China Pitches New Reserve Currency

By Justin Gardner | Related entries in China, Economy, Money, The World

You knew the time would come when the dollar would fall out of favor, but did you think it would happen this fast?

Actually, it’s not just the dollar that we’re talking about here. What China is proposing is leveling the playing field and including all world currencies in the reserve basket, which now only includes the dollar, the yen, the pound and the euro. So this wouldn’t amount to the monetary armageddon some were predicting since it would happen over a much longer period of time, but these adjustments would still have repercussions.

From Financial Times:

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

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

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of 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,” Mr Zhou wrote.

Note the language there in that last sentence. The world was relying on the US to lead the way when it came to finance. And for a time it worked out, but our deregulatory policies threw the entire thing into a tailspin, and now world powers aren’t so trusting anymore…especially when we want to deficit spend (even though they’re doing the same thing).

More as it develops…


This entry was posted on Tuesday, March 24th, 2009 and is filed under China, Economy, Money, The World. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

10 Responses to “China Pitches New Reserve Currency”

  1. SD3 Says:

    …this wouldn’t amount to the monetary armageddon some were predicting…

    Damn, that’s a good hit. Take it in deep & hold it…try not to cough. Now let it out nice & slow…

    Dude, you got any cheeetos? I got some serious munchies over here…

  2. Doug Mataconis Says:

    Justin,

    This suggestion, assuming that it’s something more than the typical Beijing posturing, has little to do with “deregulation” and everything to do with the fact that, since September, the Bush and Obama Administrations, along with the Federal Reserve, have engaged in policies that will have the ultimate effect of debasing the dollar and reducing the value of the bonds that the Chinese hold. A debased dollar would also make for a very bad reserve currency.

  3. pligg.com Says:

    Donklephant » Blog Archive » China Pitches New Reserve Currency…

    You knew the time would come when the dollar would fall out of favor, but did you think it would happen this fast?…

  4. kranky kritter Says:

    Yes, I also don’t see the connection to deregulation, expect insofar as its a throwaway line that places all the blame for current circumstances on the previous administration. Here’s the thing, right here and right now blame has nothing to do with it. IT’s all about acting responsibly from this day forward, no matter whose fault it was. The rest of the world will not look any more kindly on on overspending because, gee whiz it was mostly the Republicans’ fault. I have no views on how true that is, I simply wish to stress that ultimately it doesn’t matter to how the rest of the world responds to our current practices.

    Current foreign concern with the status of the dollar as a stable reserve currency is directly related to our current giant levels of overspending and how that affects the dollar’s value.

    It’s likely that better gov’t oversight and credit policy might have mitigated the extent of the mortgage-market-generated unsustainable housing bubble. But the hard fact remains that concern over the dollar as the global reserve currency is primarily due to the giant flood of additional dollars that began with the fall TARP bailout by the Bush admin and has continued with the stimulus plan.

    No one ought to be surprised that China is keeping an eye on the US’s fiscal house, as they are deeply enmeshed with us. The statements Justin excerpts are an indication that China and the entire global financial system is unlikely to tolerate continued US spending at the levels we have seen from the 2008 and 2009 budgets. They’ve moved from long term to short term US bills, and are beginning to move into hard assets that hold core value. In other words, they will be dumping their dollars for things like metal, oil, and so on.

    For now, this statement counts as saber rattling, but saber rattling always means that there US a saber. The currency basket is no panacea. It would be a complicated and extremely contentious undertaking, and so it won’t be undertaken unless the rest of the globe feels it has no choice.

    If our nation’s fiscal actions continue to be tantamount to blithely printing more and more money (which they have so far), th rest of the globe will, be 100% correct in making the assessment that the US has left them with no choice.

    I understand that there are many ardent supporters of Obama and stimulus plans and big gov’t debt during a deep recession. Fine, but for these folks, the very least that they MUST understand is how high and wiggly a tightrope we are walking with current fiscal policies. We MUST bring spending back into line with historical overspending rates within the next one or two budgets after this. Ideally, we’d do so with the very next budget.

    The more dollars that there are, the less valuable each individual one will appear, absent strong US economic growth. Expect China to lead by example in response to our overspending, and expect others to follow.

  5. gerryf Says:

    In fairness to the previous administration, one of the biggest pieces of deregulation that led to where we are right now was the Gramm-Leach-Bliley Act of 1999, signed by Clinton.

    I basically agree with most of what you say (although I want to point out this is about more than the housing bubble), but I do think you are dismissing the impact of 30 years of deregulation.

    Why is this important? Because even if Obama’s plan to right the economy works, we will end up exactly where we are now again after a few years have passed.

  6. SD3 Says:

    We MUST bring spending back into line…

    Seriously, what do you think the adds are of that happening, Krispy? Can you identify a solitary piece of evidence we’re going to stop turning trees into paper money?

    I genuinely pity the American public, particularly those who will be caught completely flat-footed by our coming collapse.

    If you care at all about your family & friends, for God’s dake, wake them up. Get their attention. Tell them to prepare.

    This thing’s going to be a f*cking blood-bath.

  7. Donklephant » Blog Archive » Geithner Wants Broader Powers To Seize Non-Banks Says:

    [...] to our taxpayers, but also the rest of the world. Because don’t kid yourself by thinking that China’s public calls to consider replacing our currency in the reserve basket didn’t come as a direct result of letting firms like AIG overleverage themselves to the point [...]

  8. gerryf Says:

    Got enough cans of creamed corn in that bomb shelter, snoop?

  9. kranky kritter Says:

    SD3, here’s another spot where I like to default back to my point that we’re all guessing.

    That said, my guess is that it will not happen entirely voluntarily. Here’s the thing: the smart guys from China and other nations know how hard and painful it will be to extract themselves from their dollars, and they know that the alternate plan they are shopping will be difficult to establish, and may not work. It’s no panacea.

    The comparative stability of the dollar and the government that backs it has been like the air the global economy breathes. No transition to breathing something else will be easy, and such a transition will certainly bring a period of breathtaking fear and uncertainty. So it will be undertaken only with the greatest reluctance, after a long period of entreaties and threats.

    I know you deny it, but I still believe strongly that faith is the most important variable in how things evolve. If faith crumbles suddenly, then we’ll see a sudden collapse, the bloodbath you predict. If instead, reluctant co-dependents perform an elaborate dance over time, we’ll see a gradual tightening of US budgetary policy leading (largely due to exhaustion and inertia) to a return to US deficits in the 2 to 4% range of overspending, which are arguably sustainable with sufficient growth.

  10. Mike @ Stock Picks Says:

    China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

    To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

    Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.
    jmho

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