G20 secretariat and 5+1 system are essential to improve global governance and address systemic risks

The G20, as an important platform for world economic cooperation, played a significant role in tackling the 2008 financial crisis. Yet it is facing a series of problems, such as its lack of authority and executive power. With changes ongoing in the world economy, the mission and strategic position of the G20 are in transformation, from the short term of dealing with financial crises to promoting long-term sustainable development of the global economy.

The 11th summit of the G20 will be held in Hangzhou, Zhejiang province, in September. During its presidency of the G20 this year, China should seize the opportunity to make proposals to lead the transformation of its mechanisms and play a proactive role in global governance. One of the most urgent issues is to establish a permanent secretariat and to improve the macroeconomic policy coordination mechanism of systematically important economies.

President Xi Jinping has called on the international community to strengthen macroeconomic policy coordination at many important international occasions. He advocates improving global economic governance through the G20 and other mechanisms to avoid negative spillover effects from the macroeconomic policies in major economies, so as to promote strong, sustainable and balanced growth in the world economy. Yet this initiative has not been well implemented.

First, the global economy has been undergoing slow growth. The economic trends and policies of different countries seriously diverge and the spillover effects of macroeconomic policies from systematically important economies are increasing. The systemic financial risk is rising, which requires countries to urgently improve macroeconomic policy coordination mechanism.

The US economy is taking the lead in recovery. Economic recovery in Europe is relatively weak, and the quantitative easing policy of the European Central Bank is expanding. Abenomics in Japan has shot "three arrows" with only limited effect, and the Japanese central bank has released a negative interest rate policy. Bulk commodity prices continue to slump and short-term capital flows are accelerating in the global markets. Foreign exchange markets are fluctuating intensively and emerging economies are facing new risks. Under such a complicated context, establishing and improving macroeconomic policy coordination among major economies are needed to avoid another financial crisis.

Second, the current global macroeconomic policy coordination mechanism cannot meet the needs for global financial stability and the sound development of the world economy. After World War II, the International Monetary Fund, the World Bank and the World Trade Organization were set up under the Breton Woods system. For 70 years, that system has been evolving and still plays an important role in global governance after the emergence of the floating exchange rate system in the 1970s, the formation of the G7 in the '80s, the introduction of the WTO to replace the General Agreement on Tariffs and Trade in the '90s, and the establishment of the G20 in 1999.

Facing today's challenges, the problems in the Breton Woods system are fully exposed. For instance, in the aspect of fiscal and monetary policy coordination, G20 members have a biennial assessment on each country's fiscal stand, public debt and potential financial risks. The Breton Woods system cannot provide an efficient solution when facing the problem of polarized interests and the increasing negative spillover effects of macroeconomic policy from major economies.

With trade policy coordination, all kinds of free trade agreements are surging, and the WTO Doha Round of negotiations is severely hindered. In addition, major economies are all facing structural problems. A meeting of the G20 finance ministers and central bank governors absorbed the structural reforms into a framework of "strong, sustainable and balanced growth". In the aspect of structural reform, G20 members are required to strengthen policy coordination as well.

Third, as the core platform of international economic cooperation, the G20 has played a significant role in global governance. So a reform within the G20 is feasible to improve the global macroeconomic policy coordination. The G20 gathers the main policymakers, including those from developed and emerging economies. For a long time, the G20 meeting has been a platform for information exchange and policy communication among world leaders, but its biggest weakness is in the lack of executive force. This will negatively affect its authority.

Now, the G20 consists of meetings organized by the country holding the rotating presidency, including general summits, meetings for finance ministers and central bank governors, and meetings for businesses and think tanks. However, due to the fact topics are largely broad and that there are too many interested parties involved, it is extremely difficult to push forward the coordination work needed in an effective way.

In recent years, there have been calls among G20 members to establish a permanent secretariat. This proposed standing body would organize and coordinate the work to be finished after the G20 meetings are adjourned. A permanent secretariat has its advantages: As a longstanding mechanism for the institute, it could improve the timeliness and effectiveness of the communication and coordination between members; it could help supervise and push forward implementation of resolutions made during G20 meetings; and it could help enhance cooperation between the G20 and other international organizations.

The G20 secretariat would need to be established with the IMF's support.

Given there have been similar appeals at previous meetings, China's proposal is to follow with the consensus. With China's presidency this year as a home advantage, it could be positively expected that such a proposal may be well supported by the G20 members.

In addition, we need to construct a 5+1 global macroeconomic policy coordination mechanism. The five economies with currencies in IMF's special drawing rights basket - the US, the European Union, China, Britain and Japan - are the major players in today's world economy of systematical importance. Changes in macroeconomic policies by any of them could have a significant influence on the global economy. Undoubtedly, enhancing the communication and coordination of macroeconomic policies of these five economies will help effectively control negative spillover effects of policy changes, reduce possible risks of all kinds, and maintain the stability of the global finance system and promote a strong, sustainable and balanced world economy.

The 5+1 would be the US, the EU, China, Britain and Japan, plus the IMF. Regular meetings would be organized, the agendas of which would focus on macroeconomic policy: fiscal, monetary, foreign exchange, trade and structural reforms, and so on. The objective would be to enhance positive spillover effects of coordinated macroeconomic policy in these five major parties while reducing the negative spillover effects.

The IMF should receive help to scale up the usage of SDR currencies. Now, the international monetary system is still dominated by the US. That means so much risk and responsibility is shouldered by the dollar. It is not only unhelpful for the stability of global financial systems, but also due to the Triffin dilemma (the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies), it is not good for the independence of the US Federal Reserve's monetary policy. In a lot of situations, the Fed faces a difficult choice between the value stability of the dollar and the balance of supply and demand of global liquidity. Promoting the status of the SDR in international payments as a "super sovereign currency" could help reduce the level of risk in the international monetary system, and it will also help increase the IMF's financial resources, which will help it to execute its responsibility in a more effective way.

The SDR, as the unit of account in adjusting international payment unbalances, has many restrictions with it, including the limited size and usage. The call for scaled up usage of the SDR has a relatively long record. In 2009, on the eve of the G20 London summit, Russia and China openly proposed to level up the status of the SDR in the international monetary system. Zhou Xiaochuan, governor of the People's Bank of China, also once wrote an article on this topic.

In what ways we could expand SDR's usage? One might revise regulations regarding SDR, including valuing and issuing, and also establish the settlement relation with other currencies. Second, expand SDR's usage in international payments among IMF members and in crisis-relieving assistance. Third, broaden the usage of SDR as the pricing unit in international trade and investment. Fourth, the IMF could provide SDR loans to central banks of its members and other multilateral development banks - the World Bank, for example - which could as a result promote the usage of SDR in key infrastructure investments.

China should take affirmative action on bringing up the topic that advocates the establishment of a G20 secretariat backed up by the IMF and the 5+1 macroeconomic policy coordination mechanism.

In regard to their implementing, it would be better to build a smooth atmosphere for follow-up actions. Seminars on the topics could be organized by think tanks to initiate academic discussions on these issues, including the organization framework, rules of decision, operational mechanism, and so on.

China could actively communicate with relevant parties informally, trying to reach more consensuses. After that, a formal proposal could be brought up at the G20 meeting for finance ministers and central bank governors. At last, in September, a resolution regarding the topic could be finalized during the G20 summit.

The author is director of economic research at the China Center for International Economic Exchanges. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/12/2016 page10)