Zhou Xiaochuan: Libra presents new challenges to foreign exchange research

On July 9th, at the seminar on "China's Foreign Exchange Management Reform and Development" jointly organized by the Foreign Exchange Research Center of the State Administration of Foreign Exchange and the China Finance Forty Forum, Zhou Xiaochuan, president of the China Finance Association, "The emergence of Libra Foreign exchange research presents new challenges and new topics" delivered a keynote speech. He pointed out that Libra's improvement of the past cryptocurrency is reflected in two aspects: First, it absorbs the lessons that the cryptocurrency has been too successful in the past, stressing that 100% of the preparation for the payment is not a speculative product but a trading medium, which can avoid a large value of the currency. Fluctuation and speculative components; second, Libra changed its cross-border business. In the face of the challenges Libra may bring, we need to be prepared and prepared to make the RMB in a favorable position in the future internationalization and global competition, and better serve China's economic development and national economic and financial security. The following is a record of the speech, without the author's own review.

Good morning, every body!

First of all congratulations on the establishment of the Foreign Exchange Research Center of the State Administration of Foreign Exchange This is a good thing. I believe that we will make an important and greater contribution to the study of important issues in the foreign exchange field. I am very honored to participate in the "China Foreign Exchange Management Reform and Development" seminar, I wish the seminar a complete success, and hope that this will inspire everyone to pay more attention to foreign exchange research in the future.

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I have listened to the three speeches and speeches just now. I agree very much. Today is a seminar. I will take this opportunity to choose a topic to tell you about my thoughts. I will talk about the emergence of Libra and bring new challenges and new issues to foreign exchange research .

With the advancement of reform and opening up and the development of the national economy, foreign exchange management has different priorities at each stage, and it generally consists of three stages.

The first stage is the early stage of reform and opening up. Foreign exchange shortage is the bottleneck of economic development, so foreign exchange resources are the most important national economic resources. After the Third Plenary Session of the Eleventh Central Committee of the Party, Comrade Chen Yun, as one of the main leaders of the national economy, engaged in 22 major projects, many of which were projects related to the national economy and people's livelihood, such as fertilizers, and the project was carried out in half because of the lack of foreign exchange. Suspended, this shows the restrictive role of foreign exchange in the early days of reform and opening up. At that time, the focus of foreign exchange management research was how to maintain the balance of foreign exchange, or balance of payments, especially the current account balance. Increase foreign exchange supply through export earning, rationally allocate foreign exchange demand, and allocate foreign exchange as an important strategic resource.

In the second stage, with the development of reform and opening up, in order to better promote the economy, especially the development of export-oriented economy, it is necessary to promote trade and investment facilitation. The new formulation of the Party’s Third Plenary Session of the 14th Central Committee on international and domestic resources and two markets has emerged in this environment. Looking at the Chinese economy at that time with foreign trade dependence, the ratio of imports and exports to gross domestic product (GDP) is 70% at the highest in China. The focus of foreign exchange management at this stage is to study how to make the use of foreign exchange more convenient, the allocation of foreign exchange resources is more smooth, and the role of the market in the allocation of foreign exchange resources is fully exerted to mobilize the enthusiasm of market players such as enterprises. In this process, we must balance convenience and prevent risks, and also pay attention to preventing financial crisis.

In the third stage, globalization has greatly increased the breadth and depth of the Chinese economy's participation in the global economy. In 2013, China proposed the “One Belt, One Road” initiative. During this period, foreign exchange research emphasized the need to pay attention to the convergence of local and foreign currencies. Just now Vice Chairman Chen Yuan mentioned that the RMB has joined the SDR, which indicates that the free use of the RMB has been greatly improved and will appear in the future. The degree of integration in local and foreign currencies has increased significantly.

In the new stage of globalization, various initiatives to promote currency globalization have emerged internationally. One of the more prominent ones is the cryptocurrency distributed ledger technology (DLT). There have been many problems in the development of cryptocurrency: too eager to achieve success, establishing a trading market eager to speculate and making money, turning cryptocurrency into speculative rather than trading medium. Libra, which appeared not long ago, is different, and has made two improvements on the basis of cryptocurrency.

On the one hand , the People's Bank of China began to say three years ago that if it engages in cryptocurrencies, it should refer to the experience of Hong Kong. The mode of issuing money can be the central bank issuing money or issuing money from commercial organizations. In the past, the issuing bank was HSBC and Standard Chartered. Before the reunification of Hong Kong, BOC Hong Kong was added. The three banknote issuing banks must have a reserve of US$1 for every HK$7.8 issued, which is equivalent to 100% reserve. In the past, we did not pay enough attention to this. With the huge fluctuations in the cryptocurrency trading market, we gradually accepted this view, and now we all emphasize 100% reserve preparation. Of course, Libra didn't say how to calculate the amount of hosting, and who is going to host it. Self-hosting will have a big problem, because there is a big profit motive in the middle, and the outside does not know if you are really 100% prepared.

Another improvement is that Libra is targeting cross-border business . From the perspective of developed countries, because their overall payment has been relatively convenient, the role of new technology in reducing costs to developed countries is not as large as that of developing countries. For developed countries with Swift systems, the efficiency of existing payment methods is not much different. Small economies and developing countries have a large number of immigrants and semi-immigrant workers, generating a large amount of remittances, but cross-border transactions, especially remittance efficiency. not tall. Libra has seized the pain point of its cross-border transaction costs, long time, poor efficiency, and user dissatisfaction. Our research has found that the current level of electronicization does not make remittances so low, mainly due to policy reasons. Developed countries have concerns about remittances and fears that there will be an incentive for immigrants. Developing countries generally welcome the return of funds, but there may be exchange controls inside. Regardless of the inflow and outflow, there are also relatively large exchange rate risks, as well as anti-money laundering and anti-terrorism financing issues.

The emergence of Libra raises an idea that has impacted traditional cross-border business and payment systems. Libra wants to focus on a basket of currencies, which is linked to eSDR and dSDR. In the future, there may be a stronger international currency, which may have a relationship with the current major sovereign currency, and even become the world's major currency. Libra's success in the future is still unknown, and it may be replaced by better ideas or more stringent, more stable and more efficient electronic money. However, we believe that from the trend of recent years, many institutions are trying to establish such a more global currency, and then there will be problems of strong coins eroding weak currency. This is a challenge for our RMB and foreign exchange management.

At the same time, the strength of the currency is also directly related to the problem of capital flows. The current strong currency is the US dollar, saying that strong coins eroding weak currencies are the dollar eroding other currencies. In the future, retail shopping and asset transactions can be directly used in US dollars, which will also lead to capital flows. Capital flows depend not only on investment opportunities, spreads, but also on the situation of finding a sense of security from a weaker country to a strong currency, especially when there is a crisis or fluctuation. In the past many years, the global dollarization process has been the erosion of the US dollar against weak currency countries.

From the point of view of the weak currency countries, because the macroeconomic regulation and control is not well done and the inflation is too high, it is easy to appear dollarization. The most typical is Zimbabwe. Zimbabwe has abolished the local currency and finally used the US dollar and other currencies. In the process of transition from a planned economy to a market economy, many countries also have a very significant dollarization phenomenon. We communicate with China and the Middle East (Central Asia, the Black Sea, the Balkans), including Russia, Turkey, Israel and other countries. Dollarization is an important issue. Looking at the proportion of US dollar assets, US dollar deposits, and US dollar transactions in the country, many countries in Central and Eastern Europe are more dollar-dollar, especially in the Balkans and Central Asia. Some Central Asian countries look good, and in fact dollarization has reached 40%-50%. Capital outflows and exchange rate instability have traditionally been a headache for weak currency countries.

Under the trend of globalization of science and technology, we are not saying that Libra or the future currency will erode. Now it has not eroded. We need to prepare in advance to make the RMB a strong currency. From the perspective of the integration of local and foreign currencies, the renminbi is in a favorable position in the future internationalization and global competition, serving China's economic development and the “Belt and Road” while maintaining economic stability and preventing economic crisis.

The economic and financial crisis is inevitable. Forward-looking research in advance will help us prepare early. When the economic crisis occurs, there will be fewer weaknesses and fewer problems, so that we can gain an advantage in the global competitive landscape.

China is now the world's largest trade and the world's second largest economy. This is a gradual process. The most obvious stage of shortening the gap is after the US subprime mortgage crisis. In 2006, before the subprime mortgage crisis, China’s economy was less than 20% of the US economy. In 2017, the Chinese economy was 67% of the US economy at current exchange rates. In the course of the decade, the gap between China and the United States has shrunk dramatically.

On the one hand, it is because the Party Central Committee and the State Council have correctly led the economic policy formulation. On the other hand, it is also related to the economic environment and response measures before the crisis in the two countries. China's financial system and financial institutions just carried out a major round of reforms before the crisis. The institutions are healthier, the financial markets are more stable, and the financial crisis is relatively smooth. In the decade of the crisis, the United States and Europe experienced negative growth or low growth, while China’s economic recovery was relatively fast. After the recovery in the second half of 2009, it maintained a relatively high growth rate. It is this relatively high growth rate that has rapidly narrowed the gap. . It depends on policy research and policy reserves.

The establishment of the Foreign Exchange Research Center, making forward-looking research on the reform and development of foreign exchange management, proposing good policy opinions, facing various new shocks and challenges, and making good preparations and policy preparations in advance, is conducive to making Our system is healthier and I believe that foreign exchange research will definitely make more progress.

I once again wish the seminar a complete success, thank you all.

(This manuscript is a shorthand manuscript and has not been reviewed by me. It is for reference only.)

Article source public number: China Foreign Exchange

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