The challenge of how to “Maintain Prudent and Consistent Foreign Exchange and MonetaryPolicies in Response to the Current and Future Global Financial Crises” was the focus of a June 18 address by Prof Xiao Geng, Director of Brookings - Tsinghua Centre for Public Policy and Senior Researcher of the Brookings Institution. Prof Xiao was addressing the 20th CEIBS Lujiazui Finance Salon, held at the CEIBSLujiazui International Finance Research Centre.

To resolve the current crisis and ensure steady future economic growth, Prof Xiao urged central banks to collaborate closely in order to meet two critical goals:establish prudent principles of monetary policy and new cooperation mechanisms, and maintain the stability of foreign exchange rates among major currencies (thereby preventing countries from using currency devaluation for trade protection and minimizing artificial foreign exchange risks.) In addition, he said such moves will sustain reasonable real interest rates, ensuring the efficiency of resource allocation in the real economy within the context of high price volatility.

To accomplish these goals, Prof Xiao explained,international organisations such as the WTO should guard against the myopic behaviour of governments and central banks so as to maintain the financial stability of the current "paper money-based" international landscape through global cooperation and mutual supervision.He outlined six specific policy proposals that are vital in order to meet the following key objectives:

• the establishment of a three-currency (US Dollar,RMB, Japanese Yen) linkage mechanism for emergency purposes;
• the establishment of a global alliance of central banks including the Federal Reserve, the People’s Bank of China,and the Bank of Japan;
• the injection of capital into important and vigorous multinational companies via global sovereign wealth funds;
• the creation of a controllable financial environment that allows a moderate increase in salaries and CPI, raises the price of assets to their original level through moderate inflation, and helps companies gradually absorb toxic assets;
• the implementation of consistent macroeconomic policies; and
• the adaptation of consistent tax relief measures and public expenditure plans.

China - with its rapid increase in labour productivity and high demand for significant adjustments in salary levels - has a greater tolerance for higher inflation levels than the U.S, which needs to retain a positive real interest rate, Prof Xiao argued. China is well positioned to help coordinate global foreign exchange and monetary policies, for the sole purpose of ensuring effective resource allocation in the real economy and avoiding asset bubbles, he added. If the next stage of reform goes well, he predicted that China will maintain sustainable and more efficient growth.