By Bian Yongzu, Liu Yanjie Source: China Matters Published: 2017-7-7
The G20 Summit emerged from the turbulent state of the world economy after the financial crisis of 2008. The Hangzhou Summit in 2016, for instance, reviewed and approved the G20 Agenda Towards A More Stable and Resilient International Financial Architecture, which proposed to continue to analyze and monitor capital flows, and to manage the risk of excessive volatility of capital flows.
Reforming the international financial system and ensuring that progress is made has always been at the heart of the G20. Since the first Summit, international financial reform has focused on four goals: rebuilding and supplementing the capital and mobility of the banking industry under the standards of Basel III, improving the loss-absorption capacity of banks that are influential to the global financial system, and their management of working practices, reforming the trading of OTC derivatives, imposing new regulations on the scrutiny of shadow banks, and converting them into direct financial market trades.
Based on the second annual report on the Implementation and Effects of the G20 Financial Regulatory Reforms published by the Financial Stability Board (FSB), the UK and the US are propelling reform with considerable resolution and have achieved certain goals, while emerging market countries are lagging slightly behind, especially in dealing with potential financial risk.
China has achieved outstanding results in terms of the obligations it bears on financial reform. Among 24 countries scrutinized by the FSB, China is performing well in the implementation of Basel III and executive compensation, and is also making progress in the OTC derivatives market. China is also the only country that fully meets the criteria imposed on shadow banks. Its only weakness is the unwieldy banking system — laws directed towards important domestic banks have been passed but not yet put into effect; no law has been made on the Stable Funding Ratio; on problems of orderly bankruptcy on the banking side, either there has been no legislation, or the legislation has not been put into effect.
Compared with other emerging market countries, and even with Europe and Japan, the progress of financial reform in China is faster and more efficient. China is therefore in a favorable position when facing potential future risks. Advanced countries like Germany, France and the UK did not meet the requirements of supplementary capital when implementing Basel III;only Saudi Arabia fully meets the criteria of the Stable Funding Ratio among the 24; there is a significant deficiency in Korea’s OTC derivatives trading platform. That is to say, on the issue of international financial fragility China is not the weak link, but the leading force in maintaining financial security. China’s achievements in financial system reform are conspicuous, and set a good example to other countries.
The international financial system has changed a lot since 2008. One noticeable change is that influential financiers in developed countries are reducing their business capital in emerging markets and developing countries. This is closely related to the US policy of quantitative easing and the interest-rate rise cycle that will bring US dollars back to the US. Since the beginning of this year, the US has increased the interest rate twice to address undesirable economic indicators, which will in turn force tight monetary policy in Europe, Japan, and even countries like China due to the currency spillover effect. Therefore, it will be harder for emerging market countries to secure cheap financing from the international financial market compared with the situation of 9 years ago. This has had a negative influence on economic development and aroused public concern about the risks currently faced by the global financial market. During the early phase of the crisis, the financial markets were concerned about US dollar depreciation, default on EU Debt, and the slump in the oil price, while now the market worries more about loss of liquidity and the stability of emerging markets that could lead to unrest in the financial market.
This year’s Summit should continue to maintain the stability of financial markets. In this surging wave of financial globalization, no country can independently sustain the stability of its financial market outside the international financial system. However, different financial markets are facing different problems. The emerging markets and developing countries, for instance, are asking for more diversified remedies compared with developed countries. Their principal motivation is to transfer potential damage to other countries, thus it is hard for them to unify as a single strong voice to defend their interests. At the same time, developed countries have released a mass of liquidity under their QE policy, which has increased the financial index and generated several economic bubbles, hence instability is likely should anything go wrong. This situation does not accord with the interests of developed countries. Therefore, in order to realize the common interests of all countries, greater unification, sound policies, and coordination in fiscal policies and monetary policies are required. Countries should also avoid seeking to profit from others’ difficulties. These are the pivotal factors that will enhance global economic resiliency, and the areas where the G20 offers bright prospects.
The theme of the summit – “Shaping an Interconnected world” – encapsulates the core policies in all relevant countries. The Summit is the main platform for global governance. Chinese President Xi Jinping will attend relevant events during the Summit. China will also bring forward opinions, and share its experience, in maintaining an open global system and supervising the risks of cross-border economy, with the goal of helping the G20 to play a more effective role in maintaining global financial stability.
Bian Yongzu is a researcher of Chongyang Institute for Financial Studies, Renmin University of China; Liu Yanjie is a research assistant of Chongyang Institute for Financial Studies, Renmin University of China.