China harps on new world reserve currency

Written by Bloomberg | Updated: Jun 28 2009, 05:20am hrs
Chinas central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members foreign-exchange reserves, triggering a decline in the US dollar.

To avoid the inherent deficiencies of using sovereign currencies for reserves, theres a need to create an international reserve currency thats delinked from sovereign nations, the Peoples Bank of China said in its 2008 review released on Friday. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.

The restatement of Governor Zhou Xiaochuans proposal in March added to speculation that China will diversify its currency reserves, the worlds largest at $1.95 trillion at the end of March. Chinese investors, the biggest foreign holders of US Treasuries, reduced holdings in April after Premier Wen Jiabao expressed concern about the value of dollar assets.

Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency, said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. The dollar should depreciate to address the global imbalance but because its a reserve currency it cannot.

President Barack Obama needs the support of China as the US tries to spend its way out of recession. The Dollar Index that measures the currencys performance against six trading partners fell as much as 0.7% at 12:42 pm in London.

China, the biggest foreign holder of US government, cut its holdings by $4.4 billion to $763.5 billion in April, the first monthly reduction since February 2008, according to US Treasury Department data. At the end of 2008 the dollar accounted for 64% of global central bank reserves, down from 73% in 2001, according to the IMF in Washington.

There may be signs here of tensions mounting between the PBOCs economic concerns over Chinas holdings of dollars and the Chinese governments diplomatic reasons for doing so, Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, wrote in an e-mail.

Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a more diversified monetary system to reduce dependency on the greenback at a June 16 meeting in the Russian city of Yekaterinburg. In May, China and Brazil began studying a proposal to move away from the dollar and use yuan and reais to settle trade instead.