China Calls for New Reserve Currency

We’ve been treated as being a bit daft when we dared suggest that the dollar’s status as reserve currency was at risk. But after the Fed moved officially to quantitative easing last week (after saying it they might go that route back in December), the euro strengthened. Many have argued that that the ECB lacked the full suite of tools a modern central bank needed, and thus the euro was too shaky a currency to serve as a store of value. But do enough to damage the dollar, and former second best options may start looking a lot more atractive.

So far, this move is merely a shot across the bow, but the fact that China is raising doubts about the dollar is not trivial. And while the Fed may want a cheaper dollar (weakening the currency is a standard remedy for a country suffering a financial crisis), a disorderly fall in the dollar would be another matter entirely, and could constrain the Fed.

In addition, the Fed has been called the second least independent central bank in the world, and if a fall in the dollar led to markedly higher oil prices, there could be political pushback.

From the Financial Times:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected 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”…..

“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.

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.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions…

Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.

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  1. Anonymous

    All right, I know it’s not time to move to Canada yet, but could I maybe get a heads-up when the time draws relatively close? Is there an RSS feed I could sign up for that would let me know?

  2. Stuart

    C’mon! NOBODY should be surprised by this given the FOMC announcement last week. NOBODY!

    US$ is going the way of the British Pound.

  3. Anonymous

    Isn’t it extremely likely that the US dollar will now fall if the economy recovers, since it would finally give some breathing room to anyone who wanted to dumb the US dollar but couldn’t in the short term as no alternatives looked safe?

    If the economy recovers, we could logically see a parallel drop in the value of the US dollar no?

    The US dollar’s value would not go out with a bang, but a peeeeeeeeeeeew.

  4. Ilya

    China, Russia, Iran, and Kazakhstan (who did it first) have all come up with an idea of a global currency. It does look to me as a political rather than an economic point. I am surpirsed Hugo Chavez hasn’t weighed in yet.

    As Brad Setser points out the US has become a sort of a lender of last resort to the rest of the world. this does not seem on the fce of it to point to a collapse of USD as the reserve currency.

  5. mmdonner

    i cannot imagine folks think we are going to recover any time soon! do people actually think there are not more shoes to drop…both here and in europe and round the world?
    do we really want/hope that things will get back to “normal”..values at 2005 levels (so the PPT will break the tax payer even over time?)? do we really want to go back to unaffordable housing? lower wage growth? unsustainable commercial real estate, 14 million cars sold each yr. a flat screen Tv in each room?
    where somehow…back to normal..dictates no need to clean house, get regulations in place and enforce them….
    no, this horror will go on for some time..and if the feeling is ‘let’s get back to normal’ then i kinda feel that i hope we don’t. sorry to say that but..really..Normal? Recovery? out of the woods so soon?
    no need for a new reserve currency then i guess..either.

  6. Anonymous

    I love how much people love to predict the collapse of the dollar — like that would be in China’s interest. A weakened US consumer is still a much more powerful force in China’s economic future than all the crap you hear about the Chinese “boosting domestic demand.” If the dollar were to fall precipitously, the US takes back hundreds of thousands of jobs, and i doubt the Chinese will want that to happen. This is just propaganda, very well timed to the current circumstances but otherwise meaningless. Everybody (except Ilya) stop being so gullible.

  7. Andrew Bissell

    I love how Zhou professes a debt to Keynes, the one thinker most responsible for the post-Bretton Woods nightmare that is the unbacked, vapor-paper reserve dollar.

  8. Anonymous

    You read Setser’s piece as saying the US is the lender of last resort. I read the piece as saying the US is loaning foreign central banks to support the dollar. The swaps aren’t showing as swaps but as loans. The central banks were then using these “swaps” to buy US treasuries.

    Imagine the scene where coyote went of the cliff and still kept running until the realization hit he was about to plunge downward. Just like the dollar.

  9. Ben

    Can someone explain to me why the Chinese would invite the fall of the dollar when it would wipe out huge amounts of their savings? Wouldn’t inflation in the United States be, as the head of China’s sovereign wealth fund said recently, “the easy way out for the US?”

  10. mmdonner

    am i the only one who believes that the value of the dollar on the international scene is relative in nature to the value of other currencies and both/all based upon the perception of strength of the country? sure there is ups and downs..normal..but geez…dollar falls off the cliff compared to what? \
    being both canadian and US and living in canada now…we see/think/believe that the canadian situation is far more stable and sustainable..but that does not seemm to be the international preception no matter how much i wish it so….(just an example)
    imagine the power of a basket of currencies that was under the supervision/contol/care of an international body that the good ole USA would have to be a ‘part of’ not the ‘sole of’…
    now, there is change we could believe in perhaps…transforming indeed. think the neocons will give into that easily? the one superpower vision forever is a hard nut to crack even within the american psyche let alone real geopolitical realities..for the same reason in part of course.

  11. Anonymous

    The Chinese only have a trillion dollars or so. Tim and Ben piss that away before breakfast every Monday.

  12. Waldo

    I think a single global currency is for the long run.

    Going global now with one currency is like letting your 9 year old daughter go to the local high school prom.

    A weaker dollar due to criminal behavior by the past Administration (and additional pressure on the dollar caused by 0% interest rate and uncertainty of the massive unserviced debt) must be maturely managed (justice and writedowns, respectively) to restore proper global currency valuations so we can moveforward and apply the lesson). learned (new regulations & serious enforcement.

  13. Anonymous

    “I love how much people love to predict the collapse of the dollar “

    Similar comments were made I’m sure around WWII re: the British Pound.

  14. Anonymous


    An international currency

    “that is disconnected 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”…..

    Sounds like gold

    Back to Bretton Woods I!!!!
    At last

  15. max

    And while the Fed may want a cheaper dollar (weakening the currency is a standard remedy for a country suffering a financial crisis),

    USG wants a cheaper dollar. Wall Street wants a strong dollar and lots of money for banks. China wants a strong dollar and lots of exports. Europe wants a strong dollar and lots of payouts for European banks.

    a disorderly fall in the dollar would be another matter entirely, and could constrain the Fed.

    China is trying to constrain the Fed through fear. They need the exports, and they need to grow out of their dollar investments, since if they pull them out, they’re hosed.

    Of course, if Russia, Europe, Japan and China got togther and did the SDR thing, then China could basically attempt to force a US conversion before inflation.

    This is an on-going negotiation over whether China will be made good on its investment and on whether the US will remain China’s main importer or will China get locked out. China doesn’t feel like they’re in a strong enough position to move, but if their dollar reserves tank, they’ve got no reason to adhere to the system or to protect US investments in China, which will presumably be nationalized in retaliation.

    [‘As long as we keep running until we drop, they promise not to try to shoot us in the head.’]

  16. Anonymous

    These countries will never agree on the ratios in a basket. It’s tantamount to giving up economic sovereignity. That won’t play with exporters in the Pearl River Delta anymore than it will in Ohio. This is a warning, but it has as much a chance as unity at the G20.

  17. Anonymous

    I think it is a mistake to assume that only enermies of the west are behind this movement. George Soros mooted a similar scheme recently and others in the western camp have before him. The proposal has merits and should be discused without acrimony.It also has merits for the USA economy recovering on a firm footing in the longer term as an excess of issuing debt over the years has led to America’s worst nightmare comming true.

  18. max

    It’s tantamount to giving up economic sovereignity. That won’t play with exporters in the Pearl River Delta anymore than it will in Ohio.

    They could go with it temporarily to take the US down a page and then fight amoungst themselves for the reserve currency.

    I think it is a mistake to assume that only enermies of the west are behind this movement.

    I suspect everyone is tried of the US screwing around and wants to stop being annoyed by us. It’s just that China wants their damn money.

    [‘So they’ll push it.’]

  19. svf

    I would be interested to know if it is possible that the Feds announcement to buy the UST long term bond is a way to buy the the LT bonds that China will soon be selling. If China sold $100-300B there would be a selling panic driving prices down (hurting China even more) so perhaps a secret arrangement between China-US to cover China reducing its overexposed position

  20. AlanM

    Zhou’s comments, and especially that they were made publicly, are a healthy sign.

    As when Geithner used the “m” word regarding China’s exchange rate, Zhou is acknowledging reality.

    I wonder to what extent the G2 (Chimerica) will become explicit in the next few years. Cheers to Brad Setser and Michael Pettis for digging in, and to Yves for invaluable links and commentary.

  21. Phillip Huggan

    In 2100 the countries with the highest Commitment to Development Index scores will have proportionally the most eggs in the SDR basket. The logic being we will reward those who spend money well. IDK how long it will take to get from this WWII vestige until then. I hope not 91 years.

    Seriously, what are the other considerations? China wants points for not so credit-driven currencies. I like the idea of a counter-cyclical or employment intensive asset basket (more fine-grained than currencies) that could provide nearly instant stimulus; save a few months of administrative processes if money is already there.
    India and Africa broke even this contraction. Maybe accelerating their growth is the best improvement? Would economic growth to a quadruple-digit $GDP/capita kill their potential for future recession immunity? If a bubble is suspected, say via increasing derivatives outstanding, should SDR % be shifted away from the bubble country?

  22. Anonymous


    Between China and Russia… they are just trying to set up a system where they will be able to manipulate… I mean “influence” the markets and global economies more than they already do.

  23. eh

    Actually, I posted a link yesterday where the Chinese were reported saying more or less the opposite: that they would continue to purchase Treasury debt and ‘support the dollar’s role as a global currency’. Whatever that means.

    Given their vast holdings, it’s a little easier for me to believe that this represents reality as seen by them: they are, in effect, ‘all in’ because they have to be — they have too much at stake.

    And just last week weren’t the Chinese remonstrating publicly with Washington? Admonishing them to protect China’s investment in US debt. So why would they be doing the opposite themselves now with a pronouncement like this?

    It’s hard to take all of this seriously.

  24. Yves Smith


    The remark today was by the head of the central bank in an official pronouncement, the one yesterday by a less senior official in a Bloomberg interview. Today’s comment trumps.

    As for “oh they hold all those Treasuries” that is a sunk cost fallacy. If they are rational they will look at incremental gains and losses from various courses of action. And they almost certainly have longer time frames than we do and weigh geopolitical outcomes more heavily than mere dollars and cents considerations.

  25. Timo

    About friggin time, Americans misused the reserve currency status to the max and allowed their economy to become consumption oriented shopping mall disneyland without adequate PRODUCTION economy behind it.

    US economy is now turning into one giant wasteland and after the reserve currency status will be taken away in near future, dollar = soviet rubles.

  26. Anonymous

    The only salvation for the Asian dilemna: The US consumer coupled with the ability to manipulate a private currency and a foolish US trade policy.

    The value of the worlds’ currencies are not free floating, they are manufactured to be correlated to the dollar, including the Euro.

    Any revamping of the reserve currency will require real time revaluation in a non-rigged FX market. China is not interested in a fairly valued floating currency regime. Just some guy shooting off his mouth. The public announcement of contnuing support for the mercantilist lending is much more believable and a tacit admission they need the US consumer to spend.

    The US has financial, medical, military, and government left. Consumption on manufactured goods is considered some one else’s problem by our elected government and intelligencia.

  27. Swedish Lex

    Let us first assume that the euro survives its current and first existential crisis and secondly that it receives a non negligible position in the new, global, basket of currencies that would assume the vacuum left after the USD.

    From a purely internal EU perspective, it would mean that the currency will have achieved most, if not all, its objectives.

    With a global basket of currencies, I assume that global macro co-ordination would have to be intensified as result. The new basket would, at least in some regards, resemble the European exchange rate mechanism (ERM) that preceded the euro, I imagine. The ERM period forced the EU states to co-ordinate the economies and when they failed to do so, the mechanism blew up and had to be re-booted all over, with closer macro co-ordination as result. Should this pattern repeat itself at a global level, I can only see advantages.

  28. Anonymous

    I’ve gotten the impression that in the short-term, it’s in China’s interest to continue to support the dollar and the status quo. However, they clearly want to move away from the dollar over the long-term. What that timeframe is exactly, is uncertain. I suspect its after they feel their economy is stabilized somewhat. Maybe 2 years or so.

    Remember, China plays chess while we play checkers.

  29. Anonymous

    Russia and China calls for a New Currency, Hummm.. How many of You readers have read The book of Revelation? I know it sounds , pesimistic, It’s coming and it was predicted for the one world Monetary system coming out of Russia. Its scarey. The tecnilogical system is in place, and people have been sold into liking, the debit card, credit card, auto pay, the scanners at Walmart, the UPC code..and now the Vchip has been put into Our Dogs and Kids . The mark of the beast 666 is here! Russia and China calling for a new currency. The Euro was predicted also in Revelation. Im a cash guy so Im not happy about a One World Currency. Its the last bubble to pop, get rid of Your cash!!The G20 is meeting in April to discuss it.
    It makes sense, Nixon took the gold standard away and We are printing worthless Money in the trilions and other Countries knows , its backed By Ink! The World holds more USA cash then We do, and they don’t like that We have devalued it, thats when currencies collaspe..when other Countries don’t believe in its value. (Is that true now?) Just a thought. Read the book of Revelation concerning ‘One World Money system” Its the Last Book of the Bible. You certainly can’t argue its not true if it was written 2009 years ago and is taking place before our eyes.Its scarey for sure. Between Homeland security, eye scans, finger printing at Disney World, airport scrutiny, terrorists and drug money, the World will do away with The US dollar. It will be the Vchip . No more cash, no more Crime, no more drug money ,Easy tax collecting… “They Will do away with cash! April The G20 meets it will be about, The currency, get ready!

  30. PeeDee

    Stiglitz is also recommending a basket SDR type currency along with a UN based economic council rather than the IMF.

    Realistically, conversion to a currency basket at the current levels is the only way large US creditors (China, Japan, Taiwain, Saudi) will get out of the USD with their savings intact. If any of them break ranks they will all lose their investment as the dollar tanks.

  31. MyLessThanPrimeBeef

    In Debt We Trust, China used to like silver a lot more than gold. Imperial currencies had always been based on that metal. Those Ming blue and white porcelain you see in Europe, they were purchased by the Spaniards financed by the silver taken out of Mexico. Even today, you still see a lot of beautiful Ming blue and white wares in Mexico.

  32. Sash

    Since I’m only a student, i might not understand much about currencies and inflation …

    But isn’t the fact that most important ressources are valued in dollars one of the best defenses against inflation of the dollar?

    I mean, as long as oil and stuff is traded in dollars, the US can pretty much print as many dollars as the want, or am i wrong?

    So imho should the USA try as hard as they could to keep the status quo

    Or can somebody give me a link or some information why i’m wrong?

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