After all, China is one of the world’s largest economies that in spite of its increasing openness follows a course of its own. Critics of the dollar peg believe that if the renminbi were allowed to float, it would appreciate, thus reducing China’s current account surplus and shrinking the US deficit. In the long term, I believe that it is right to allow the renminbi to float. In the short term, however, it is difficult to see this as the appropriate solution. The main reason for not floating the renminbi yet is the Chinese financial system. The Chinese banking system is still a long way from being adapted to market conditions, and a large proportion of its lending is still made to state-owned companies that are often unable to honour their payment obligations. If we take into account all the hidden and disclosed nonperforming loans in the banking system, these are estimated to be equal to as much as half of China’s GDP, and they are continuing to grow. Were the currency allowed to float before addressing these problems, it is just as likely to depreciate as appreciate since the Chinese public could take advantage of the opportunity to transfer its assets abroad instead of saving at low interest rates in the weak  4  BIS Review 47/2003  domestic banking system, a system that would then be rocked to its foundations.
As the representative of a central bank, I must add that it is interesting to at least toy with the idea of how a global currency and global monetary policy would look. But for the time being this will probably remain no more than an intellectually stimulating vision. At global level, integration needs to go much further, and the economies become more synchronised, if the long-term gains of fixed exchange-rate cooperation are to outweigh the risks. In the long term, it is not inconceivable that a trend will arise towards large regional currency blocs with single currencies, but with flexibility between them. Within these blocs, it will be possible to reap the advantages of integration fully, while the risks will be limited by increasingly similar conditions in the countries taking part in the common currency. Competition between these areas regarding which has the dominant reserve currency may increase gradually. The dollar’s unique position will weaken, just as we are seeing today with a number of Asian central banks planning to increase their assets in euro and reduce those in dollars. Let us hope that there will also be cooperation between the regions, so as to give the world greater stability, development and continued integration. BIS Review 47/2003  5