amando m tetangco, jr : navigating thru the waters of change... and butterflies speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the 2015 annual joint general membership meeting of aci, fmap, ihap, mart, nasbi and toap, manila, 29 september 2015. * * * i hope you share my view that meeting the six industry associations in a single general membership meeting such as this one is not only efficient but it is also hopefully more effective in developing : 1 ) a holistic view of events and developments – both here and abroad – and 2 ) a clearer common understanding of bsp policies. in the end, meetings like this should help us more expeditiously attain our shared goal of sustaining the strength and responsiveness of our financial market. your officers had asked me to share my views on the impact on emerging markets and the philippine policy framework of the recent developments in china. this topic choice is quite focused. while your interest in china is understandable, i think you will concur that it is also difficult to isolate this from other developments in the global market. in any case – let me try to zero in on two things about china – its growth prospects and the recent devaluation of the yuan. chinese growth : first, growth. some have argued that the slowdown in the chinese economy is neither recent nor a surprise. china ’ s gdp growth has been decelerating over the past 5 years, from 10. 6 % in 2010 to 7. 4 % in 2014. this is projected by the imf to decline to 6. 8 % in 2015 and 6. 3 % in 2016. yet, the imf ’ s august 2015 article iv report1 in fact states that china is moving towards a new normal of slower yet safer and more sustainable growth. there is also the case being made about base effects to explain the slowing growth rates. 2 since china passed japan in 2009 in terms of economic size, china has expanded by the equivalent of “ 1 ¼ japans to its output ”. the bigger base then will require substantially increased economic activity if the growth rate is to be maintained. but even if the gdp growth rate is closer to 5 % in 2015 – a significant drop from currently reported rates – the increase in output “ will add almost one and a half thailands to china

, of course, was clearly transitional, and the dollar subsequently became dominant. but the most important factor inhibiting the emergence and persistence of a single vehicle currency throughout the world is the attraction of portfolio diversification. this can be a powerful counterforce, especially because currencies offer far greater opportunities for diversification than most other assets. the average price of all currencies, by construction, is trendless, tending to increase the negative covariance within a portfolio of currencies. in contrast, equity instruments are often driven in the same direction, as are debt instruments ; and often debt and equity prices move together. this point brings us to the question : how does a currency become an international currency? the question is particularly intriguing because, in the reign of fiat currencies, its answer is unlike the explanation of how a currency becomes dominant within a country. when gold, silver, or other commodities were the normal means of exchange, units of currency were defined by commonly understood weights of the commodities that circulated. soon the equivalent of warehouse receipts for precious metals circulated as currency. under a commodity standard more generally the value of paper currency or any other financial claim is derived from the value of the standard. contracts can be written in terms of ounces of gold or, more conveniently, in terms of a unit of exchange. the pound sterling, of course, was originally a pound of silver. the u. s. dollar was originally defined for legal purposes in the coinage act of 1792 as either 0. 05 ounces of gold or 0. 77 ounces of silver. in today ’ s world of government - issued monies, the unit of currency is not, and need not be, defined. it circulates as legal tender under government fiat. its value can be inferred only from the values of the present and future goods and services it can command. in the international arena, however, no overarching sovereign exists to decree what is money. instead, a myriad of private agents must somehow reach agreement on which currency to use as an international currency. in the modern world of fiat currencies, a number of factors can enhance the attractiveness of a currency to private agents, making it easier for them to settle on an international currency. first and foremost, an international currency must be perceived as sound. to be acceptable, market participants must be willing to hold it as a store of value. a necessary condition of that willingness is that a currency ’ s future