Source: www.asiaecon.org |
CHINA CALLS FOR NEW GLOBAL CURRENCY
In anticipation of the G-20 summit in London next week, China officially launched a proposal calling for a new global currency to replace the US dollar. The surprise proposal by Beijing's central bank governor reflects unease about its vast holdings of US government bonds and adds to Chinese pressure to overhaul a global financial system dominated by the US dollar and Western governments.
In anticipation of the G-20 summit in London next week, China officially launched a proposal calling for a new global currency to replace the US dollar. The surprise proposal by Beijing’s central bank governor reflects unease about its vast holdings of US government bonds and adds to Chinese pressure to overhaul a global financial system dominated by the US dollar and Western governments.
The world economic crisis shows the “inherent vulnerabilities and systemic risks in the existing international monetary system,” Gov. Zhou Xiaochuan said in an essay released Monday by the bank. He recommended creating a currency made up by a basket of global currencies and controlled by the International Monetary Fund (IMF) and said it would help “to achieve the objective of safeguarding global economic and financial stability.”
China has long been uneasy about relying on the US dollar for the bulk of its trade and to store foreign reserves. Premier Wen Jiabao publicly appealed to Washington this month to avoid any response to the crisis that might weaken the US dollar and the value of Beijing’s estimated $1 trillion in Treasuries and other U.S. government debt.
For decades, the dollar has been the world’s most widely used currency. Many governments hold a large portion of their reserves in dollars. Crude oil and many commodities are priced in dollars. Business deals around the world are done in dollars.
But the financial crisis has highlighted how America’s economic problems and the US dollar can wreak havoc on nations around the world. For China to keep the value of its currency steady, the Chinese government has to recycle its huge trade surpluses, and the biggest, most liquid option for investing them is US government debt.
To better insulate countries from the ills of one country or one currency, Zhou said the IMF should use a “reserve currency” based on shares in the body held by its 185 member nations, known as special drawing rights, or SDRs. He said it also should be used for trade, pricing commodities and accounting, not just government finance.
Zhou also called for changing how SDRs are valued. Currently, they are based on the value of four currencies, the US dollar, euro, yen and British pound. “The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies,” he wrote.
Zhou’s comments are also part of China’s longstanding push to reform the IMF, World Bank and global financial system to give greater voice to China and other developing economies, another theme that will be heard from China, Brazil, Russia and India at the summit of the Group of 20 major economies next week.
However, many western countries, especially the US, have dismissed the idea of replacing the dollar. President Barack Obama described China’s proposal as unnecessary and US Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke took similar stances at a congressional hearing. They were asked by Rep. Michele Bachmann, R-Minn., if they would “categorically renounce the United States moving away from the dollar and going to a global currency,” and both said they would.
The European Union’s top economy official said the dollar’s role as the international reserve currency is secure despite China’s proposal. “Everybody agrees also that the present world reserve currency, the dollar, is there and will continue to be there for a long period of time,” EU Commissioner Joaquin Almunia said Tuesday after a meeting of the European Commission.
Although any change is unlikely to occur, the fact that the discussion will be present at G-20 summit in London next week is a critical step for emerging economies such as China, Russia and Brazil.
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Source: www.asiaecon.org |