Abstract

Today's global monetary and financial system is an imbalanced one in which US dollar plays hegemonic role. Global financial crisis of 2008 foretells collapse of this system because growth model of United States based on undue consumption and credit expansion is unsustainable. Inevitable decline of US dollar's hegemony brings about a great opportunity for the rise of RMB as key global reserve currency, but it also puts forward a big challenge for transformation of economic and financial development model of China.

The past success story of Chinese economy can be boiled down to demographic dividend. We find that if systemic risk, in particular real estate bubble, can be controlled, this dividend will still be a powerful driving force for China's economic growth until around 2019- key time window for reform of Chinese economic system, especially reform of fiscal and financial system. Different from other countries, fiscal and financial system in China is a pro - growth model paired with financial restraint in which government plays role of“visible hand”in resource allocation rather than“invisible hand”providing public goods for economy. Under this system, the relationship between government and market and relationship between central and local government have gradually become disordered, causing economic engine lose momentum and even systemic risk accumulate.

After global crisis, while systemic problems in domestic economy have not been tackled, internationalization of RMB is launched under atmosphere of somewhat blind optimism. But this kind of internationalization is based on erroneous guiding principle and adopts wrong model we have already seen its costly failure in Japan in 1990s.

The object of RMB internationalization is to establish RMB's status as key reserve currency. This status will benefit both of global monetary and financial system and Chinese economic and financial development, but its premise is fundamental reform of domestic economic system, especially fiscal and financial system.

Since the Third Plenary Session of 18 thCPC Central Committee, China has launched a systemic reform in order to rectify disorder in relationship between government and market and relationship between central and local government. This reform will change China's fiscal and financial system profoundly. It will bring about a financial revolution in China.