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China Calls for New World Reserve Currency


China is calling for a new currency to eventually replace the dollar as the world's standard reserve, days before the G20 financial summit in London. Some analysts say the move demonstrates China's growing discontent with American dominance of the world economy.

China's central bank head Zhou Xiaochuan had strong language this week, when he said the global financial crisis reveals flaws in the international monetary system.

Zhou did not specifically mention the U.S. dollar. But, in an essay posted to the People's Bank of China website, Zhou said an international reserve currency should not be tied to the interests and economic conditions of any one country.

Analyst: Calls for replacement will lead nowhere

Peking University finance professor Michael Pettis says he thinks the Chinese are making a mostly political statement, in the run-up to G20 meeting.

"This whole issue of an alternative currency just doesn't make any sense," Pettis said. "This becomes more of an issue of the political implications of the essay."

Pettis wrote in his blog this week that "every decade or so" there are calls for the replacement of the U.S dollar with a more international reserve currency. "They always lead exactly nowhere," he said.

Is US dollar domination coming to an end?

Shanghai-based economist Stephen Green, of Standard Chartered Bank, says he believes Zhou's essay represents the thoughts of many Chinese officials in Beijing, who see the days of American dollar world domination coming to an end.

"He [Zhou] pointed out the inconsistencies that we currently face," noted Green, "for example, that the world relies on the dollar as a reserve currency, which means it has to preserve its value, but America, in order to solves its own economic problems, has to now print money, and that will, in the long term, devalue the currency. So there is an essential contradiction there."

China is largest holder of American debt

China is the world's largest holder of American debt, with about $1 trillion worth. If the U.S. dollar loses value, the value of China's investment would drop significantly.

Chinese Premier Wen Jiabao has said this possibility "worries" him, although Chinese officials have recently indicated they will continue to buy U.S. Treasury bonds, for the time being.

In his essay, Chinese central banker Zhou proposed the creation of a super-sovereign reserve currency that is not connected to any one nation, but managed by the International Monetary Fund.

Beijing proposes diversified monetary system

However, one day earlier, Chinese central bank official Hu Xiaolian told reporters in Beijing her country believes the international monetary system should still be based on the U.S. dollar.

Hu says the American dollar is still the most important currency used in investment, pricing and trade settlement. But she points out that China is ready to discuss what she describes as a "diversified monetary system."

In Asia, Beijing has been pushing for regional trade to be settled in the Chinese currency, the RMB yuan.

Hu says, if the cash-strapped IMF issues bonds to raise money, China would consider buying them. But she says Beijing also wants to see further reform of all international financial institutions, such as the IMF, so that countries like China can play a greater role.

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