China's central bank calls for new reserve currency

http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

by bokonist • 17 years ago

53 43 17 years ago

bokonist3• 17 years ago

This is the first time I've ever heard a Chinese official this high up call for replacing the dollar. Can anyone else think of any other examples? If this is really a new development, then it's very significant news.

ironsam• 17 years ago

The premier of China publicly spoke about his concerns for the value of the dollar recently: http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_...

dc2k08• 17 years ago

There has been news about it but it has not been given much coverage. Christmas eve last, it was reported by AFP and Xinhua (Chinese Govt. Media) that China was trying to create conditions for the yuan to become an international settlement currency and would use the yuan in transactions with neighbouring economies on a trial basis:

http://www.marketskeptics.com/2008/12/china-makes-yuan-inter...

I link to a blog and not the articles because I think the blogger makes some great commentary. He also gives his incite to yesterday's news in the first link on the right. Definitely worth a read.

gregatragenet• 17 years ago

China has made several statements in the last few weeks about their concerns about the dollar. However the real BIG news is not their talk, its their actions. China has been moving their dollar holdings into short-term bills out of longer-term notes. They are positioning themselves so that they can get out of the dollar quickly - and they are doing it in a way that won't raise alarms because they aren't (yet) cashing-in their dollar holdings.

http://www.atimes.com/atimes/China_Business/KC18Cb01.html

Rod• 17 years ago

"In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."

Monetary policy is definitely not my forte, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation, after all. Creating a new currency takes such a long time that I wonder whether it would be practical.

mattmcknight• 17 years ago

I don't think it would be a real currency, it would just be a broadening of the current basket the IMF uses. We'd use an expanded form of special drawing rights as reserves, and the SDRs would be based on the broader basket of currencies.

redsymbol• 17 years ago

Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone.

Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable.

I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment?

Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights

jodrellblank• 17 years ago

Throws the markets out of whack

It's important that we adjust what we do so we don't break the system that models what we are doing. /nods sagely/

bokonist3• 17 years ago

It's hard to see how that kind of basket would work. If you don't have fixed pegs between the currencies, then you have not increased the stability of the system. If you have fixed pegs, then each member country must cede complete control of its monetary policy to the international bank. Otherwise the temptation to inflate would be too great.

jwilliams• 17 years ago

I thought that China moved to a basket currency a few years ago?

known• 17 years ago

Just curious, what will happen if China and India joins EU?

katz• 17 years ago

> e, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation,

Yes, but isn't there one European Central bank? That is the problem.

kirse• 17 years ago

Coming from China, I think it is absolutely fair that they have to deal with the dollar as the reserve currency because we had to put up with the decade of bullshit from them pegging their yuan to the US dollar.

The major reason they're holding an excess of US assets is because they decided for 10+ years to ensure that it was artificially cheap for anyone in the US to import from China. We complained to hell about fair trade and threatened import taxes, but we let it slide mostly in the name of diplomacy and cheap consumption.

Well now China gets to reap the consequences of that decision and I have not a single ounce of remorse for them.

Great article from back in '03 when this was still an issue: http://www.treas.gov/press/releases/js774.htm

dejb4• 17 years ago

What's with all the moralising? You think China are under some sort of moral obligation to take their losses cause they 'had it coming' for keeping the yuan low? Just like the US they'll do whatever they see is in their advantage. I don't see anyone saying you should feel remorseful but if China want to move towards other currencies then that is their right.

DanielBMarkham• 17 years ago

I don't think morals have to enter into it. If a country artificially ties its currency to the dollar for purposes of inflating trade, it's going to end up with a bunch of dollars that aren't worth so much.

Seems like natural consequences to me.

I'm dubious that the system is so simple that simply changing the reserve currency is going to fix anything. But if I were an expert in international finance, I wouldn't be working on startups. And I'd probably be a lot more boring.

jhancock• 17 years ago

This shouldn't be about "payback". The first post in this thread (kirse) makes a fair statement about China's fixed currency. But does take it too far. Similarly, China not accepting that it is a partner in its situation of the USD is also taking things too far. I think most of this is political response to China's leaders having to answer to its own "middle class" trying to explain what happened to their dream.

It is very true that China would not have its position in the world today if the U.S. had not made credit so cheap to not just U.S. citizens, but the entire world. This is key to understand: the problem with the USD is the world's problem not just Americans. Bankers, traders, homebuyers worldwide benefited from the loose credit policies of the U.S.

Mr. Zhou's statements on changing the system are worth looking into. But keep in mind that there were many smart economists that studied the current set of rules for decades prior to loosening U.S. banking regulations and most of them thought it would work...they were wrong. I'm sure if we jumped into Mr. Zhou's "new IMF system" that in 40 years, there would be externalities we could not have predicted.

eru2• 17 years ago

You are complaining that America got to buy real physical products for a little paper money?

Production is not an end in itself. Consumption is.

light3• 17 years ago

This is interesting, this would certainly be a very new direction for foreign currency.

Another interesting point is this was not raised during the 2008 APEC meeting, much to the dismay of European countries.

However this time around things seem to have progressed, and Russia has put forth the proposal to the G20, it will be interesting to see how this plays out.

http://en.rian.ru/world/20090323/120689432.html

and this one with some humor:

http://mnweekly.ru/news/20090305/55369676.html

1gor3• 17 years ago

>the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Gold exists already.

Retric5• 17 years ago

Gold is highly unstable which is bad. It's value fluctuates even faster than the USD.

1gor3• 17 years ago

I would argue that USD and the rest of currncs are unstable vs. gold.

Supply of gold is fixed. Supply of paper money is at the whim of greenspans.

savantguy• 17 years ago

haha.... in 1971 when the US Gov. defaulted on gold, they stopped other countries from redeeming dollars for gold. Thus removing the FIXED exchange rate with a commodity that has been used for centurys as MONEY. Ever since 1971 all currencies are just floating and thus are NOT stable. Imagine being a saver and thinking "what will my cash savings be worth in the future? What about inflation?" The US Dollar is FIAT, which means its only money because the government says so. Gold has been chosen BY the people for THOUSANDS OF YEARS! The US Gov. AND the Fed have screwed this country for decades and all the crap is finally coming out in the open. I could go on and on about about these problems but would rather you just goto mises.org and learn some real economics. The standard of living here in the US will be going down HUGE so prepare yourself.

Oh, btw, why don't you check the "value" of gold against ALL currencies and see what it tells you. Hint... Gold measured in ALL currencies has passed its all time highs, the only currency that hasn't (minus the 1980's high) is the USD, but that is because the USD is the reserve currency.

This article is just another indicator of how our currency is going to crap...

anamax• 17 years ago

The actual statement doesn't make any sense: "China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency 'that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies'."

"controlled by the IMF" does not imply stable. While the IMF is somewhat disconnected from individual nations, it is gamed.

I suspect that this is China's way of saying that it wants to play too. Since it's big enough to break the IMF, it may just be a public announcement of China's new role.

sethg2• 17 years ago

IIUC one downside of the European monetary integration is that if, say, the German economy is doing fine while Italy is in recession, then Italy cannot simply loosen up its currency to boost demand while Germany keeps its currency tight. Instead, the ECB has to either keep the euro tight, screwing Italy, or loosen it, screwing Germany. And since other pan-European political institutions are not as strong as the US Federal Government, setting Europe-wide economic policy for everything other than currency is difficult.

The upside of the euro may be greater than the downside, but it seems to me that a new global reserve currency would be mostly downside, for this reason. Then again as a US citizen I have a vested interest.

China's central bank calls for new reserve currency

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