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| China calls for new reserve currency | ||
| 2009-03-24 | ||
| 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.
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 organisations. 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.
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| Posted by:Steve White |
| #4 Dr White has it right. This is currently sound and fury. But ultimately we could allow the Chinese to do to us what the Brits allowed us to do to them. They're doing this on the backs of the Chinese people. Since China is growing quickly from a small base, the Chinese people are willing to let the government hog the trough. They don't know what they're giving up. But things could change and the Chinese don't have a stable constitution. |
| Posted by: Nimble Spemble 2009-03-24 07:24 |
| #3 Another proposal I've seen is a new currency backed by commodities (oil, gold, iron ore etc). The problem is you would have to trust individual countries have the commodity stocks they say they have and would hand them over if required. You would have a new currency, lets call it the Globo, used for international trade. China accumulates a surplus of Globos and say Brazil and Nigeria accumulate deficits of Globos. To rectify this China says to Brazil send us x million tons of iron ore and to Nigeria send us y million barrels of oil. Now bear in mind the reason you adopted the Globo in the first place is because you didn't trust the US to maintain the value of its currency, but now you are not only reliant on Nigeria and Brazil to send you what they own you, but even if they have the material to send you in the first place. |
| Posted by: phil_b 2009-03-24 02:23 |
| #2 Today, the value of SDRs is based on a basket of four currencies -- the US dollar, yen, euro and sterling Chuck in gold and I'll go along with that, but only for international trade. |
| Posted by: tipper 2009-03-24 01:48 |
| #1 The key change which I saw floated last week is for SDRs to be issued without being backed by reserves of a real currency. Which means the World Bank would get its own money printing press. And as I pointed out yesterday, A currency not backed by a national government which can't be used to purchase goods and services in that country (or countries) is a recipe for disaster. |
| Posted by: phil_b 2009-03-24 01:30 |