China argues to replace US dollar

Discussion in 'China' started by I-G, Jun 27, 2009.

  1. I-G

    I-G Tihar Jail Banned

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    Page last updated at 11:31 GMT, Friday, 26 June 2009 12:31 UK


    China argues to replace US dollar


    China's central bank has reiterated its call for a new reserve currency to replace the US dollar.

    The report from the People's Bank of China (PBOC) said a "super-sovereign" currency should take its place.

    Central bank chief Zhou Xiaochuan has loudly led calls for the dollar to be replaced during the financial crisis.

    The bank report called for more regulation of the countries that issue currencies that underpin the global financial system.

    "An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," the Chinese central bank said.

    The dollar fell after the report was released. The US currency dropped 1% against the euro to $1.4088, and declined 0.8% versus the British pound to $1.6848.

    SDRs

    Mr Zhou caused a stir earlier this year when he said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.



    Dollar poses dilemma for China

    The PBOC said in the report that not only should the world adopt the SDR, but that the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves.

    "To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the PBOC report said.

    It also issued some veiled criticism of the US policies, saying that one of the major issues was that it was difficult to balance the needs of domestic politics with the requirements of being the world's reserve currency.

    "The economic development model of debt-based consumption is most difficult to sustain," the PBOC said.

    Russian President Dmitry Medvedev recently joined Mr Zhou in saying it was time to consider an alternative benchmark currency for international debt.

    But Russian finance minister Alexei Kudrin then said "it's too early to speak of an alternative".

    BBC NEWS | Business | China argues to replace US dollar
     
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  3. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    How about we get the US to give permission to other countries to print their notes.

    Chaos.
     
  4. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    dollar poses dilemma for China so the whole world should change currency-what a joke.
     
  5. Daredevil

    Daredevil On Vacation! Administrator

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    Why China won’t get its world currency any time soon

    Why China won’t get its world currency any time soon

    By Edmund Conway Economics Last updated: June 27th, 2009

    It is rather like a soap opera - but one that stretches over decades and one that will change the global economy forever.

    Every week there is a new episode in the war of words surrounding the dollar. As I wrote in a feature just under a week ago, the facts are simple: the dollar’s position as the world’s reserve currency is under the greatest threat since it stole that mantle from the pound in the middle of the last century. As China rises in importance and influence and takes on American economic hegemony, it becomes less and less conceivable that the dollar will always be the world’s primary currency. At the very least, it will have to share the position with a number of other currencies. But until China, or Russia or India for that matter, allow their own currencies to be more widely and freely traded and back this up with the reforms that make their economies truly flexible, it is a moot question whether there is anything which can really take its place.

    The big episode of note earlier this year in the dollar soap opera came when Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), suggested introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency.

    Well, the PBoC has now done the same again, with Zhou reiterating his comments this week in the bank’s 2008 annual review, saying: “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations.” He repeats his suggestion that the SDR is used.

    It is an intriguing idea, in part because it echoes the Keynesian conception of a redrawn international monetary system in Bretton Woods. At that conference in 1944, John Maynard Keynes suggested that at the heart of the international monetary system should be a global reserve currency – Bancor – which would be tied in value to a basket of 30 or so commodities. In the event, partly down to political reasons, the Bretton Woods system that eventually sprouted out of the meeting was closer to the American Harry Dexter White’s idea, with the dollar taking on that role as reserve currency – its value in turn being fixed to gold.

    This system then broke down over the following years under the weight of growing government deficits (themselves the product of expensive social welfare systems in the developed world) leaving us with the mutated malfunctioning monetary system which is, in my opinion, largely responsible for the current economic and financial mess. On the face of it, Zhou’s idea harkens back to the Keynesian plan in Bretton Woods with one key exception: it is not clear from this plan precisely what the SDRs are to be valued against. At the moment the SDR (itself set up by the IMF in 1969 as the original Bretton Woods system was fraying) is simply valued against the values of sterling, yen, the euro and the dollar. The only way the SDR might conceivably become a feasible international reserve currency is if it included the values of a floating yuan, rupee and rouble, but this seems some way off in the distance (interesting article from an OECD bigwig on these issues here by the way).

    Moreover, the real question here is whether the Chinese are also suggesting a real return to what Keynes suggested, and want to tie the global monetary system to a commodity or group of commodities. We learnt the hard way that the gold standard, or for that matter the silver standard, are horribly arbitrary ways to structure a world economy: they meant that whenever there was a big discovery of the precious metals it had an instant knock on effect on the entire monetary system. Until we discover a commodity (or basket of them) which is not finite (therefore putting deflationary shackles on the world economy – Barry Eichengreen is the man to read on this by the way) and preferably whose supply rises over time at about the same rate as the global growth rate, any attempts to link the monetary system to these materials is going to come up against these barriers.

    Perhaps more likely is the idea that China sees the SDR as being a kind of bridge currency over the next few decades, which gradually will become more widely used, and this will give it time to make the necessary adjustments to its economy (allowing the yuan to float more, weaning the economy off exports and getting consumers to spend more) after which the yuan may eventually be able to take over as the world’s leading currency. Certainly it is not inconceivable that over the coming years more people may start denominating things in SDRs, using the currency as a unit of account. But, again, until the SDR includes more than its current four constituent currencies, this does not make a fundamental difference to the world’s monetary structure.

    I had a word with Moritz Kraemer, Standard & Poor’s head of ratings in Europe and Africa, about this earlier in the week. He compared the situation now to the one where the UK ceded the position as leading world currency to the US last century. Although the US overtook the UK rather early in the century in almost every meaningful yardstick of economic might, it took another three or four decades for Britain’s hands to be prised off the position as world reserve currency.

    Kramer said: “The UK experience in the past is that this command over the reserve currency is not for eternity: you can lose it. But we’re not anywhere near that yet for the US dollar.”

    What is encouraging, however, is that the Chinese are throwing some interesting and important debating topics into the hat. We do need a debate about the structure of the global monetary system. We do need to rethink the dollar’s hegemonic position. But reassuringly, China is keen to find a multilateral way of doing this (with SDRs) rather than (as the US did in 1944) ploughing in and trying to assert its national power on the international system. True, this is early days in the soap opera, but the storyline is far less fraught and ominous than it could have been.
     
  6. Yusuf

    Yusuf GUARDIAN Administrator

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    The RMB will not become the reserve for sure. It does not have a wide acceptability. China is working with smaller countries to do it. But it will not work in the world at large.
    China has pegged it country's currency for a long time. It has flouted all free trade principles and now wants to assume leadership on the economic front. China does have a lot of money to show off, but it's a result of all the doctoring as well from it's policy makers.
     
  7. Daredevil

    Daredevil On Vacation! Administrator

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    It will be better as people have previously proposed, to have a common currency, which is pegged against basket of major currencies (dollars, pounds, yens, rouble, rupee etc) and such currency can be used for international trade. As pointed out by the author, other countries should allow free flow of their currencies in the world market, which is not happening right now, to accomplish this objective.
     
  8. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    The Chinese RMB can easily be regulated to reflect their own growth with respect to the market. It will be manipulated by the Chinese at every turn. More importantly, the Chinese economy is closed, is not available for scrutiny and have very archaic financial laws compared to Europe and US.

    If the world does shift to a new currency, then it will be Pounds or Euro. Most probably Euro. And the world will not shift just because China says so. The world's bigger than China and America.

    Countries in the world have large reserves of Dollars. So, who is going to buy all the Dollars(especially the $2Trillion reserve in China)? The US will definitely not buy back their own currency. So, the Dollar will stay, unless China wants to buy all the Dollars with RMB, and that's not going to happen.
     
  9. Yusuf

    Yusuf GUARDIAN Administrator

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    It took ages for Europe to impliment the Euro. Many could not make the cut due to it's strict financial policy.
    How will the world arrive at a single trading currency when the economies are so diverse?
     
  10. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    chinese would have had a better response if they formed a coalition and made proposals, doing this by themselves makes them look like shellfish cry babies.
     
  11. Koji

    Koji New Member

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    They did, it was called BRIC...and other East Asian countries who hold Dollars.
     
  12. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    they proposed IMF bonds but currency issues were skirted by Russia at the last minute

    BRICs Don't Flee The Dollar - Forbes.com
     
  13. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    The economies are diverse. But, the currency itself is stable. This is what is required. Europe can be given more responsibilities and they will handle it better through better implementation of policies and reforms due to an already sound economic policy. No other currency other than Dollar, Pound or Euro can be the international currency anyways.

    The stricter the policy, the better is the currency. Atleast the banks will not give away money so freely as in the US. More importantly, the Euro will be well regulated to handle inflation and any other global or domestic financial crisis..
     
  14. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    Multiple currencies is the best way to go, IMO. Dollar, Pounds and Euro are the best bet.

    If China can influence a few countries to use RMB, well, its good for them.
     
  15. Yusuf

    Yusuf GUARDIAN Administrator

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    Then I'm sure India will throw in it's currency as well.
     
  16. LETHALFORCE

    LETHALFORCE Moderator Moderator

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  17. Binder

    Binder New Member

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    India is incapable of "throwing in" its reserve currency. It simply does not have nearly enough the weight of a US, China or even Russia. The rupee is unlikely to ever be a reserve currency.
     
  18. F-14

    F-14 Global Defence Moderator Senior Member

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  19. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    50 to a dollar. Nobody will buy the rupee. Though it makes sound economic sense to simply invest in India and hope for higher returns. INR is not powerful enough.

    The Russian exchange rate is high too. But, they have way too much diplomatic clout.
     
  20. F-14

    F-14 Global Defence Moderator Senior Member

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    iam all for the good old pound sterling
     
  21. Daredevil

    Daredevil On Vacation! Administrator

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    Pound??. Who want's go for it?. Its the currency of sick child (UK) of Europe. Its better to have a unique international currency pegged against basket of major currencies.
     

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