China Daily reports that China calls for new global reserve currency.
(emphasis mine) [my comment]
Top banker proposes setting new global reserve currency
Updated: 2009-03-24 14:03
BEIJING -- Zhou Xiaochuan, governor of China's central bank, has proposed to create a super-sovereign reserve currency as part of reform in the international monetary system.
The desirable goal of the international monetary system is to "create an international 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," he said.
Zhou said the Special Drawing Right (SDR) of the International Monetary Fund (IMF) has the potential to act as a super-sovereign reserve currency in a signed article posted on the website of the People's Bank of China Monday.
The SDR is an international reserve asset created by the IMF in 1969.
The ongoing financial crisis is a testimony to the inherent deficiencies of current monetary system of the world, he said.
He admitted the creation of a new reserve currency is a long-term goal that requires foresight and courage from state leaders of various countries.
"In the short term, monitoring, evaluation, and early warning mechanisms should be strengthened against risks of the current system on condition that the international community, especially the IMF, acknowledges such risks," he added.
Zhou's remarks came ahead of the G20 summit slated to start in London on April 2, when leaders across the world and large international organizations like the IMF are expected to discuss reforming of the international monetary and financial system in light of the current crisis.
Last week, Russia announced a similar call for the introduction of a super-national reserve currency as part of the country's proposal to reform the international monetary and financial system at the upcoming London summit.
Bloomberg reports that China's calls for 'super currency' shows dollar concern.
China 'Super Currency' Call Shows Dollar Concern
By Li Yanping
March 24 (Bloomberg) -- China's call for a new international reserve currency may signal its concern at the dollar's weakness and ambitions for a leadership role at next week's Group of 20 summit, economists said.
Central bank Governor Zhou Xiaochuan yesterday urged the International Monetary Fund to create a "super-sovereign reserve currency." The dollar weakened after the Federal Reserve said it would buy Treasuries and the U.S. government outlined plans to buy illiquid bank assets.
"China is concerned about the potential for a slide in the dollar as the U.S. attempts to stimulate its economy," said Mark Williams, a London-based economist at Capital Economics Ltd. The "rare" sight of a Chinese official attempting to reframe an international debate may be "a sign of China becoming more engaged," he said.
Zhou's comments may also signal ambitions for the yuan to play a bigger global role. The central bank this week signed a currency swap with Indonesia, adding to agreements since December with South Korea, Hong Kong, Malaysia and Belarus [Currency swaps allow these central banks to use the yuan as a foreign reserve]. It's also preparing for trade settlement in the Chinese currency with Hong Kong, Macau and the Association of Southeast Asian Nations.
"There is concern and even frustration among top policymakers in Beijing about China's high exposure to U.S. dollar-denominated financial assets," said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong.
Yuan forwards rose the most in three months with traders betting on appreciation for the first time since September on speculation that the U.S. policies will weaken the dollar. The 12-month forward rate gained 0.9 percent.
Support for Dollar
U.S. policy makers testifying before lawmakers in Washington today affirmed their support for the dollar.
Treasury Secretary Timothy Geithner, asked at a House Financial Services Committee hearing whether he rejected moving toward a global currency, replied, "I would, yes."
"I would also," said Federal Reserve Chairman Ben S. Bernanke. The question was asked by Representative Michele Bachmann, a Minnesota Republican.
Premier Wen Jiabao called on March 13 for the U.S. "to guarantee the safety of China's assets." China's Treasury holdings climbed 46 percent in 2008 and now stand at about $740 billion, according to U.S. government data. The nation is the biggest holder of U.S. debt.
Raising Yuan's Status
China is promoting use of the yuan to smooth currency volatility and to serve "a long-standing interest" to raise its status to that of a global reserve currency, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc in Hong Kong. Such moves are not "a knee-jerk response" to the economic crisis, he said.
"If turning the Chinese yuan into a global reserve currency sounds ambitious, then encouraging its adoption as a regional reserve currency is more straightforward," said Simpfendorfer.
G-20 leaders will gather in London on April 2 to forge a common response to the financial crisis that has spawned a global recession. The summit will di scuss proposals for reforms of the International Monetary Fund.
Flexing 'Some Muscle'
The timing of Zhou's proposal is "the latest example of China's policy of neo-assertiveness in world affairs," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "China is starting to flex some muscle and generally steer the debate in China's own direction."
Zhou's article highlighted the "dilemma" that countries issuing reserve currencies face in balancing their own monetary-policy goals with other nations' demand for their money.
The global crisis raised the question of which reserve currency would secure "global financial stability and facilitate world economic growth," Zhou said. He proposed expanding the use of the IMF's Special Drawing Rights, which are currency units valued against a composite of currencies.
"The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and gross domestic product may also be included as a weighting," said Zhou.
Some economists back his case.
"The world economic landscape has been changed since the establishment of the SDR 40 years ago," said Ha Jiming, chief economist at China International Capital Corp. in Hong Kong. "Specifically, no such reserve currency would make sense without the yuan being included."
China Daily reports that China's capital account norms may be eased.
Capital account norms may be eased
By Wang Bo (China Daily)
Updated: 2009-03-14 14:02
China will continue to open up its financial sector this year despite the challenges in the international financial market, the nation's central bank said on Friday.
In its 2008 international financial market report, the People's Bank of China, the central bank, said that as long as the risk is controllable, it would gradually relax the restriction on capital account deals, and continue to work towards the full convertibility of the yuan. [more evidence that China is moving to quickly make yuan an international currency]
My reaction: China is now openly calling for a new reserve currency! This is a major development which more or less seals the dollar's fate.
1) Central bank Governor Zhou Xiaochuan yesterday urged the International Monetary Fund to create a "super-sovereign reserve currency."
2) China's call for a new international reserve currency signals its concern at the dollar's weakness and ambitions for a leadership role at next week's Group of 20 summit.
3) Last week, Russia announced a similar call for the introduction of a super-national reserve currency
4) The Chinese central bank this week signed a currency swap with Indonesia, adding to agreements since December with South Korea, Hong Kong, Malaysia and Belarus.
5) China continues to gradually relax the restriction on capital account deals and work towards the full convertibility of the yuan.
Conclusion: Last December, China announced its decision to make the Yuan an international currency. To this end it has
A) Signed agreements to settlement trades in yuan with neighboring countries including Russia, Mongolia, Vietnam and Myanmar, Hong Kong, etc...
B) Signed currency swap agreements with Indonesia, South Korea, Hong Kong, Malaysia and Belarus.
C) Relaxed the restriction on capital account deals and worked towards the full convertibility of the yuan.
D) Called for a "super-sovereign reserve currency" and taken an active leadership role ahead of next week's Group of 20 summit
At the pace which developments are moving, the framework for a new international currency could be in place by year end. This new international currency would be created using the Special Drawing Right (SDR) of the International Monetary Fund (IMF) and would be backed by the currencies of the world's major economic powerhouses including the yuan and the euro. Given concerns with the fed's money creation, it is possible and likely that dollar backing is ultimately excluded from this future international currency.
Below are my past entries on the Yuan's slow progress towards becoming an international currency.