China calls for new reserve currency

The governor of China’s central bank has called for a new international reserve currency as part of reforms aimed at combating the financial crisis.

In a veiled attack on the use of the American dollar as the world’s reserve currency, Zhou Xiaochuan, the governor of the People’s Bank of China, said: “The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.”

The comments came in an essay published yesterday on the bank’s website ahead of the G20 summit of global leaders in London next week.

Zhou argued that an international reserve currency should be fixed to a stable benchmark, with flexible supply according to a clear set of rules, and that “such adjustments should be disconnected from economic conditions and sovereign interests of any single country”. It should be overseen by the International Monetary Fund (IMF), he said.

“Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies,” Zhou said.

The Chinese government holds about $1 trillion in American government debt and has expressed concerns that the value of these holdings could be eroded. The American government this month embarked on a programme of “credit easing” which results in an increase in money supply.

As a transitional measure, Zhou argued for an increase in the role of Special Drawing Rights (SDRs), a unit of account used by the IMF and calculated on a basket of currencies including the dollar, euro, yen and sterling.

“Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping,” advised Zhou. “Create financial assets denominated in the SDR.”

The essay is the latest move in a growing assertiveness by China over international monetary policy. Earlier this year it was accused of manipulating the value of its own currency, the renmimbi, by Timothy Geithner, now the American treasury secretary, a charge the country denied.

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