PBOC Governor Pan Gongsheng: Some Thoughts on Global Financial Governance

Pan Gongsheng shared his views on four issues: the International Monetary System, cross-border payment systems, global financial stability systems, and the governance of international financial organizations.

Speech: Pan Gongsheng

Source: Shanghai Financial Official WeChat

Dear Secretary Jin, former Governor of the People's Bank of China Mr. Xiao Chuan, Mayor Gong Zheng, respected comrades Wang Jiang, Yun Ze, Wu Qing, Hai Feng, He Xin, and esteemed guests:

Hello everyone!

I would like to express my heartfelt thanks to the Shanghai Municipal Party Committee, the Municipal Government, especially Secretary Chen and Mayor Gong, for their concern and support for the financial industry and the People's Bank. It is a great honor to serve as a co-chair for this forum. After years of effort, the Lujiazui Forum has become an exchange platform with strong international influence and market dissemination power. On behalf of the People's Bank and the organizers, I extend a warm welcome and heartfelt gratitude to everyone!

At last year's Lujiazui Forum, I reported on China's monetary policy stance and the evolution of the future monetary policy framework. Over the past year, the People's Bank has maintained a supportive monetary policy stance, introducing multiple monetary policy measures from the perspectives of quantity, price, and structure, effectively supporting the continuous recovery and improvement of the economy and the stability of the financial market. At the same time, we have improved the monetary policy framework, optimized the intermediate targets of monetary policy, cultivated policy interest rates, enhanced the transmission efficiency of monetary policy, enriched the monetary policy toolbox, and ensured effective policy communication and expectation guidance. The transformation of the monetary policy framework is a gradual and ongoing process, and in the future, we will continue to assess and improve it.

Next, I would like to share some thoughts on the theme of "Several Reflections on Global Financial Governance". Global financial governance is a very broad topic. Today, I will mainly focus on four issues: the International Monetary System, cross-border payment systems, global financial stability systems, and the governance of international financial organizations, and share a few views with you.

The first question is about the International Monetary System.

Historically, the International Monetary System has always been in evolution, and the replacement of international dominant currencies reflects profound changes in the international landscape and the iteration of national competitiveness. In the 17th century, the Dutch guilder became an early internationally accepted currency; from the late 18th century to the first half of the 20th century, the British pound became the international dominant currency; after World War II, the US dollar established its dominant position and has continued to this day.

The international dominant currency has the attributes of a global public good, carried by a sovereign currency of a country, which inherently has some internal instability issues. First, when the interests of the sovereign currency country conflict with the global public good attributes, the sovereign currency country tends to prioritize its own interests, affecting the provision of global public goods. Second, the continuous accumulation of fiscal and financial regulatory issues and internal structural economic contradictions in the sovereign currency country can spill over to the global stage in the form of financial risks, potentially evolving into an international financial crisis. Third, when geopolitical conflicts, national security interests, or even wars arise, the international dominant currency can easily be instrumentalized or weaponized.

Due to the above issues, there has been increasing discussion internationally about reforming the currency system. Over the past decade, the driving force behind the transformation of the International Monetary System has mainly come from the economic and financial aspects following the international financial crisis, with related discussions primarily focused on these areas; the current new round of discussions is more influenced by geopolitical factors. These discussions generally have two directions.

The first direction is how to weaken the excessive reliance on a single sovereign currency and its negative impacts, forming a benign competition and incentive constraint mechanism among a few strong sovereign currencies. The development of a multipolar International Monetary System helps to promote sovereign currency countries to strengthen policy constraints, enhance the resilience of the International Monetary System, and more effectively maintain global economic and financial stability. Recently, European Central Bank President Christine Lagarde gave a speech in which she stated that the global system based on multilateral cooperation is undergoing fragmentation, the uncertainty of the U.S. dollar's dominant position is increasing, and the euro is expected to play a more important role in the global currency system.

Over the past 20 years, the evolution of the International Monetary System has two important characteristics. First, the euro was born in 1999 and currently accounts for about 20% of global foreign exchange reserves, second only to the US dollar. Second, after the 2008 international financial crisis, the international status of the renminbi has steadily risen. The renminbi has become the world's second-largest trade financing currency; when calculated on a full-caliber basis, the renminbi has become the world's third-largest payment currency; in the International Monetary Fund (IMF) Special Drawing Rights (SDR) currency basket, its weight ranks third globally.

In the future, the International Monetary System may continue to evolve towards a pattern where a few sovereign currencies coexist, compete, and balance each other. Whether it is a single sovereign currency or a few sovereign currencies acting as the dominant international currencies, the countries issuing these sovereign currencies will need to assume corresponding responsibilities, strengthen domestic fiscal discipline and financial regulation, and promote structural economic reforms.

The second direction of discussion is the use of a supranational currency as the international dominant currency, with much discussion around the IMF Special Drawing Rights (SDR). Mr. Zhou Xiaochuan, former governor of the People's Bank of China, raised this issue in 2009. Theoretically, SDR can better overcome the inherent problems of a single sovereign currency as the international dominant currency, has stronger stability, can better perform the functions of global public goods, regulate global liquidity, and implement crisis relief, which characterizes it as a supranational international currency.

SDR has become the international dominant currency, facing issues of insufficient international consensus and driving force at the political level. Currently, the market's scale, depth, and liquidity are inadequate, limiting its role. To promote SDR as the international dominant currency, member countries need to build political consensus, which is not easy in the current international environment. On the operational level, it is necessary to optimize the mechanism arrangements and gradually expand the use of SDR. Regarding the allocation and issuance mechanism, the IMF currently allocates SDR mainly for crisis response, often using a one-time large issuance approach. In the future, regular SDR issuances could be increased, and the scale of issuance expanded. In terms of usage, it is important to actively promote the participation of the private sector and various market entities, widely using SDR in international trade and investment financing activities, issuing bonds denominated in SDR, enhancing the role of SDR as a reserve asset, and establishing a settlement mechanism for SDR that accommodates large-scale use.

The second question is about the cross-border payment system.

The cross-border payment system is the "artery" of the global monetary funds operation, serving as an important support for promoting international trade and investment financing, as well as maintaining financial stability. The evolution of the international monetary system towards the coexistence of a few sovereign currencies and the rapid development of digital technology will promote the diversified development of the cross-border payment system; in turn, a diversified cross-border payment system will accelerate the transformation of the international monetary system.

In recent years, the problems facing the traditional cross-border payment system have gradually become prominent. First, there is a generational gap between traditional cross-border payment methods and emerging digital technologies, with issues such as low efficiency, high costs, and poor accessibility that urgently need improvement. Second, cross-border payments require coordination of different legal and regulatory frameworks and more stakeholders, and international cooperation needs to be strengthened. In response, international organizations such as the G20 have paid close attention and specifically formulated a roadmap to improve cross-border payments. Third, geopolitical games are intensifying, and traditional cross-border payment infrastructure is easily politicized and weaponized, used as a tool for unilateral sanctions, undermining the international economic and financial order.

In this context, there is a growing global call to improve the cross-border payment system, with emerging payment infrastructures and settlement methods continuously surfacing, pushing the global cross-border payment system towards a more efficient, secure, inclusive, and diverse direction. This trend is expected to continue to strengthen in the future.

First, the cross-border payment system is developing towards diversification. In terms of currencies, more and more countries and regions are using their local currencies for settlement, promoting the international use of more currencies, and the dominance of a single sovereign currency in cross-border payments is gradually changing. In terms of channels, in addition to the traditional correspondent banking model, emerging cross-border payment systems and regional multilateral payment systems have emerged one after another, making settlement channels more diverse and further improving the efficiency of cross-border payments. After more than a decade of construction and development, China has initially built a multi-channel and widely-covered RMB cross-border payment clearing network.

Secondly, the interoperability of payment systems and ecosystems is continuously improving. More countries and regions are extending the operational hours of payment systems, adopting internationally standardized messages, and promoting the interconnection of fast payment systems to enhance the efficiency of cross-border payments and reduce transaction costs. Countries and regions represented by Asia have significantly improved the interoperability of the retail payment ecosystem through the interconnection of QR code payments, greatly facilitating residents' cross-border payments.

Thirdly, emerging technologies are accelerating applications in the cross-border payment field. Technologies such as blockchain and distributed ledgers are driving the vigorous development of central bank digital currencies and stablecoins, achieving "payment as settlement," fundamentally reshaping the traditional payment system, significantly shortening the cross-border payment chain, while also posing significant challenges to financial regulation. Technologies like smart contracts and decentralized finance will continue to promote the evolution and development of the cross-border payment system.

The third question is about the global financial stability system.

Before the 2008 financial crisis, the international community mainly relied on the global financial safety net led by the IMF for assistance during and after events. After the crisis, financial regulatory rules and other preventive mechanisms were further strengthened.

On one hand, the multi-layered financial safety net continues to improve. At the Boao Forum for Asia last March, I delivered a speech on strengthening the construction of the financial safety net. At the global level, in recent years, the IMF has continuously enhanced its crisis rescue capabilities, strengthened its policy oversight functions, and expanded the scope of policy supervision. At the regional level, the European Stability Fund, the Latin American Reserve Fund, the Chiang Mai Initiative, and the Arab Monetary Fund have been established successively, becoming important supports for financial stability in their respective regions. At the bilateral level, central banks of major developed economies, such as the Federal Reserve and the European Central Bank, have injected liquidity into the market during times of crisis through currency swap mechanisms. The cooperation on local currency swaps among emerging markets is also progressing steadily. Currently, the People's Bank of China has signed bilateral local currency swap agreements with more than 30 countries and regions' central banks or monetary authorities, becoming an important part of the global financial safety net.

On the other hand, the crisis prevention system based on regulatory rules has been continuously improved. After the financial crisis, the international community carried out a series of major reforms to the global financial regulatory system, including the issuance of Basel III, which strengthened the soundness of banking institutions and strengthened the supervision of systemically important financial institutions. China has been actively involved in the formulation and implementation of international financial regulatory standards, and is one of the few economies that has fully implemented Basel III. A regulatory framework for systemically important financial institutions has been established, and the total loss-absorbing capacity of systemically important banks in China has all met the standard. A deposit insurance system has been established to provide full protection for more than 99% of depositors; The introduction and full implementation of new regulations on asset management have significantly reduced the risk of shadow banking.

Currently, the global financial stability system is facing some new challenges.

First, the regulatory framework remains fragmented, with a tendency towards "competitive bottoming out". Recently, the implementation of international regulatory rules such as the "Basel III Accord" has fluctuated due to domestic political factors in member countries, which may lead to regulatory arbitrage and weaken the global financial stability system. The international community should actively implement the agreed regulatory reform measures to prevent regulatory arbitrage and cross-border transmission of risks.

Secondly, there is insufficient regulation in some emerging fields such as digital finance. For example, there is a lack of global regulatory coordination regarding the rapidly expanding cryptocurrency market and the regulatory framework related to climate risks, with significant swings in regulatory orientation driven too strongly by politics; the application of artificial intelligence in the financial sector lacks unified regulatory standards. The world needs to strengthen regulatory collaboration and address regulatory shortcomings.

Third, the regulation of non-bank intermediaries remains weak. Over the past 20 years, the share of non-bank intermediaries in global financing has significantly increased. This type of financing is less stable, has lower transparency, and rising levels of leverage, and regulation needs to be strengthened.

We believe that building a diversified and efficient global financial safety net, centered around a strong International Monetary Fund, and maintaining the consistency and authority of global financial regulatory rules is the key pathway for crisis prevention and resolution, and it is also the direction that should continue to be adhered to.

The fourth question is about the governance of international financial organizations.

After World War II, the international community started with the IMF and the World Bank, gradually establishing a multi-tiered and multi-dimensional international financial organization system that covers areas such as international policy coordination, financial regulatory rule-making, and multilateral development institutions. This system has become the main institutional platform for conducting international financial governance, playing an important role in promoting global economic and trade growth and maintaining global financial stability.

With the changes in the global economic landscape, the shares and voting rights of major international financial organizations such as the IMF and the World Bank, as well as some regional financial organizations, have long lacked substantial adjustments. The proportion of emerging markets and developing countries is significantly lower than their actual position in the global economy. The international community should also pay attention to the fact that the policy orientation of individual member countries pursuing unilateralism has interfered with and influenced the governance and operation of international financial organizations. International financial organizations need to keep pace with the times to advance governance reforms, dynamically reflect the relative positions of member countries in the global economy, enhance the voice and representation of emerging markets and developing countries, uphold and practice true multilateralism, and improve governance efficiency.

Among various international financial organizations, the IMF occupies a central position and plays an important role in global economic and financial governance. The IMF is a quota-based international financial organization. The size of the quotas determines the IMF's crisis relief capacity, while the quota share determines the voting rights of member countries in the fund organization and the scale of financing they can obtain. Currently, the IMF's quota share does not reflect the relative position of member countries in the global economy. According to the consensus reached, promoting the adjustment of quota shares as soon as possible is key for the IMF to improve governance and enhance its legitimacy and representativeness.

Currently, the global economy is facing high uncertainty. While improving governance structures, major international financial organizations should further strengthen their economic supervision functions, objectively assess the risks faced by the world and individual countries, and actively guide countries to firmly support economic globalization and the multilateral trading system. Strengthen policy guidance for countries, enhance coordination of macroeconomic policies, and maintain the stability of the international financial system.