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 ?



Note:
You may wish to check out my other posts on US investment and economic analysis.

Nordic Capitalism – the future of capitalism ?

In this FT's article, it was said that, Jorma Ollila, advocates that Nordic style of capitalism (characterised by openness to globalisation balanced by strong government programmes to protect people from its excesses and an egalitarian education system), is the future of capitalism.


Who is Jorma Ollila?

His more prominent roles are:

1. Chairman of both Nokia and Royal Dutch Shell
2. Chairman of European Roundtable of Industrialists (an informal forum of around 45 chief executives and chairmen of major multinational companies of European parentage covering a wide range of industrial and technological sectors).

European Roundtable of Industrialists is a good place to get views of European Industrialists.

So, what is Nordic Capitalism ?
I found this insightful PDF file written by University of Jyväskylä.

Nordic economies:
Five small North European countries, which includes Denmark, Finland, Norway, Iceland, Sweden.

There is this book, Creating Nordic Capitalism – the business history of a competitive periphery, which is a good source to learn about Nordic Capitalism.

You can get a sample chapter from the website.

There are case studies given by the books on Capitalism of Sweden, Finnish, Danish and Norwegian.

Swedish Capitalism
Bonnier & Wallenberg
ASEA/ABB

Finnish Capitalism
Stora-Enso
Nokia and Tampella

Danish Capitalism
Arla Foods
Carlsberg

Norwegian Capitalism
Elkem
Kreditkassen

Iceland, as we know, is in deep trouble.

I wonder how are the status of these countries (Denmark, Finland, Norway, Sweden) and the companies used as success stories of Nordic Capitalism.

Can they withstand the onslaught of this financial crisis ?
How should the future of capitalism be ?

US: toxic asset plan - using public-private investment funds (PPIF) : Legacy Loans Program and Legacy Securities Program

To remove toxic assets from US banks, FDIC & Treasury launch Legacy Loan Programs and Legacy Securities Program.

We can get details of Legacy Loan Program and Legacy Securities Program from FDIC’s website.
Legacy Loan Program and Legacy Securities Program

The PDF files are very wordy and I feel that the easier way to understand is through the examples given.

(Excerpt from website)

Examples of Legacy Loan Program (main components related to $ highlighted)

If a bank has a pool of residential mortgages with $100 face value that they are seeking to divest, the bank would approach the FDIC. The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. The pool would then be auctioned by the FDIC, with several private buyers submitting bids. The highest bid from the private sector – in this example, $84 – would define the total price paid by the private investors and the Treasury for the mortgages. Of this $84 purchase price, the Treasury and the private investors would split the $12 equity portion. The new PPIF would issue debt for the remaining $72 of the price and the debt would be guaranteed by the FDIC. This guarantee would be secured by the purchased assets. The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.


Example of Legacy Securities Program (main components related to $ highlighted)

Treasury will launch the application process for managers interested in the Legacy Securities Program. An interested FM would submit an application and be pre-qualified to raise private capital to participate in joint investment programs with Treasury. Treasury would agree to provide a one-for-one equity match for every dollar of private capital that the FM raises and provide fund-level leverage for the proposed PPIF. The FM would commence the sales process for the PPIF and raise $100 of private capital for the PPIF. Treasury would provide $100 of equity capital to be invested on side-by-side basis with private capital and would provide up to a $100 loan to the PPIF if the fund met certain guidelines. Treasury would also consider requests from the FM for an additional loan of up to $100 subject to further restrictions. As a result, the FM would have $300 (or, in some cases, up to $400) in total capital and would commence a purchase program for targeted securities. The FM would have full discretion in investment decisions, although the PPIFs will predominately follow a long-term buy and hold strategy. Depending on the amount of loans provided directly from Treasury, the PPIF would also be eligible to take advantage of the expanded TALF program for legacy securities when that program is operational.

Resources for shareholder activism - Hermes Principles and the example of People’s Solidarity for Participatory Democracy (PSPD)

In this time of recession/financial downturn, we see lots of frauds on listed companies, majority shareholders trying to buy out and delist companies at cheap price, actions by majority companies that are detrimental to minority shareholders’ welfare etc..

Ever wonder, can minority shareholders do something to protect themselves from onslaught of these companies’ management ?

Shareholder activism is the answer.

European Corporate Governance Institute (ECGI) has a good write-up and resources on shareholder activism. There are proponents and opponents on shareholder activism. Some research reports are available in the website which argue on different angles.

Hermes (which is also featured in ECGI website above) has come out with Hermes Principles for corporate governance.

These are the principles concerning requirement that companies be run in the long term interest of shareholders. Read the PDF files for details. Its principles are on:
1. Communication
2. Financial
3. Strategic
4. Social, Ethical and Environment.

These principles can be a guideline for minority shareholders to ask companies’ management to adhere to.

In reality, companies’ management often doesn’t heed the opinions of minority shareholders.
What then should minority shareholders do ?

We can take a look at Korea’s shareholder activist group :
People’s Solidarity for Participatory Democracy (PSPD)
One of its articles in the website mentions some basic methods for shareholder activism: (read the article as it comes with examples and resources)

Participating in the Corporate Decision Making Process
1. Attending Shareholders Meetings
2. Shareholder Proposals
3. Proxy Solicitations
4. Convening Extraordinary Shareholders Meetings
5. Policy Recommendations

Preventive Measures and Monitoring the Behavior of Management
1. Inspection of Books and Records, Appointment of Inspectors Demands to Cease Illegal Activities
2. Injunctions to Prevent Illegal Acts of Management
3. Policy Recommendations
4. Holding Management Accountable for Their Conduct

Shareholder Derivative Actions
1. Criminal or Administrative Complaints
2. Demanding the Dismissal of Responsible Officers.
3. Policy Recommendations

Shareholders, unite ! :)