C3S Event Report No: 011/2018
The following is an event report of a Lecture-discussion on “Rise of China in the International Monetary System and Implications for other Economies”, organized by C3S and the Southern India Chamber of Commerce and Industry (SICCI) at SICCI, Chennai on July 27th 2018.
Mr V. Srinivas IAS, Chairman, Board of Revenue for Rajasthan and Chairman, Rajasthan Tax Board, led a lecture-discussion, titled: “Rise of China in the International Monetary System and Implications for Other Economies”, jointly organized by the Chennai Centre for China Studies (C3S) and the Southern India Chamber of Commerce and Industry (SICCI) in Chennai, on 27 July 2018. The event was moderated by Mr. K. Subramanian, Treasurer, C3S and Former Joint Secretary (Retd.), Ministry of Finance, Government of India. The Welcome address was delivered by Mr. Rafeeque Ahmed, President, SICCI. Mr. Somi Hazari, Member, Executive Committee Member, SICCI; MD, Shosova Group of Companies; Senior Advisor (India), Transnational Strategy Group LLM, introduced the speaker.
According to Mr. V. Srinivas, the People’s Republic of China enjoys a significant clout in the International Monetary System, after the twin measures of inclusion of Renminbi (RMB) in the International Monetary Fund (IMF)’s Special Drawing Rights (SDR) basket and an increase in its voting rights in the IMF, after the US Congress approved changes to IMF governance norms (in 2016).
Mr Srinivas traced the growth and development of China’s economy and of the Renminbi since the 90s. The 1991-97 economic cycle saw easing of bank credit and increased levels of Provincial and Central spending. In 1996, inflation was reined in to single digits, from spiraling double digit levels in the 70s and 80s. But the availability of easy credit led to huge borrowings and subsequently many borrowers defaulted. This led to a rise in Non-performing Assets (NPAs). The People’s Bank of China (PBOC) was also under significant political influence and control from the Communist Party.
Under the then-Governor of PBOC, Dai Xianglong (1995-2002), a major reorganization of the regional offices of the PBOC was undertaken to minimize political interference in the bank’s functioning. Four Asset Management Companies (AMCs) were setup to reduce the NPA burden. A total of nine interest rate cuts were announced during Mr Dai’s tenure. Mr Dai also stated that the current financial system could not solve the Balance of Payments crisis and therefore, a need for additional currencies to enter into IMF’s SDR must be considered. During his tenure, China also entered into currency swap agreements with many Asian countries. It is also to be noted that the Asian Financial Crisis (1997) didn’t affect the Chinese economy severely, as the government had taken proper steps to mitigate the headwinds arising from the crisis, including in the Hong Kong Special Administrative Region (SAR).
Zhou Xiaochuan was the next Governor (2003-March 2018) of the PBOC. Major events during his tenure were the adoption of Exchange Rate Flexibility and Capital Account Convertibility, devising appropriate policy responses to the International Financial Crisis (2008-10), the internationalization of the RMB and the slowdown in Chinese economic growth due to a shift from export-oriented model to a consumption-driven one.
On 21 June 2005, China moved to a Floating Exchange Rate regime. As a result of the adoption of Exchange Rate Flexibility and Capital Account Convertibility, Chinese banks were authorized to sell and purchase Foreign Exchange. The RMB became convertible for foreign currency transactions. In 2006, China registered double-digit GDP growth of 10.5% and Foreign Exchange Reserves touched $900 billion in the same year (today, it stands at around $3 Trillion).
On the Banking and Financial sectors in China, Mr Srinivas stated that China adopted a broad range of financial and banking sector reforms. The China Banking Regulatory Commission was established for improving governance standards in corporate banks. The authorities made full provisioning of non-performing loans (NPL) to reflect the true picture of accounts. Value Added Tax (VAT) system of taxation was introduced.
China has increased spending on capital projects. The accumulation in foreign reserves was happening at a rapid rate of $40 billion/month during 2011. Despite this, serious concerns remained regarding shadow banking transactions and volatile stock market swings. All these factors drew the world’s attention to studying China’s economic growth and the spillover effects it could pose to the world economy.
On China-Iran relations, Mr Srinivas elaborated that China purchased oil from Iran in RMB during the time of sanctions imposed by the US. Due to this, China-Iran trade flourished significantly. He also said that Eurasia and Southeast Asia were focus-regions in Chinese foreign policy.
Elaborating on the state of Chinese economy today, Mr Srinivas remarked that China is the world’s largest economy (in Purchasing Power Parity terms). Successive reforms (especially large-scale infrastructure projects) have catapulted China to the status of a ‘Middle-Income Country.’ China is today a manufacturing powerhouse. It contributes to 15% of global exports and has pulled nearly 600 million people out of poverty. Its growth is also attributable to high levels of Foreign Direct Investment (FDI) and low labour rates. However, despite all these successful reforms, the Chinese banking system still suffers from inadequate independence.
In conclusion, Mr Srinivas stated that China continued its call to reform the international monetary architecture, despite the twin successes (voting share increase and acceptance of RMB into the SDR basket).
China is looking at gaining a total of 12% vote share (currently 6.09%) after the conclusion of the 15th Quota and Voice Reforms of the IMF. This worries Japan (6.15% of vote share), as then China would eclipse it by 6% and become the second largest vote-share holder in the IMF.
The talk was followed by an insightful interactive session with the audience.
Cmde. R.S. Vasan IN (Retd.), Director, C3S delivered the Vote of thanks.
(Compiled by Arjun Sundar, Member, Young Minds of C3S)
