New global reserve currency porposed by China

Zynks

From the BBC today http://news.bbc.co.uk/2/hi/business/7960620.stm

China's central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.

Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.

With the world's largest currency reserves of $2tn, China is the biggest holder of dollar assets.

Its leaders have often complained about the dollar's volatility.

China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington's efforts to rescue the US economy could erode the value of the currency.

His speech was, unusually, published in both Chinese and English, signalling it was intended for an international audience.

The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," said Mr Zhou in an essay on the People's Bank of China website.

Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates.

On Tuesday, the dollar weakened against most major currencies following the announcement of a US plan to buy up toxic debt.

'Light in tunnel'

Mr Zhou said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.

"The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses," he said.

"However, it serves as the light in the tunnel for the reform of the international monetary system."

The essay comes before the G20 summit in London on 2 April, at which reform of the international financial system is top of the agenda.

"This confirms that China intends to play fully its role of global economic and political power at the next G20 summit," said Sebastien Barbe, an analyst at French financial service firm Calyon in Hong Kong.

Am I correct in assuming that if a plan like this takes off that the US economy is essentially bankrupt? After all, they have been printing does green pieces of paper and getting goods in exchange for years, and if now other countries knock on their doors asking for goods in exchange for the same paper they will not be able to fulfill the promise that currency basically is. Is this a correct assumption?

P. Breathnach

Zynks wrote: »

...Am I correct in assuming that if a plan like this takes off that the US economy is essentially bankrupt? After all, they have been printing does green pieces of paper and getting goods in exchange for years, and if now other countries knock on their doors asking for goods in exchange for the same paper they will not be able to fulfill the promise that currency basically is. Is this a correct assumption?

It could be interesting. China, of course, has just taken a big hit in its external reserves because of the effective devaluation of the dollar.

[Picture the scenario if the Chinese decided to liquidate their dollar holdings by going shopping in the US. If they decided not to buy any of their own products on the basis that they could get them cheaper at home, what could they purchase? A few nice pieces of military hardware, some Californian wines, any number of cheap houses, a few politicians ...]

Is this the first step on a long journey? A creditor that big has to be listened to.