On the evening of July 6th, RDCY Seminar Series was held in Chongyang Institute for Financial Studies at Renmin University of China (RDCY). Wang Yongli, former vice-president of Bank of China, was invited to give a lecture themed “Deliberate of ten years after the financial crisis”. Before the lecture, Mr. Wang Yongli accepted a letter of appointment and became a senior fellow of RDCY.
2018 marks the 40th anniversary of reform and opening up and the 10th anniversary of the global financial crisis. It has special significance in China’s economic history. Wang Yongli made an in-depth interpretation of the history and reasons behind the financial crisis and the risks that China's financial system needs to pay attention to in the future.he also made several proposals on preventing the risks. Zhang Yanling, former executive vice president of Bank of China and senior fellow of RDCY, attended the lecture and gave her ideas. Wang Wen, executive dean of RDCY, gave an opening speech.
Wang Yongli mentioned that this year is the 10th anniversary of the global financial crisis and the 40th anniversary of China's reform and opening up. Since the reform and opening up, China's finance has undergone huge changes and ran ahead of many countries of the world in such areas as the monetary aggregates, foreign exchange reserves, assets size of Central Bank, scale of financial assets, and the scale of financial profits. However, at the same time, it has accumulated a lot of problems, especially in recent years, the situation in domestic and abroad has undergone tremendous changes, leading financial risks more prominent. Therefore, preventing and resolving major financial risks has become one of the highest priorities. He emphasized that when we review the crisis again, we cannot simply reflect on theories but closely relate to the current reality.
Wang talked about the history of subprime crisis developing into the overall crisis. In September 2008, the famous investment bank Lehman Brothers collapsed and Merrill Lynch was taken over, which triggered a comprehensive financial crisis in the United States and quickly spread to the whole world, forming a global financial crisis once in a hundred years, and the global economy was in great collapse. However, before this, the US had suffered a subprime mortgage crisis in July 2007. The subprime mortgage crisis is precisely the market crisis of financial products supported by subprime mortgage loans that broke out in the security market. This must be traced back to the 1997 Southeast Asian financial crisis. The financial crisis in Southeast Asia had caused a large amount of capital to flow into the US internet industry and form bubbles, which in turn led the US stimulus policy to the massive development and risk aggregation of subprime loans and their financial derivatives. In addition, China's accession to the WTO has accelerated the outflow of capital from the US. Finally, housing prices fell and detonated the US subprime crisis, which in turn triggered a financial crisis. After the financial crisis broke out, the G20 quickly adopted an unprecedented joint rescue campaign.
After the crisis, many people attributed the causes of the financial crisis to the systemic risks caused by the excessive financial innovation and lack of financial regulation; greed of financial institutions and investors chasing high returns regardless of high risks; loopholes of the accounting system and the irresponsible of the rating companies. These are all influencing factors, but Wang Yongli believes that these are the factors at the surface and technology level, not the root causes.
Wang Yongli said that the massive transfer and serious excess of capital and production capacity driven by the development of globalization are the roots of crisis. The fundamental cause of the global economic and financial crisis is the large-scale surplus caused by information asymmetry and inadequate objective existence in the process of large-scale international capital and capacity transfer. This happens in the Great Depression of the last century as well as the crisis in 2008.
Then Wang Yongli explained the reasons why China joined the WTO in 2001. In 1989, the international situation changed dramatically. The fall of the Berlin Wall led to the drastic changes in Eastern Europe. The collapse of the Soviet Union in 1991 had a tremendous shock and profound impact on China. Deng Xiaoping’s 1992 Southern Inspecting Speech made it clear that development is the top priority, stability is overwhelming, and the Chinese economy had begun to accelerate developing. The 1997 Southeast Asia financial crisis was a test for China’s export-oriented economy. The question at the time was whether the Chinese RMB should be depreciated. In the end, China decided that the RMB would not depreciate. This decision helped China to consolidate its status as a major power in Southeast Asia and promote the circulation of the RMB in Southeast Asia.
More importantly, after the 1997 Southeast Asia crisis, Chinese people realized the importance of finance in peacetime, which pushed China to promote a very profound financial reform in 1998. After the introduction of these three major reforms, by the year 2000, China’s upward momentum has formed a clear contrast against the world. Therefore, China joined the WTO in December 2001 after 13 years of continuous efforts. In fact, since 2001, China’s share of the world’s new economic output has surpassed that of the US. However, the rapid development of this round of globalization has also made global overcapacity and excess liquidity more serious.
Wang explained China's financial risks and crisis response. The 2008 global financial crisis has been in its 10th year. Facing the current dramatic changes and complicated international situation, combined with China's domestic development, it is in the process of transformation and promoting the new stage of reform and opening up, especially the prevention of financial risks have become the top three major goals of China, and we must be highly vigilant and positively respond to financial risks and even financial crises. Wang Yongli stressed that China's current crisis awareness and coping experiences are inadequate. Financial institutions, financial supervision, foreign exchange management, and state coordination need to carefully learn the lessons from the past financial crisis. He said that ten years after the financial crisis, global financial risks became more prominent and it is just the best time to deliberate.
Finally, Wang Yongli emphasized that China is facing enormous challenges, but it still has significant opportunities and advantages. The most important part to truly form the international influence of China's finance is to focus on the development of financial markets. And here we are required to keep up with all aspects of law, supervisions and services. If China’s international financial market is heavily denominated and settled by RMB, the internationalization of the RMB will have a real foundation, He said.