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Expert: time for yuan to go international
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14:55, November 25, 2008

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A Chinese senior fellow of Brookings suggested that China should make its currency (RMB) international while keeping the exchange rate stable. He also suggested China develops its financial market and stock market so that the country will be well prepared to have a greater say in the global financial system going multi-polar.

Prof. Xiao Geng, director of Tsinghua-Brookings Center, said in a recent interview with People's Daily Online that China, with 20 percent of the world's population and great potential of fast growth due to its urbanization process, will play a more important role than ever in the global financial system. The financial crisis may make that process faster as smaller economies running out of forex are thirsty for money.

"It is too early to say that the US is losing its leadership (in the global financial system)," he noted, adding that the yuan, yen and euro will all become important options for reserve currencies.

However, he warned that the precondition was to have a global exchange rate regime in place to ensure the stability of exchange rates. Then, he argued, countries will compete only for the market share of their currencies, not for prices. That will keep the systematic risks off.

Xiao also urged a development of China's financial sector which is still backward compared with that of some western countries. "The challenges that China's financial system faces…" he said, "…include poor efficiency and lack of talent. Shanghai has financial hardware better than New York and London," commented Xiao, "but the software is not as good." By saying software, he refers to people.

And the stock market in China is still "small". There are few products for investors to choose from even though there are mature tools available. Xiao believes that China should encourage the development of the stock market.

China still has to learn from the western economies in developing its financial sector and stock market, although there are problems in their systems which have been made evident in the current crisis. "There are loopholes in their system, but theirs is still the most efficient system to promote the market economy," he said.

However, he highlighted the importance of caution when learning from western practices. First, the mistake of making the capital too cheap in the US and Japan has to be avoided in China. That mistake has resulted in a big stock market bubble. A similar situation has taken place in China and should be avoided in the future. Secondly, China must be very careful when introducing new, exotic investment products on the market. "At least regulators should understand what those products are all about before they give the approval," he said.

In addition, he noted that other countries are also expecting China to have a greater say and play a more important role --- if not a leading role --- in the international financial system. He is confident that China will build its own international financial center "within a decade".

And he is confident that China can play a leading role in the future.

By People's Daily Online

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