Monetary system requires management of sovereign credit risk

Editor's note: Qian Zongxin is an executive director of Center for Future Financial Innovation, Renmin University of China.

The article reflects the author's views and not necessarily those of CGTN.

The current international monetary system features a few key currencies that serve as vehicle currencies for international transactions and reserve currencies.

Notably, the issuers of these currencies, such as the US dollar, euro, British pound, and Japanese yen, are also major suppliers of sovereign bonds which are widely held in the global financial market.

The supply of these sovereign bonds is a double-edged sword.

On one hand, the growth of the global economy requires liquidity.

Long-term economic growth requires investment which usually has a relatively long horizon.

Such long-term investment, however, is typically not very liquid.

That is, when investors have to serve current liability, it is usually very difficult to turn these long-term investments into instant money to repay short-term debt.

Such conversion, even if it is possible, is costly, which generates unexpected losses for investors.

For this reason, in addition to their long-term investment, investors usually hold liquid assets that can be cheaply and easily turned into instant money to repay short-term debt.

In the current international monetary system, sovereign bonds issued by governments with strong credibility serve as such liquid assets.

Economies that issue major vehicles and reserve currencies enjoy added credibility from their currency status.

Growing international transactions generate continuous demand for international vehicle currencies.