by M. Ulric Killion
People’s Bank of China Governor Zhou Xiaochuan answers a question during a press conference in March 2010. The International Monetary Fund on Friday said it will hold a high-level conference of central bank governors in Shanghai next week to discuss ways to address the global financial crisis; Photo/AFP/Liu Jun.
China Central Bank Governor Zhou Xiaochuan's earlier call to replace the US dollar with a new global currency seems to be slowly gaining support in the international community. In terms of the general practices that associate with a reserve currency, and the role of the International Monetary Fund (IMF):
. . 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. . . . 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 (NPR.org, March 24, 2009).
According to Governor Zhou, the problematic of the SDR is that it "has the features and potential to act as a super-sovereign reserve currency" (Lesova,, 2009).
As earlier mentioned, there is slowly growing support for Governor Zhou's proposal. For instance, Joseph Stiglitz, a Columbia University economics professor who heads a United Nations expert panel, is said to support, at least in theory, some aspects of the idea or Zhou's proposal.
As earlier mentioned, there is slowly growing support for Governor Zhou's proposal. For instance, Joseph Stiglitz, a Columbia University economics professor who heads a United Nations expert panel, is said to support, at least in theory, some aspects of the idea or Zhou's proposal.
Joseph Stiglitz, . . . . said a reserve currency system based on an International Monetary Fund (IMF) unit instead of the US dollar, like what Zhou has proposed, could be phased in within a year. Stiglitz's panel has issued a set of recommendations for global financial reforms, including a proposal for a new reserve system based on the IMF's special drawing rights (SDRs) — a basket of currencies consisting of the euro, yen, sterling and the US dollar. One of the main issues to resolve is determining how SDRs would be allocated, he said. Stiglitz, also a Nobel laureate, said developing countries have been lending the United States trillions of dollars 'at almost zero interest rates, when they themselves desperately need that money. It's a net transfer, in a sense, to the United States of foreign aid.'(Wang Xu, 2009).
There are other sources also hinting in this direction.
. . In an 18-page report released on Thursday, the UN panel said the new system "could contribute to global stability, economic strength and global equity". It also said such an SDR system would be "feasible, non-inflationary and could be easily implemented". UBS AG's head of China research and former IMF economist Wang Tao said: "The UN report is a strong signal that there is consensus on the need for a new global reserve currency. China's central bank governor said in an article earlier this week that it was necessary to create a "super-sovereign reserve currency" to overhaul the existing international monetary system. He also said the IMF's SDR could become the new global reserve currency. Russia earlier this month proposed creating a new reserve currency to be issued by international financial institutions. It is expected to raise the suggestion at the G20 summit to open in London on April 2. Brazilian President Luiz Inacio Lula da Silva said on Thursday that it was important to discuss the Russian proposal at the G20 summit. "It's a valid and pertinent issue; we should discuss it," Lula said, adding that he will talk about China's SDR proposal with President Hu Jintao during the summit. Lula said Zhou's proposal would win endorsements from most emerging economies (Wang Xu, 2009).
Borrowing from the title of one article, "At G20, Kremlin to Pitch New Currency" (Iosebashvili, 2009). In addition, as China calls for a new global currency that will be controlled by the IMF, and steps up pressure ahead of a London summit of global leaders for changes to a financial system dominated by a US dollar and Western governments, many anticipate that China would press for developing countries to have a bigger say in finance at the recently convened G20 meeting (NPR.org, March 24, 2009).
(EPA Photo)
Moreover, although Governor Zhou Xiaochuan's essay does not specifically mention the US dollar by name, his essay firmly asserts that the current crisis clearly demonstrates "the dangers of relying on one nation's currency for international payments" (NPR.org, March 24, 2009). In the interim, some news sources report that, while the US Treasury Secretary Timothy F. Geithner maintains that the US will remain the top reserve currency, he still expressed openness concerning SDRs' use.
Both Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Geithner, actually, rejected on Tuesday (March 31, 2009) the call to drop the dollar as the world's key reserve currency (Lesova, 2009). The viewpoints of Chairman Bernanke and Treasury Secretary Geithner reflect the consensus of many that Governor Zhou's proposal is symbolic of the latest sign of tension in Sino-US relations over critical global economic matters. Outside of the halls of Washington, there are others who agree with the positions of both Bernanke and Geithner, such Axel Merk, the president and chief investment officer at Merk Investments. According to Merk:
. . . . Zhou's views "reflect China's frustration in relying on the U.S. dollar as the world's reserve currency, when U.S. policy makers conduct monetary policy based on domestic considerations." "That's a friendly way of expressing that the U.S. may be trying to debase the dollar, raising concern in China about the value of its massive U.S. dollar denominated reserves," Merk said in a research note. Central banks around the world won't be willing to yield power to a new world monetary authority, specifically the IMF, Merk said. "We believe China may realize sooner rather than later that building a diversified basket of reserves followed by a free floating exchange rate, will provide China with the advantages China's central bank governor is seeking," he said (Lesova, 2009).
However, outside the halls of Washington, there are others who also disagree with the policy positions of both Bernanke and Geithner, such as Marc Chandler, who is a currency strategist at Brown Brothers Harriman. Marc Chandler, distinguishably, offers a softer and seemingly more open approach to the issue of Zhou's proposal. This is because, according to Chandler:
. . . China has not sought to undermine the U.S. dollar. "Just as important is what China is not saying," Chandler said. "It is not saying it will dump dollars. It is not saying it will buy more euros." The support for a new international reserve asset seems to be an attempt to get around the contradictory pressures on a national currency that is also a reserve asset, he said. "The dollar's role seems as secure as ever," Chandler said. "There is no clear national alternative and a new international asset cannot simply be foisted on countries. The dollar remains numeraire, imperfections and all" (Lesova, 2009).
For these reasons, the viewpoints of Bernanke and Geithner obviously do not necessarily enjoy a consensus in the United States, nor in other Western countries, as demonstrated by the slowly growing support for Zhou's proposal.
Then there is Ma Jun's, formerly a World Bank economist, now Deutsche Bank AG economist, who anticipates strong support for Zhou's proposal from developing and least-developed countries (LDCs). According to Ma, Zhou's proposal will potentially present the most profound reform of the global monetary system in the future.
Many developing countries support Governor Zhou's proposal. This is because many developing countries, including China, blame the current global crisis on what they deem the mishandling by the United States of over-extended mortgage loans and investments in them. However, as one source observed, "With the US also borrowing trillions of dollars, it risks hyperinflation, which would considerably weaken the dollar. An independently administered reserve currency could operate without conflicts posed by the US dollar and keep commodity prices more stable" (Sunday Telegraph, March 29, 2009).
Sources:
Wang Xu, Voice of support for global currency, China Daily eclips, March 28, 2009.
Polya Lesova, Geithner, Bernanke reject China currency proposal, MarketWatch, March 24, 2009.
NPR.org, March 24, 2009.
UN backs new new global currency reserve, The Sunday Telegraph, March 29, 2009.
Ira Iosebashvili, At G20, Kremlin to Pitch New Currency, Moscow Times, March 17, 2009.
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