Wednesday, April 15, 2009

Bergsten - We Should listen to Beijing's Currency Idea

China Central Bank Governor Zhou Xiaochuan's earlier call to replace the US dollar with a new global currency continues to enjoy slowly growing support in the international community. According to C. Fred Bergsten, Governor Zhou's idea has a great deal of merit. However, while Asian countries, Brazil, and Russia support Governor Zhou's proposal, other countries, such as, the United States, rejected his idea.

Bergsten generally characterized the merits of Governor Zhou's proposal, especially the creation of an "open-ended SDR-denominated fund", as follows:

The substitution account would be a winning proposition for all concerned. The dollar holders would obtain instant diversification. The United States would avoid the risk of a free fall of the dollar. Europe would prevent a sharp rise in the euro. The global system would eliminate a potential source of great instability. These benefits call for the use of a global asset to make up any losses to the account from future falls in the dollar, such as creation of additional SDR or the IMF's gold holdings (including the sizeable US share of them). The main argument against such an account is that China has accumulated its dollar hoard of more than $1,000 billion by keeping its currency substantially undervalued, through massive intervention in the foreign exchange markets, and thus deserves no sympathy if it takes losses on those dollars. One might even suspect that the Chinese have mentally booked such losses as the implicit cost of the subsidy to exports and jobs achieved through their currency manipulation. But there is no sign that China will stop intervening, or that its surpluses will abate, even though the US external deficit has declined sharply, and its reserve build-up is thus likely to become even more threatening. Moreover, this is an ideal issue for China and the United States to develop the informal "G-2" partnership that is needed to provide global economic leadership to pass needed reforms at the existing multilateral institutions. . . (Bergsten, 2009).


C. Fred Bergsten, We Should listen to Beijing's Currency Idea, April 8, 2009 (Co-Ed in the Financial Times).

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