China, together with Brazil and India has been, for a year, a full member of the Financial Stability Board, and as, such, participates in steering and leading the effort to build a more resilient and efficient global financial system. Second, we may start thinking about ways of dealing with international capital flows volatility. For one given country, capital controls may temporarily reduce the pressure on its capital account or even permanently limit the volatility of its exchange rate. For the whole international system, however, they may simply displace the pressure to other countries or asset classes and exacerbate, rather than reduce, overall volatility. There might be ways to eliminate those negative effects by creating a predictable framework defining the circumstances, modalities and conditions trough which temporary or permanent controls would be implemented. Third, it is important that countries which decide to open their capital markets be adequately protected against external financial shocks. Emerging countries have constantly sought to expand their foreign exchange reserves from 4 percent of GDP in 1190 to over 20 percent on average today. Reserves act as precaution against possible abrupt capital outflows. They also serve to provide liquidity to domestic financial institutions. They are used as a tool for internal – as well as external – financial stability. The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis. Hence the current search for financial safety nets which has taken first stage in the G20.

Many are aging and want to secure their future income through good and safe returns on their investments. We therefore share a common interest in well functioning global capital markets. Asymmetries in financial development prevent us from reaping all the benefits of our savings efforts. These asymmetries exist for good reasons. In many emerging economies, the memories of the 1997–98 crisis are still there. They lead to precautionary behaviors and a very cautious approach to capital market liberalization. Obviously, the case for unrestricted financial development and market liberalization has been somehow weakened by the crisis. Nevertheless, we might be paying a heavy price for the disorganized state of our global financial and monetary system. While real interest rates are historically low, many investments with high returns are not undertaken. Poor and emerging economies growth is, in many cases, constrained by lack of infrastructure. We may face future shortages in many essential commodities because of insufficient investment in the current period. Differences in financial systems also exacerbate capital flows and exchange rate volatility, especially when, as is the case today, monetary policies are widely divergent across countries. Surely, we can do better in the future. Full harmonization and total convergence in financial development between different countries is neither desirable nor feasible. But ensuring that our different financial systems interact harmoniously should be a priority. There are four possible avenues for progress. BIS Review 170/2010  3  First, greater convergence in financial regulation approaches between advanced and emerging economies. Significant advances are being made.