25 Mar 2009
March 25 (Bloomberg) -- China's call for the creation of a new international reserve currency may signal its concern at the dollar's weakness and ambitions for a leadership role at next week's Group of 20 summit, economists said.Central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to create a "super-sovereign reserve currency." The dollar weakened after the Federal Reserve said that it would buy Treasuries and the U.S. government outlined plans to buy illiquid bank assets.
"China is concerned about the potential for a slide in the dollar as the U.S. attempts to stimulate its economy," said Mark Williams, a London-based economist at Capital Economics Ltd. The "rare" sight of a Chinese official attempting to reframe an international debate may be "a sign of China becoming more engaged," he said.
While Zhou didn't call for the yuan to become the new reserve currency, his remarks may signal ambitions for China to play a bigger global role. The central bank this week signed a currency swap with Indonesia, adding to agreements since December with South Korea, Hong Kong, Malaysia and Belarus. It's also preparing for trade settlement in the Chinese currency with Hong Kong, Macau and the Association of Southeast Asian Nations.
"There is concern and even frustration among top policymakers in Beijing about China's high exposure to U.S. dollar-denominated financial assets," said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong.
The yuan traded at 6.8320 against the dollar as of 10:54 a.m. in Beijing from 6.8296 yesterday.
Obama Supports Dollar
President Barack Obama affirmed support for the dollar at a press conference at the White House in Washington.
"I don't believe there is the need for a global currency," Obama said.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke told lawmakers at a House Financial Services Committee hearing that they rejected such a move.
Premier Wen Jiabao called on March 13 for the U.S. "to guarantee the safety of China's assets." China's Treasury holdings climbed 46 percent in 2008 and now stand at about $740 billion, according to U.S. government data. The nation is the biggest holder of U.S. debt.
"The Chinese are a little disingenuous in saying that it's so bad that we own all these dollars," former Fed Chairman Paul Volcker, an adviser to Obama, said at the Wall Street Journal's "Future of Finance" conference in Washington. "They own all the dollars because they chose to buy the dollars and they didn't want to sell the dollars."
Yuan's Status
China is promoting use of the yuan to smooth currency volatility and to serve "a long-standing interest" to raise its status to that of a global reserve currency, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc in Hong Kong. Such moves are not "a knee-jerk response" to the economic crisis, he said.
"If turning the Chinese yuan into a global reserve currency sounds ambitious, then encouraging its adoption as a regional reserve currency is more straightforward," said Simpfendorfer.
Hong Kong Chief Executive Donald Tsang said yesterday that he was "all for" a common Asian currency to reduce volatility and help trade, adding that if countries as diverse as Greece, Spain and Ireland can share the euro, "there's no reason why Asia cannot come together."
Such a move would have to wait until China removed restrictions on converting the yuan, Tsang said at a conference in Hong Kong.
Flexing ‘Some Muscle'
G-20 leaders will gather in London on April 2 to forge a common response to the financial crisis that has spawned a global recession. The summit will discuss proposals for reforms of the International Monetary Fund.
The timing of Zhou's proposal is "the latest example of China's policy of neo-assertiveness in world affairs," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "China is starting to flex some muscle and generally steer the debate in China's own direction."
Zhou's article highlighted the "dilemma" that countries issuing reserve currencies face in balancing their own monetary- policy goals with other nations' demand for their money.
The global crisis raised the question of which reserve currency would secure "global financial stability and facilitate world economic growth," Zhou said. He proposed expanding the use of the IMF's Special Drawing Rights, which are currency units valued against a composite of currencies.
"The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and gross domestic product may also be included as a weighting," said Zhou.
