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Meet the new changes in the international monetary system

  The international balance of power has undergone profound changes, the conflict between Russia and Ukraine has accelerated the changes in the geopolitical pattern, various political and policy ideological trends have changed, and technological trends have been changing with each passing day. These factors have jointly pushed the international monetary system to usher in historic changes. The current international monetary system centered on the US dollar and dominated by floating exchange rates is entering a new period of reform. The situation in Russia and Ukraine has changed dramatically this year, and the financial sanctions imposed on Russia by the United States and Europe may accelerate this process. In this regard, China should intensify its research, actively plan, and make arrangements in advance, so as to gain the upper hand in the great changes unseen in a century.
1. The characteristics and evolution of the international monetary system

  The international monetary system has evolved from the gold standard (1914 and before), the gold exchange standard (during the two world wars), the Bretton Woods system (1944-early 1970) to the current Bretton Woods-like system (early 1970s to the present), It is an important part of the global governance system and international order. The generation, evolution and transformation of this system show some basic characteristics and laws. Understanding these basic characteristics and laws is very important for us to judge the future direction of change and countermeasures of the international monetary system.
  The international monetary system is a public good. The “public goods” attribute of the international monetary system means that, on the one hand, a country needs to have the will and ability to formulate and maintain rules for it. On the other hand, once this willingness or ability begins to change due to some subjective or objective conditions, The international monetary system may be turbulent as a result.
  ”The economic base determines the superstructure.” Changes in economic power and contrast determine the existence and evolution of the international monetary system. Based on a series of conditions such as its outstanding economic advantages after the war, the U.S. dollar finally gained an almost exclusive position in the international reserves; after the disintegration of the Bretton Woods system, the U.S. dollar remained at the center of the international monetary system, and the U.S. economy has maintained its status after the war to the present. Most of the time is related to absolute dominance in the world.
  The international monetary system has network externalities. The network externality of the monetary system also determines that the coordination of international forces and trust-based cooperation are crucial to maintaining the stability of the monetary system, and it also determines that a country is unlikely to continue to rely on unilateral actions to maintain the international monetary system or promote it. its transformation.
  The international monetary system has a path dependence. Path dependence refers to the fact that changes in the monetary system often have historical continuity. The next evolution of the monetary system is often based on the previous version, born out of the previous version. Sudden changes also exist, but they require a dominant force in the global economy to coordinate to overcome resistance and achieve sufficient consensus, which often occurs after a major crisis or shock. In addition, the path-dependent characteristics of the monetary system are also reflected in that the trauma left by one system may become the target that the next system should try to avoid and thus affect the formation of a new system.
  The evolution history of the international monetary system basically follows the constraints of the “impossible triangle” of exchange rates, interest rates and capital flows. The future evolution of the international monetary system may follow similar constraints. If a country values ​​policy autonomy more, it may have to abandon the fixed exchange rate system (choose a floating exchange rate) or free capital flow (choose a certain degree of capital control).
  The evolution process and results of the international monetary system are also affected by many factors such as domestic politics and economic trends. In recent years, due to the trend of domestic populization and political extremism, major developed countries have to adopt extremely loose monetary policies to deal with domestic contradictions. Modern Monetary Theory (MMT) is also more popular and easily accepted in this context. Objectively, it will also have an impact on the current international monetary system. Most of the developed economies are currently facing inflationary pressures, which may be related to this policy preference and also bring challenges to the current international monetary system.
  The evolution of the international monetary system is full of conflicts and even crises. Throughout the history of the currency system, it is a history of the mutual balance and evolution of the contradictions of “stability” and “flexibility”, which are full of balance and trade-offs between different goals in the system, and balance and wrestling between different regions. , has been accompanied by contradictions, conflicts, and even crises.
  The stability of the international monetary system is deeply dependent on international cooperation and coordination. The characteristics of the currency system’s public product attributes, network, and path dependence determine that the stability of the currency system requires coordination and cooperation from multiple parties, which is fully reflected in the history of the development of the currency system in the past 100 years. This feature means that if the future world evolves in a direction where international cooperation and coordination are relatively difficult, the international monetary system may also enter a period of relative instability.
  The evolution of the international monetary system is also influenced by technological developments. The development of cryptocurrency/encrypted assets (crypto currency/assets), decentralized finance (DEFI), digital trade and other aspects under the background of current information technology development, the basic arrangements for the international monetary system such as currency form, cross-border settlement and payment , may also have a significant impact.
  It is worth noting that the international monetary system itself is relatively complex and involves a wide range of areas. Understanding these basic characteristics and laws is crucial for us to predict the direction of change and evolution of the international monetary system and take forward-looking measures to deal with it.
2. Changes are brewing in the international monetary system, and both challenges and opportunities for China coexist

  The driving factors for the new changes in the current international monetary system are relatively comprehensive.
  The international monetary system centered on one country’s currency is inherently unstable. The Bretton Woods system established after the war and the dollar-centered Bretton Woods-like system after its disintegration are essentially monetary systems centered on a single currency. This system faces the “Triffin’s Dilemma”. This kind of instability is endogenous, and the intuitive manifestation is that the global economy will fluctuate greatly with the balance of payments of the United States, and the exchange rate of the dollar will also show a large fluctuation cycle of appreciation and depreciation, which once triggered a very widely discussed global The global imbalance is related to such large cyclical fluctuations. After the disintegration of the Bretton Woods system in the 1970s, several typical large fluctuations that attracted worldwide attention, such as the asset price bubble in Japan in the late 1980s, the asset price bubble in China in 2006-2007, and the global financial crisis in 2008, are inextricably linked to this endogenous instability.
  The balance of economic power is changing the post-war global economy where the U.S. economy continues to dominate, and is gradually shaking the foundation of the Bretton Woods-like system. Under the post-war Bretton Woods system and the Bretton Woods-like system after 1970, the United States established its central position in the international monetary system by virtue of its dominant position in the global economy. In recent decades, the proportion of emerging market countries in the global economy has gradually increased, becoming an important pole in the global economy. It is also changing the situation that the US economy was the dominant player for most of the post-war period. The international monetary system has changed from a single central currency to Moving towards diversity creates possibilities.

  The policy discipline of the United States has declined in recent years, and new policy trends are posing challenges to the Bretton Woods-like system. The post-pandemic global “stagflation” environment has exacerbated the vulnerability of this system. After the epidemic, the United States launched a huge amount of monetary and fiscal policy stimulus under the tendency of domestic populism and internal contradiction polarization, which is bringing continuous inflationary pressure. Although this policy stance is a helpless choice for the United States to deal with internal economic problems, it is unfavorable for the United States to maintain the central role of the dollar in the long run. This has already made people feel similar to the rising inflation in the late 1960s before the disintegration of the Bretton Woods system, and the repeated helpless policy choices of the United Kingdom in the face of the internal and external environment in the gold standard system in the 1920s and early 1930s.
  Dollar unilateralism, the use of currency and finance as weapons, is undermining the foundation of trust in a Bretton Woods-like system. At present, the relative position of the US economy in the world is gradually declining. At the same time, under the pressure of the domestic political situation in the US, the US has shown a trend of using or claiming to use the US dollar as a “weapon” on a larger scale and more frequently in recent years. In order to seek their own security, other countries and regions have begun to seek non-dollar payments and the possibility and necessity of establishing alternatives to the dollar have risen sharply, which will objectively promote the reform of the international monetary system.
  The evolution of technological innovation and the rise of digital currencies may also have a significant impact on the existing system. With the development of blockchain technology, cryptocurrencies (digital currency) and encrypted assets have become more and more topics of concern to monetary authorities and large enterprises in various countries. Internet technology itself is also constantly evolving. Based on blockchain technology, Decentralized Finance (DEFI), which is evolving with each passing day, and Web3 (including “Metaverse”, etc.) are constantly iterating and evolving. While uncertainty remains, it is foreseeable that these are expected to have profound and even revolutionary effects on traditional financial and monetary systems.
  As the world’s largest developing economy, with the expansion of its economic size and international influence, China has objectively become a more important force in the international monetary system. higher requirements. China should be more active in meeting the gradual coming reform of the international monetary system, conduct research in advance, make arrangements early, and win the initiative in the new round of reform of the international monetary system.
3. Suggestions on China’s response to the reform of the international monetary system

  We propose to intensify forward-looking research, follow the principles of marketization, rule of law and openness, accelerate the construction of a “big and lively” economy and a “deep and broad” financial market, strengthen regional economic and financial cooperation, and step up efforts to understand new trends in science and technology. The follow-up research and experiments, etc., began to strengthen the response to the reform of the international monetary system. Specifically, it includes the following aspects.
(1) Coordinate various forces and increase research on the reform of the international monetary system.

  ”Everything is foreshadowed, and if not foreshadowed, it is abandoned”, research must be done first. The international monetary system is a global “public good” related to China’s own interests, and a comprehensive and in-depth study of it is a necessary measure for China to deal with the unprecedented changes in a century.
  We believe that the relevant topics that need to be further systematically tackled at least include: 1. The characteristics and evolution of the international monetary system from the perspective of China; 2. Comparison of different types of monetary systems, advantages and disadvantages; 3. The main problems existing in the current international monetary system and the demands of major economies for the international monetary system; 4. Analysis of the reasons for the rapid and sustained U.S. dollar after the war; 5. The Soviet Union, the Cold War and the international monetary system; Analysis; 7. Analysis of the reasons why the role of the euro in the international monetary system does not meet expectations; 8. Analysis of the “Euro-dollar market” and the inspiration and experience for the offshore RMB market; 9. Accelerate the promotion Discussion on the realization path of RMB internationalization; 10. Potential impact of digital currency, encrypted assets, and decentralized finance on the international monetary system; 11. Conception, advantages and disadvantages of a diversified monetary system, and the connection with the current international financial framework Discussion on the potential realization path; 12. Discussion on the possibility and implementation path of the special drawing right as an international monetary unit, etc.
(2) Steadily build a dynamic, resilient and open economic system and accelerate the construction of a deep, broad, market-oriented and legalized financial system.

  Participating in and promoting the reform of the international monetary system has put forward higher requirements for the construction of China’s own economic and financial system. The renminbi should play a more important role in the international monetary system, in addition to China’s global economic scale, an open, dynamic and resilient economic system, and an active, deep and wide-ranging financial system that adheres to marketization and the rule of law. system is particularly important.
  When discussing the future reform of the international monetary system, a vice president of the European Central Bank talked about five conditions for becoming a major international currency: an economy large enough to support network externalities with extremely low transaction costs, deep enough, effective and efficient Open financial markets, good policies and governance structures ensure the external value of the currency, and the “rule of law” of perfect implementation protects the rights and interests of international and domestic investors, geopolitical influence and political stability.
(3) Steadily promote the opening of the capital account and actively promote the internationalization of the RMB.

  In the future, if China wants to play a more important role in the international monetary system, more flexible policies are required for overseas capital entering China and Chinese capital going overseas. The flexibility under the capital account will inevitably increase, and it is still necessary to steadily promote the gradual opening of the capital account.
  Another issue associated with capital account liberalization is the internationalization of the renminbi. Since the global financial crisis in 2008, the internationalization of the RMB has made great progress, but there is still a big gap with the current status of China’s economy and trade in the world. In the future, China can continue to seek to increase the proportion of RMB in trade settlement, settlement of important commodities and the international use of RMB.
(4) Strengthen bilateral and multilateral international cooperation and jointly promote the reform of the international monetary system.

  Whether the future international monetary system will continue to evolve towards a single currency center or a diversified monetary system is still uncertain. But no matter which direction, the network externalities and path dependence of the international monetary system determine that the evolution and reform of the monetary system are inseparable from closer international cooperation; no matter which direction, if China hopes to be in the future international To play a more important role in the monetary system, it also needs to start from strengthening regional cooperation, including cooperation with neighboring Asia, the Middle East and Europe, South America and other places.
(5) Improve the construction of China’s international financial center.

  China’s more important role in the international monetary system cannot be separated from the support of an international financial center. The regions corresponding to the current major international reserve currencies all have international financial centers (or even more than one) in the region, including New York, London, Paris, Frankfurt, Tokyo, etc.
(6) Closely track the impact of technological changes on the currency and currency system, and do a good job in talent reserve.

  The evolution of blockchain and related applications such as cryptocurrencies and encrypted assets is changing with each passing day, and the development of decentralized finance is also in full swing. Its impact on the international monetary system is still uncertain, but compared with the traditional international payment and settlement system, it has been reflected obvious advantages in some respects. China should adhere to the follow-up research on this, follow up the corresponding talent pool and explore the potential regulatory framework.
  To sum up, the world is facing profound changes unseen in a century, and the international monetary system is ushering in a new round of changes. China is objectively an important stakeholder in this round of new changes. This is both an opportunity and a challenge for China. China should increase its forward-looking research on the issues of this era, actively plan the layout, and win the first opportunity to build a future-oriented international monetary system and realize a community with a shared future for mankind.

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