenby 7 any people are talking about internationalising the Mrenminbi, but no-one has yet designed a clear-cut road- This is Asia’s millennium Meghnad Desai 8 map. China needs to enshrine this goal within a much wider Global analysis: Asian currencies advance as reserve assets 11 and more comprehensive financial strategy corresponding to the full potential of its economic and monetary ambitions. Central banks can still be surprised David Green 21 One important component of this approach would be to Strauss-Kahn in vanguard in Europe Darrell Delamaide 23 enhance the use of the renminbi in international bond issues, including by foreign governments. The US Treasury could Archive insight: How Trichet told Köhler the facts of life 24 pave the way. This would be a positive and stability-orientated Stronger global accounting governance Paul Boyle 26 method of recycling China’s current account surplus abroad in a way that – in contrast to the amassing of dollar reserves by Ireland quicker than Greece William Keegan 27 the People’s Bank of China – does not build up unnecessary foreign exchange risks for Chinese creditors. The issuing OMFIF Advisory Board 28 activity would be concentrated on Shanghai. There would This document must not be copied an important side-effect in enhancing both the profitability OMFIF and is only to be made available of Chinese banks and Shanghai’s status as an international Official Monetary and Financial Institutions Forum to OMFIF members, prospective financial centre. members and partner organisations (continued on page 6 ...) www.omfif.org 1 OMFIF Official Monetary and Financial Institutions Forum Letter from the chairman Official Monetary and Financial Institutions Forum When troubles come… One Lyric Square London W6 0NB We lift our eyes to Asia United Kingdom t: +44 (0)20 3008 8415 David Marsh, Co-chairman f: +44 (0)20 3008 8426 David Marsh hen troubles come, they come not in single spies, but in battalions. Georges Co-chairman WPapandreou, the Greek prime minister, might be forgiven for quoting Shakespeare e: [email protected] as he surveys his tide of problems. At OMFIF, we are lifting our eyes beyond the Greek t: +44 (0)20 3008 5207 ferment to take a wider look at the world, on the special occasion of the Inaugural Michael Lafferty Meeting in Asia at Bank Negara Malaysia. Co-chairman e: [email protected] Stewart Fleming surveys the challenges facing the Group of Twenty and concludes that t: +44 (0)20 3008 8415 the organisation and the reforms it is meant to espouse are running into the buffers. Vasi Papadopoulos Songzuo Xiang sets down an unusually detailed and well thought out road-map for Wiebke Räber renminbi internationalisation, including the proposal that foreign governments such as OMFIF Secretariat the US should start borrowing in the Chinese currency. e: [email protected] e: [email protected] t: +44 (0)20 3008 5207 Governor Zeti of Bank Negara Malaysia, our host for the OMFIF meeting, outlines the consequences for the West of a prospective ending of the Asian savings glut. In a Evelyn Hunter-Jordan magisterially wide-ranging essay, Meghnad Desai says that Asia’s time has come to Managing Director ascend to the top table of world economic governance: the West can no longer hide e: [email protected] t: +44 (0)20 3008 5283 behind veto power. John Nugée gazes into the monetary crystal ball and finds the future looking distinctly Chinese. Jonathan Fenby, who has been consistently right in his Gert van Deventer assessment of renminbi policy, considers the Chinese mood now that the US Treasury has Chief Financial Officer climbed down from sabre-rattling over a revaluation. Global Analysis takes an in-depth e: [email protected] t: +44 (0)20 3008 8421 look at the perspectives for Asian currencies to become established in coming years as fully-fledged reserve units accompanying the dollar and the euro. A key issue will be Darrell Delamaide borrowing in Asian currencies as governments and corporations seek to diversify fund- Newswire Editor raising instruments and investors try to spread out their portfolio across different regions. e: [email protected] t: +1 (0)202 248 1561 The euro’s travails are highly relevant to asset choices in Asia, given that the 11 top Tom Brown Asian central banks hold around $1.5tn of euros in their reserves. Production Editor e: [email protected] t: +44 (0)20 3008 5269 So, returning to the Athens prime minister’s sea of troubles, we offer a clutch of articles on various aspects of the European upheavals. Darrell Delamaide believes IMF managing director Dominique Strauss-Kahn’s pivotal position in the Greek rescue efforts makes him a more potent presidential candidate against Nicolas Sarkozy. Archive Insight investigates the limit to Franco-German monetary friendship as demonstrated by a revealing dispute over the French franc and D-Mark in 1992. David Green examines the transformation of central banks and their rapidly mounting challenges, not least for those in Europe beset by the Greek flare-up. Paul Boyle looks at threats to global accounting standards that have been worsened by euro strains. And William Keegan ponders parallels between Greece and Ireland. The Celtic tiger, though mauled by financial disruption, is certainly a lot less sick than the Aegean one. All this provides Strictly no photocopying is permitted. It is illegal plenty of material for comparisons between healthier and less healthy components of to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the world monetary system. y the content of this publication without the prior consent of the publisher. All OMFIF members are entitled to PDFs of the current issue and to an archive of past issues via the member area of the OMFIF website: www.omfif.org While every care is taken to provide accurate information, the publisher cannot accept liability for any errors or omissions. No responsibility will be accepted for any loss Quote of the month occurred by any individual due to acting or not acting as a result of any content in this ‘Greece is on the brink of the abyss. We are all responsible to publication. On any specific matter reference should be made to an appropriate adviser. ensure it does not take the step into the void.’ Company Number: 7032533 Karolos Papoulias, President of Greece 2 www.omfif.org OMFIF Official Monetary and Asia & the world Financial Institutions Forum Asia savings flow into infrastructure Capital shifts should rebalance world economy Zeti Akhtar Aziz, Governor, Bank Negara Malaysia sian economies have for several decades benefited immensely from their high The next step for Asavings. Today, despite the growing significance of domestic demand in Asia, the average rate of gross national savings to gross domestic product in Asia remains high.