In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar, sweeping away a decades-old system to stabilize the world monetary climate and protect its massive forex reserves.
People’s Bank of China Governor Zhou Xiaochuan (周小川) said he wants to replace the dollar, installed as the reserve currency after World War II, with a different standard run by the IMF.
China, the top holder of US Treasury bonds with US$739.6 billion as of January, has already voiced concern over its investment as the world’s largest economy battles a deep recession.
“The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Zhou wrote in an essay posted on the bank’s Web site in English and Chinese on Monday.
Zhou’s comments come ahead of the G20 summit in London, where world leaders are to discuss reforming the financial system.
He suggested the IMF’s Special Drawing Rights (SDR) could serve as a super-sovereign reserve currency as it would not be easily influenced by the policies of individual countries.
The IMF created the SDR as an international reserve asset in 1969, but it is only used by governments and international institutions.
Russia has also proposed the summit discuss creating a supranational reserve currency.
China has the largest foreign-exchange reserves in the world, valued at nearly US$2 trillion, with more than half of those holdings reportedly made up of US Treasuries and dollar-denominated bonds.
On March 13, Chinese Premier Wen Jiabao (溫家寶) said he was concerned about the safety of those assets, particularly because huge economic stimulus plans could lead to soaring deficits in the US.
Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that by making such a proposal, China was indicating that the dollar’s longstanding dominance was inherently unfair, allowing the US to run huge deficits by borrowing from abroad.
“Chinese are quite concerned that the large US government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,” Lardy said. “It is a legitimate concern.”
“It’s a sad situation: China is America’s banker. America owes so much to China, but it’s not afraid of China,” Shanghai-based economist Andy Xie (謝國忠) said. “China is America’s hostage.”
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