04/07 News

China Calls For New Global Currency -China calls for new global currency controlled by International Monetary Fund

By JOE McDONALDBEIJING, China,

24 Mar, 2009

China is calling for a new global currency controlled by the International Monetary Fund, stepping up pressure ahead of a London summit of global leaders for changes to a financial system dominated by the U.S. dollar and Western governments.

The comments, in an essay by the Chinese central bank governor released late Monday, reflects Beijing's growing assertiveness in economic affairs. China is expected to press for developing countries to have a bigger say in finance when leaders of the Group of 20 major economies meet April 2 in London to discuss the global crisis.
Gov. Zhou Xiaochuan's essay did not mention the dollar by name but said the crisis showed the dangers of relying on one nation's currency for international payments. In an unusual step, the essay was published in both Chinese and English, making clear it was meant for an international audience.

"The crisis called again for creative reform of the existing international monetary system towards an international reserve currency," Zhou wrote.

A reserve currency is the unit in which a government holds its reserves. But Zhou said the proposed new currency also should be used for trade, investment, pricing commodities and corporate bookkeeping.

Beijing 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 steps in response to the crisis that might erode the value of the dollar and Beijing's estimated $1 trillion holdings in Treasuries and other U.S. government debt.
The currency should be based on shares in the IMF held by its 185 member nations, known as special drawing rights, or SDRs, the essay said. The Washington-based IMF advises governments on economic policy and lends money to help with balance-of-payments problems.
Independent economists have suggested creating a new reserve currency to reduce reliance on the dollar but acknowledge that would face obstacles. It would need acceptance from governments that have relied on the dollar for decades and hold huge stockpiles of U.S. currency.

China has pressed for changes to give developing countries more influence in the IMF, the World Bank and other finance bodies. G20 finance officials issued a statement at their last meeting calling for such changes but gave no details of how that might happen.
Russia also has called for such reforms and says it will press its case at the London summit.

Zhou said the new currency would let governments manage their economies more efficiently because its value would not be influenced by any one nation's need to regulate its own finance and trade.

"A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity," Zhou wrote. "This will significantly reduce the risks of a future crisis and enhance crisis management capability."

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," Zhou wrote. "The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value."

My comment:

China is Challenging the Status of U.S. Dollar
The news shows that more and more countries treat dollar with distrust. Not only China but Russia, India… maintain the same idea. Within these two years, insurance,
real estate, and automobile industry in the U.S. collapse quickly, affecting the dollar’s depreciation as well. It seems that there are two power in G20 countries toward the new currency issue: U.S. and western countries versus China and Russia (or capitalism countries vs. communism countries ; developed countries countries vs. developing countries).

Let’s see the pros and cons of creating a new reserve currency system.
Strength:
1. reducing reliance on the dollar(especially those countries trading with the U.S. frequently)
2. stability
3. controlled by the neutral organization
Shortcoming:
1. obstacles like the identification problem or the huge administrative expense
2. risks of failed new currency
3. the influence of big power will go down

In a series of creating a new currency system news, what’s worthy of paying attention to is UN and IMF approval of this proposal. And now, as a giant economy body, China, has a lot of reasonable reasons to say so. The Beijing administration , some developing countries and even all BRICKs members need finance to support economy in their own countries. For example, China holds the value of $1 trillion dollars in Treasuries and U.S. government debt; nevertheless, the lasting economic depression erodes the assets that China own, and brought China instability. In conclusion, it’s not a matter of ’if ’ this will happen, just a question of ‘when.’