China
calls for new global currency By JOE McDONALD,
AP Business Writer Joe Mcdonald, Ap Business Writer – Tue
Mar 24, 10:23 pm ET
BEIJING
– China is calling for a new global currency to replace the
dominant dollar, showing a growing assertiveness on revamping
the world economy ahead of next week's London summit on the
financial crisis.
The surprise proposal by Beijing's central
bank governor reflects unease about its vast holdings of U.S.
government bonds and adds to Chinese pressure to overhaul
a global financial system dominated by the dollar and Western
governments. Both the United States and the European Union
brushed off the idea.
The world economic crisis shows the "inherent
vulnerabilities and systemic risks in the existing international
monetary system," Gov. Zhou Xiaochuan said in an essay
released Monday by the bank. He recommended creating a currency
made up a basket of global currencies and controlled by the
International Monetary Fund and said it would help "to
achieve the objective of safeguarding global economic and
financial stability."
Zhou did not mention the dollar by name. But
in an unusual step, the essay was published in both Chinese
and English, making clear it was meant for a foreign audience.
China has long been uneasy about relying on
the dollar for the bulk of its trade and to store foreign
reserves. Premier Wen Jiabao publicly appealed to Washington
this month to avoid any response to the crisis that might
weaken the dollar and the value of Beijing's estimated $1
trillion in Treasuries and other U.S. government debt.
For decades, the dollar has been the world's
most widely used currency. Many governments hold a large portion
of their reserves in dollars. Crude oil and many commodities
are priced in dollars. Business deals around the world are
done in dollars.
But the financial crisis has highlighted how
America's economic problems — and by extension the dollar
— can wreak havoc on nations around the world. China is in
a bind. To keep the value of its currency steady — some say
undervalued — the Chinese government has to recycle its huge
trade surpluses, and the biggest, most liquid option for investing
them is U.S. government debt.
To better insulate countries from the ills
of one country or one currency, Zhou said the IMF should create
a "reserve currency" based on shares in the body
held by its 185 member nations, known as special drawing rights,
or SDRs.
He said it also should be used for trade,
pricing commodities and accounting, not just government finance.
President Barack Obama described China's proposal
as unnecessary during a prime-time news conference Tuesday.
"I don't believe that there's a need
for a global currency," Obama said.
The president also pointed to the current
strength of American money. "The reason the dollar is
strong right now is because investors consider the United
States the strongest economy in the world with the most stable
political system in the world."
Earlier in the day, both U.S. Treasury Secretary
Timothy Geithner and Federal Reserve Chairman Ben Bernanke
took similar positions at a congressional hearing. They were
asked by Rep. Michele Bachmann, R-Minn., if they would "categorically
renounce the United States moving away from the dollar and
going to a global currency," and both said they would.
And the European Union's top economy official
said the dollar's role as the international reserve currency
is secure despite China's proposal.
"Everybody agrees also that the present
world reserve currency, the dollar, is there and will continue
to be there for a long period of time," EU Commissioner
Joaquin Almunia said Tuesday after a meeting of the European
Commission.
Zhou also called for changing how SDRs are
valued. Currently, they are based on the value of four currencies
— the dollar, euro, yen and British pound. "The basket
of currencies forming the basis for SDR valuation should be
expanded to include currencies of all major economies,"
he wrote.
Beijing has been unusually bold in recent
months in expressing concern about Washington's financial
management and pushing for global economic changes. That reflects
both its relative financial health and growing concern that
increased globalization means missteps abroad could harm its
own economy.
Zhou's comments are also part of China's longstanding
push to reform the IMF, World Bank and global financial system
to give greater voice to China and other developing economies
— another theme that will be heard from China, Brazil, Russia
and India at the summit of Group of 20 major economies next
week.
"Overdue reforms should give proper representation
to and increase the say of the emerging and developing economies,"
Yi Xianrong, a researcher with the Institute of Economics
and Finances at the Chinese Academy of Social Sciences, a
government think-tank, wrote in the government newspaper China
Daily.
"Proper representation and a bigger voice
for the developing countries are the need of the hour. For
instance, being the world's third-largest economy and the
largest foreign reserves holder, China should get its due
place in the monetary body."
Another idea Yi raised was that the U.S. and
Europe should give up their traditional privileges of appointing
the heads of the World Bank and the IMF.
The idea of a creating a new global reserve
currency isn't new. But analysts say the proposal isn't likely
to gain much traction because it faces major obstacles. It
would require acceptance from nations that have long used
the dollar and hold huge stockpiles of the U.S. currency.
"There has been for decades talk about
creating an international reserve currency and it has never
really progressed," said Michael Pettis, a finance professor
at Peking University's Guanghua School of Management.
Managing such a currency would require balancing
the contradictory needs of countries with high and low growth
or with trade surpluses or deficits, Pettis said. He said
the 16 European nations that use the euro have faced "huge
difficulties" in managing monetary policy even though
their economies are similar.
"It's hard for me to imagine how it's
going to be easier for the world to have a common currency
for trade," he said.