Zhou Xiaochuan of The People’s Bank of China proposed “Reform to International Monetary System”

Zhou Xiaochuan of The People’s Bank of China has proposed a reform to international monetary system in his speech "Reform to International Monetary System" (published in both Chinese and English).

Read his text of speech for details.

A lot about international reserve currency can be learnt from his view.

A summary: (I try to figure it out)
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(Previous) International reserve currency : Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system

Theoretical characteristics of an international reserve currency:
1. Anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply
2. Its supply should be flexible enough to allow timely adjustment according to the changing demand
3. Adjustments should be disconnected from economic conditions and sovereign interests of any single country

Why existing system doesn’t work:
Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

Desirable goal :
create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run

Solution:
super-sovereign reserve currency, proposed to use SDR.

Not a new idea:
1940s, Keynes: "Bancor", based on value of 30 representative commodities
1969, IMF: SDR

Proposed SDR valuation:
basket of currencies, expanded to include currencies of all major economies, GDP included as weight.

Steps
1. short run, the international community, needs to recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

2. Give SDR a greater role; push forward a SDR allocation; approved Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997; broaden scope of using SDR; Set up a settlement system; promote the use of the SDR; Create financial assets denominated in the SDR; improve the valuation and allocation of the SDR

(This may be the difficult part) :
Entrusting part of the member countries' reserve to the centralized management of the IMF and IMF as international "supervisor" on the macroeconomic policies of its member countries.

Suggestion for IMF to promote greater role of SDR :
set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired.
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Many countries are really frustrated with status of USD, especially those that bought lots of USD-denominated debts.

But questions remain:
1. Can IMF really handle this big role of handling all member countries' reserve and be the international "supervisor" on the macroeconomic policies ?
2. Will countries of the world let IMF handle it ?



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