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China Calls For Dollar Replacement

CHINA CALLS FOR DOLLAR REPLACEMENT

PanARMENIAN.Net
24.03.2009 12:53 GMT+04:00

/PanARMENIAN.Net/ China’s central bank on Monday proposed replacing
the US dollar as the international reserve currency with a new global
system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou
Xiaochuan, the central bank’s governor, said the goal would be to
create a reserve currency "that is disconnected from individual
nations and is able to remain stable in the long run, thus removing
the inherent deficiencies caused by using credit-based national
currencies".

Analysts said the proposal was an indication of Beijing’s fears that
actions being taken to save the domestic US economy would have a
negative impact on China.

"This is a clear sign that China, as the largest holder of US dollar
financial assets, is concerned about the potential inflationary
risk of the US Federal Reserve printing money," said Qu Hongbin,
chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a
pointed critique of the current dollar-dominated monetary system.

"The outbreak of the [current] crisis and its spillover to the entire
world reflected the inherent vulnerabilities and systemic risks in
the existing international monetary system," Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of
foreign exchange reserves in US dollars, and this is unlikely to
change in the near future.

To replace the current system, Mr Zhou suggested expanding the role
of special drawing rights, which were introduced by the IMF in 1969
to support the Bretton Woods fixed exchange rate regime but became
less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies –
the US dollar, yen, euro and sterling – and they are used largely as a
unit of account by the IMF and some other international organizations.

China’s proposal would expand the basket of currencies forming the
basis of SDR valuation to all major economies and set up a settlement
system between SDRs and other currencies so they could be used in
international trade and financial transactions.

Countries would entrust a portion of their SDR reserves to the IMF to
manage collectively on their behalf and SDRs would gradually replace
existing reserve currencies.

Mr Zhou said the proposal would require "extraordinary political
vision and courage" and acknowledged a debt to John Maynard Keynes,
who made a similar suggestion in the 1940s, FT reports.

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