March 23, 2009

China calls for new reserve currency

China Monday called for the U.S. dollar to be replaced as the international reserve currency.

Instead, the Chinese government said it wants a global reserve system controlled by the International Monetary Fund, The Financial Times reported.

The goal is to create a global reserve currency that is divorced from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies, Zhou Xiaochuan, governor of the People's Bank of China, was quoted by the newspaper as saying.

Zhou's remarks were posted in a paper posed in English and Chinese on the country's central bank's Web site.

The Times noted that in his essay, Zhou did not specifically mention the U.S. dollar, but the paper took issue with the current dollar-dominated monetary system.

The outbreak of the (current) crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system, Zhou wrote.

An analyst said Zhou's remarks are a strong indication that Beijing worries that measures taken to boost the American economy could affect China negatively.

This is a clear sign that China, as the largest holder of U.S. dollar financial assets, is concerned about the potential inflationary risk of the U.S. Federal Reserve printing money, said Qu Hongbin, chief China economist for HSBC.