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china calls for global currency change


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China calls for new global currency

BEIJING
By Joe Mcdonald, AP Business Writer
 
 
 
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China is calling for a 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 of 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.

In Washington, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner both rejected China's call for a global alternative to the U.S. dollar's role as the international reserve currency.

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.


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(Kitco News) - Calls by some gold-market watchers for China to move to a gold-based monetary standard are misguided, said an analyst at Standard Chartered Monday.

In the research note “China – Masterclass: Silver, revolution and the Qing” released Monday, Stephen Green, research analyst at Standard Chartered and author of the note, said Chinese history from the late 18th and early 19th century has echoes in current monetary debates, although a few things have changed since the Qing dynasty.

The similarities include strong economic growth fueled by an export boom for Chinese manufactured goods, much as it was in 2003-08, and an increase in money supply. In the late 1700s and early 1800s, it was an ample supply of Latin American-mined silver, and in the 2000s, the People’s Bank of China was intervening -- buying dollars and printing renminbi to pay for it, Green said.

“In both cases, an export boom led to strong growth in the domestic money supply. In the 18th century, China had no central bank and no ability to ‘sterilize’ these inflows; in the 21st century, the PBoC (stepped) in to sterilize some, but not all, of them. In both cases, the domestic economy appears to have been stimulated by, in effect, increased money supply,” he said. 

In the 1820s, like in 2008, a collapse in global demand sharply reduced China’s trade surpluses, and inflows reversed. “In the 1800s, the government did not understand what was happening, and the monetary contraction led to a painful and extended economic recession,” Green said, equating the silver outflows to the reverse of quantitative easing.

In 2009-11 the PBoC injected money into the banking system and told banks to lend. “One cannot do such things with a specie currency or a currency pegged to a metal. The result was a V-shaped recovery,” Green said.

While there are fears of liquidity in China drying up from time to time, Green said, the advantage of having a fiat currency and a central bank is that China can supply infinite liquidity to the system.

Although there are calls time to time for China to return to a gold-backed monetary system, Green said China’s experience with a silver-back monetary system “shows how misguided such an argument is. For all the suspicion one might have of central banks, tying one’s fate to a rock dug out of the ground -- possibly thousands of miles away -- is no improvement. Gold bugs – who claimed a currency war had broken out as Western central banks turned to quantitative easing, and who called for households and China’s FX reserve managers to load up on gold during the past five years – now have some explaining to do.”

Green said the point is not that gold and silver prices cannot rise, rather that they are assets without a yield attached to them, without a unique ability to preserve value.  Further, having a central bank and a fiat currency gives the government room for macroeconomic management when an external shock hits.

“While there are widespread expectations of higher inflation in China, of around 5% a year, in our view, they are contained and fiat money still clearly functions. China may have been in a money war back in the 19th century as it coped with the ebbs and flows of global silver production, but those days are long gone. The only currency war that Beijing is fighting today is with itself,” Green said.

The renminbi is still pegged to the U.S. dollar which leaves China’s monetary policy not as independent as it could be, but Green said the PBoC likely want to push for a more flexible exchange rate, and increase its monetary policy autonomy “and we believe that 2014 should see more progress in this regard.”

Edited by yota691
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"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."

China will push and push for the large piece of the pie.  Things are happening, China is standing ground.   It all remains to be seen. 

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China is getting sick of O and his crew of clowns not having our house in order.  Just like a bank, friendship only goes so far before foreclosure begins.  Obama has made us the laughing stock of the world, doesn't have a plan to change anything for the better, and China is getting nervous about us paying our credit card bill, personally I don't blame them, yes China has been keeping their currency value down, but that has nothing to do with the fact our government is writing checks we Americans can't cash!!

 

Maybe we can get Obama out of office, and trade China the majority of the east coast and California to pay off our debt, liberals must however remain in or move to these areas, then once we get them out of our lives we can quickly recover fast enough to buy these areas back and ship the liberals back to China with their handlers!! :eyebrows: 

Edited by DiveDeepSix
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