TELEGRAPH 25.3.09
China weighs paper gold against dollar as reserve currency
The world outgrew the gold standard decades ago. But a "paper gold"
standard might be one way out of the global financial crisis. Zhou
Xiaochuan, governor of China's central bank, has proposed shifting
the world from its dependence on the US dollar to a new reserve
currency managed by the International Monetary Fund. The idea is good
- if only China meant it.
By John Foley, breakingviews.com
The greenback has been the world's dominant reserve currency -
equivalent to a financial lingua franca - since the end of the Second
World War. Countries hold it in spades to back their own currency.
The IMF reckons that two-thirds of the $7 trillion of foreign
currency holdings worldwide are in US dollars. The euro, the second
most-held currency, makes up just a quarter.
Were international trade switched instead to an IMF-managed currency
- Zhou suggests a little-used device called a "special drawing right"
or SDR - Uncle Sam would have a real headache. America's borrowing
and trading costs would spike. After all, the US saves by rarely
needing to convert its own money - a perk known as "seigniorage".
But in the long term, the US would benefit. Being the currency of
choice has made it unnaturally cheap for the US to borrow and fund
its consumers' profligate habits. Besides, as Zhou points out in a
scholarly flourish, there's the Triffin Paradox to consider. This
says that so long as the US agrees to feed the world with dollars, it
can't successfully control its own currency.
Having a central currency - let's call it the Zhou-Triffin Doubloon
(ZTD) - managed by a supra-national organisation would make it more
difficult for any one country to get into too much debt to another.
If the supply of ZTD in issue were controlled properly - say by
expanding it in line with global GDP - it would serve as a steady
store of value, with little risk of devaluation.
Moreover, a credible ZTD would have many of the advantages of the now-
defunct gold standard. It would be strictly limited in supply and
ready acceptability everywhere. Indeed, it would be even better than
the yellow metal, which is after all too cumbersome for a modern
economy and too scarce to serve as a measure for international trade.
In sum, the ZTD would add much needed ballast to international
finance. And China would not be alone in promoting this single
currency. Russian authorities have been thinking along similar lines.
So why not get cracking? There are many obstacles: most notably
getting the IMF up to the task. Nor is China in any position to move
quickly. A truly global reserve currency would have to be based on a
basket of world currencies, which would include the renminbi. China
would have to make its tightly controlled currency freely convertible
- which it shows no desire to do.
Indeed, China probably has other things in mind than financial
stability, such as augmenting its global financial sway. Right now,
the Middle Kingdom has only a 3pc vote in the IMF, no more than
Belgium, because votes are linked to each country's contribution to
the fund. Were China able to claim credit for its prodigious foreign
reserves, it could replace the US at the top of the table.
At best, China's proposal is self-serving. At worst, it could be
merely another manifestation of growing hostility towards the US - to
be filed alongside recent protectionism, naval skirmishes and Chinese
criticism of US spending habits. That political undercurrent is a
shame. Paper gold looks like one of the best ideas to come out of the
financial crisis.
=============================
EU OBSERVER 25.3.09
EU rejects proposal for new reserve currency
ANDREW WILLIS
The EU's economy commissioner Joaquin Almunia rejected a Chinese
proposal for a new reserve currency on Tuesday (24 March), saying he
felt the dollar would remain the world's reserve currency for the
foreseeable future.
Mr Almunia said he didn't envisage: "major structural changes in the
role the dollar plays today as a major reserve currency," following
Monday's call by China's central bank governor, Zhou Xiaochuan, to
create a new reserve currency "that is disconnected from individual
currencies."
"Everybody agrees also that the [main] present world reserve
currency, the dollar, is there and will continue to be there for a
long period of time," said Mr Almunia after a meeting of
commissioners in Strasbourg reports the Associated Press.
China's call for a new reserve currency reflects fears that its huge
stockpile of dollar denominated US treasury notes, amounting to
roughly half of its $2 trillion (?1.49trn) in foreign reserves, is in
danger of being devalued.
Last week the US Federal Reserve announced the surprise decision to
expand its balance sheet and buy up to $300 billion (?223bn) worth of
longer-term US treasury securities.
Mr Zhou made the appeal for a reserve currency that "is able to
remain stable in the long run" in an essay published on the People's
Bank of China's website and included an English translation to ensure
an international readership.
In the essay, Mr Zhou proposes that an accounting unit used by the
International Monetary Fund known as special drawing rights (SDRs)
and which is currently based on a basket of four currencies - the US
dollar, the yen, sterling and the euro - should become the new
reserve currency.
The proposal suggests expanding this basket of currencies to include
all those from the world's major economies and a system whereby
governments could store their reserve SDRs with the IMF. In time SDRs
would replace the dollar as the world's reserve currency says Mr Zhou.
The British economist John Maynard Keynes, whose theory of counter
cyclical spending to lift economies out of recession is currently in
vogue, proposed a similar scheme in the 1940s.
The move highlights China's increased willingness to voice its
economic opinions on the world stage and comes just ahead of a G20
meeting of the leaders of industrialised and developing nations on 2
April in London where reforming the IMF is firmly on the agenda.
Russia has also mooted the idea of a new reserve currency based on
SDRs and has suggested the upcoming G20 meeting is the place to get
the ball rolling.
On Tuesday Mr Almunia said that "everybody agrees" over the need to
reform the IMF and give developing nations such as China a greater
say in how it is run.
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