China calls for new global currency
China is calling for a global currency to replace the dominant dollar, showing a growing assertiveness on revamping the world economy ahead of next week's London summit on the financial crisis.
The surprise proposal by Beijing's central bank governor reflects unease
about its vast holdings of U.S. government bonds and adds to Chinese
pressure to overhaul a global financial system dominated by the dollar
and Western governments. Both the United States and the European Union
brushed off the idea.
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 of a basket of global currencies and
controlled by the International Monetary Fund and said it would help "to
achieve the objective of safeguarding global economic and financial
stability."
Zhou did not mention the dollar by name. But in an unusual step, the
essay was published in both Chinese and English, making clear it was
meant for a foreign audience.
China has long been uneasy about relying on the 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 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 by extension the dollar — can wreak havoc on nations around the
world. China is in a bind. To keep the value of its currency steady —
some say undervalued — the Chinese government has to recycle its huge
trade surpluses, and the biggest, most liquid option for investing them
is U.S. government debt.
To better insulate countries from the ills of one country or one
currency, Zhou said the IMF should create 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.
In Washington, Federal Reserve Chairman Ben Bernanke and Treasury
Secretary Timothy Geithner both rejected China's call for a global
alternative to the U.S. dollar's role as the international reserve
currency.
And 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.
Zhou also called for changing how SDRs are valued. Currently, they are
based on the value of four currencies — the 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.
