6 ms·

China's central bank calls for new reserve currency

53 points by bokonist 18y ago

bokonist 18y ago
This is the first time I've ever heard a Chinese official this high up call for replacing the dollar. Can anyone else think of any other examples? If this is really a new development, then it's very significant news.
- ironsam 18y ago
  The premier of China publicly spoke about his concerns for the value of the dollar recently: http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_economy http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_...
- dc2k08 18y ago
  There has been news about it but it has not been given much coverage. Christmas eve last, it was reported by AFP and Xinhua (Chinese Govt. Media) that China was trying to create conditions for the yuan to become an international settlement currency and would use the yuan in transactions with neighbouring economies on a trial basis: http://www.marketskeptics.com/2008/12/china-makes-yuan-international-currency.html http://www.marketskeptics.com/2008/12/china-makes-yuan-inter... I link to a blog and not the articles because I think the blogger makes some great commentary. He also gives his incite to yesterday's news in the first link on the right. Definitely worth a read.
- gregatragenet 18y ago
  China has made several statements in the last few weeks about their concerns about the dollar. However the real BIG news is not their talk, its their actions. China has been moving their dollar holdings into short-term bills out of longer-term notes. They are positioning themselves so that they can get out of the dollar quickly - and they are doing it in a way that won't raise alarms because they aren't (yet) cashing-in their dollar holdings. http://www.atimes.com/atimes/China_Business/KC18Cb01.html http://www.atimes.com/atimes/China_Business/KC18Cb01.html
Rod 18y ago
"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." Monetary policy is definitely not my forte, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation, after all. Creating a new currency takes such a long time that I wonder whether it would be practical.
- mattmcknight 18y ago
  I don't think it would be a real currency, it would just be a broadening of the current basket the IMF uses. We'd use an expanded form of special drawing rights as reserves, and the SDRs would be based on the broader basket of currencies.
- redsymbol 18y ago
  Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone. Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable. I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment? Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights http://en.wikipedia.org/wiki/Special_Drawing_Rights
kirse 18y ago
Coming from China, I think it is absolutely fair that they have to deal with the dollar as the reserve currency because we had to put up with the decade of bullshit from them pegging their yuan to the US dollar. The major reason they're holding an excess of US assets is because they decided for 10+ years to ensure that it was artificially cheap for anyone in the US to import from China. We complained to hell about fair trade and threatened import taxes, but we let it slide mostly in the name of diplomacy and cheap consumption. Well now China gets to reap the consequences of that decision and I have not a single ounce of remorse for them. Great article from back in '03 when this was still an issue: http://www.treas.gov/press/releases/js774.htm http://www.treas.gov/press/releases/js774.htm
- dejb 18y ago
  What's with all the moralising? You think China are under some sort of moral obligation to take their losses cause they 'had it coming' for keeping the yuan low? Just like the US they'll do whatever they see is in their advantage. I don't see anyone saying you should feel remorseful but if China want to move towards other currencies then that is their right.
  - DanielBMarkham 18y ago
    I don't think morals have to enter into it. If a country artificially ties its currency to the dollar for purposes of inflating trade, it's going to end up with a bunch of dollars that aren't worth so much. Seems like natural consequences to me. I'm dubious that the system is so simple that simply changing the reserve currency is going to fix anything. But if I were an expert in international finance, I wouldn't be working on startups. And I'd probably be a lot more boring.
    - deleted 18y ago
      [deleted]
    - dejb 18y ago
      I agree the Chinese are in a bit of a pickle what with holding so many US dollars. The fact that they are prepared to risk their investment by saying this is suggestive. In the end I think the US would still like to hold onto the USD as the defacto world currency and the Chinese move is more a warning that that this can be lost if the value drops too much. Either way I'm not sure how much it matters who's 'fault' it was now. But I'm not an expert in international finance either. The startup I'm a part of does very well when the USD is strong but that is about it.
light3 18y ago
This is interesting, this would certainly be a very new direction for foreign currency. Another interesting point is this was not raised during the 2008 APEC meeting, much to the dismay of European countries. However this time around things seem to have progressed, and Russia has put forth the proposal to the G20, it will be interesting to see how this plays out. http://en.rian.ru/world/20090323/120689432.html http://en.rian.ru/world/20090323/120689432.html and this one with some humor: http://mnweekly.ru/news/20090305/55369676.html http://mnweekly.ru/news/20090305/55369676.html
1gor 18y ago
>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”. Gold exists already.
- Retric 18y ago
  Gold is highly unstable which is bad. It's value fluctuates even faster than the USD.
  - 1gor 18y ago
    I would argue that USD and the rest of currncs are unstable vs. gold. Supply of gold is fixed. Supply of paper money is at the whim of greenspans.
    - Retric 18y ago
      If you compare it with a basket of goods it's still highly unstable. It's not a true random walk, but day to day gold fluctuations can be extreme and it's still in the middle of a bubble so expect a sudden crash some time soon.
      - 1gor 18y ago
        If basket of goods was priced in gold rather than dollars - then its price would also be more stable. There have been centuries when gold was legal tender and nobody complained (apart from some emperors who found debasing gold coins by adding copper was a bit difficult; but printing press has not been invented yet).
        Retric 18y ago
        Think about this for a second, if you value a basket of goods in terms of oil and oil's value is fluctuating rapidly then the value of those goods also seems to fluctuate rapidly. So when you compare 2 things one of whose value is stable like USD or a basket of goods, and something else that is unstable like Gold. Then the unstable item makes the value of the other things seem to fluctuate. However, by making several comparisons you can determine that the ratio of USD to basket of goods is stable but gold vs USD or Basket is unstable so it's Gold that is unstable.
anamax 18y ago
The actual statement doesn't make any sense: "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'." "controlled by the IMF" does not imply stable. While the IMF is somewhat disconnected from individual nations, it is gamed. I suspect that this is China's way of saying that it wants to play too. Since it's big enough to break the IMF, it may just be a public announcement of China's new role.
sethg 18y ago
IIUC one downside of the European monetary integration is that if, say, the German economy is doing fine while Italy is in recession, then Italy cannot simply loosen up its currency to boost demand while Germany keeps its currency tight. Instead, the ECB has to either keep the euro tight, screwing Italy, or loosen it, screwing Germany. And since other pan-European political institutions are not as strong as the US Federal Government, setting Europe-wide economic policy for everything other than currency is difficult. The upside of the euro may be greater than the downside, but it seems to me that a new global reserve currency would be mostly downside, for this reason. Then again as a US citizen I have a vested interest.

53 points by bokonist 18y ago

This is the first time I've ever heard a Chinese official this high up call for replacing the dollar. Can anyone else think of any other examples? If this is really a new development, then it's very significant news.

ironsam 18y ago
The premier of China publicly spoke about his concerns for the value of the dollar recently: http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_economy http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_...
dc2k08 18y ago
There has been news about it but it has not been given much coverage. Christmas eve last, it was reported by AFP and Xinhua (Chinese Govt. Media) that China was trying to create conditions for the yuan to become an international settlement currency and would use the yuan in transactions with neighbouring economies on a trial basis: http://www.marketskeptics.com/2008/12/china-makes-yuan-international-currency.html http://www.marketskeptics.com/2008/12/china-makes-yuan-inter... I link to a blog and not the articles because I think the blogger makes some great commentary. He also gives his incite to yesterday's news in the first link on the right. Definitely worth a read.
gregatragenet 18y ago
China has made several statements in the last few weeks about their concerns about the dollar. However the real BIG news is not their talk, its their actions. China has been moving their dollar holdings into short-term bills out of longer-term notes. They are positioning themselves so that they can get out of the dollar quickly - and they are doing it in a way that won't raise alarms because they aren't (yet) cashing-in their dollar holdings. http://www.atimes.com/atimes/China_Business/KC18Cb01.html http://www.atimes.com/atimes/China_Business/KC18Cb01.html

Rod 18y ago

"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." Monetary policy is definitely not my forte, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation, after all. Creating a new currency takes such a long time that I wonder whether it would be practical.

mattmcknight 18y ago
I don't think it would be a real currency, it would just be a broadening of the current basket the IMF uses. We'd use an expanded form of special drawing rights as reserves, and the SDRs would be based on the broader basket of currencies.
redsymbol 18y ago
Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone. Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable. I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment? Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights http://en.wikipedia.org/wiki/Special_Drawing_Rights

kirse 18y ago

Coming from China, I think it is absolutely fair that they have to deal with the dollar as the reserve currency because we had to put up with the decade of bullshit from them pegging their yuan to the US dollar. The major reason they're holding an excess of US assets is because they decided for 10+ years to ensure that it was artificially cheap for anyone in the US to import from China. We complained to hell about fair trade and threatened import taxes, but we let it slide mostly in the name of diplomacy and cheap consumption. Well now China gets to reap the consequences of that decision and I have not a single ounce of remorse for them. Great article from back in '03 when this was still an issue: http://www.treas.gov/press/releases/js774.htm http://www.treas.gov/press/releases/js774.htm

dejb 18y ago
What's with all the moralising? You think China are under some sort of moral obligation to take their losses cause they 'had it coming' for keeping the yuan low? Just like the US they'll do whatever they see is in their advantage. I don't see anyone saying you should feel remorseful but if China want to move towards other currencies then that is their right.
- DanielBMarkham 18y ago
  I don't think morals have to enter into it. If a country artificially ties its currency to the dollar for purposes of inflating trade, it's going to end up with a bunch of dollars that aren't worth so much. Seems like natural consequences to me. I'm dubious that the system is so simple that simply changing the reserve currency is going to fix anything. But if I were an expert in international finance, I wouldn't be working on startups. And I'd probably be a lot more boring.
  - deleted 18y ago
    [deleted]
  - dejb 18y ago
    I agree the Chinese are in a bit of a pickle what with holding so many US dollars. The fact that they are prepared to risk their investment by saying this is suggestive. In the end I think the US would still like to hold onto the USD as the defacto world currency and the Chinese move is more a warning that that this can be lost if the value drops too much. Either way I'm not sure how much it matters who's 'fault' it was now. But I'm not an expert in international finance either. The startup I'm a part of does very well when the USD is strong but that is about it.

light3 18y ago

This is interesting, this would certainly be a very new direction for foreign currency. Another interesting point is this was not raised during the 2008 APEC meeting, much to the dismay of European countries. However this time around things seem to have progressed, and Russia has put forth the proposal to the G20, it will be interesting to see how this plays out. http://en.rian.ru/world/20090323/120689432.html http://en.rian.ru/world/20090323/120689432.html and this one with some humor: http://mnweekly.ru/news/20090305/55369676.html http://mnweekly.ru/news/20090305/55369676.html

1gor 18y ago

>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”. Gold exists already.

Retric 18y ago
Gold is highly unstable which is bad. It's value fluctuates even faster than the USD.
- 1gor 18y ago
  I would argue that USD and the rest of currncs are unstable vs. gold. Supply of gold is fixed. Supply of paper money is at the whim of greenspans.
  - Retric 18y ago
    If you compare it with a basket of goods it's still highly unstable. It's not a true random walk, but day to day gold fluctuations can be extreme and it's still in the middle of a bubble so expect a sudden crash some time soon.
    - 1gor 18y ago
      If basket of goods was priced in gold rather than dollars - then its price would also be more stable. There have been centuries when gold was legal tender and nobody complained (apart from some emperors who found debasing gold coins by adding copper was a bit difficult; but printing press has not been invented yet).
      - Retric 18y ago
        Think about this for a second, if you value a basket of goods in terms of oil and oil's value is fluctuating rapidly then the value of those goods also seems to fluctuate rapidly. So when you compare 2 things one of whose value is stable like USD or a basket of goods, and something else that is unstable like Gold. Then the unstable item makes the value of the other things seem to fluctuate. However, by making several comparisons you can determine that the ratio of USD to basket of goods is stable but gold vs USD or Basket is unstable so it's Gold that is unstable.

anamax 18y ago

The actual statement doesn't make any sense: "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'." "controlled by the IMF" does not imply stable. While the IMF is somewhat disconnected from individual nations, it is gamed. I suspect that this is China's way of saying that it wants to play too. Since it's big enough to break the IMF, it may just be a public announcement of China's new role.

sethg 18y ago

IIUC one downside of the European monetary integration is that if, say, the German economy is doing fine while Italy is in recession, then Italy cannot simply loosen up its currency to boost demand while Germany keeps its currency tight. Instead, the ECB has to either keep the euro tight, screwing Italy, or loosen it, screwing Germany. And since other pan-European political institutions are not as strong as the US Federal Government, setting Europe-wide economic policy for everything other than currency is difficult. The upside of the euro may be greater than the downside, but it seems to me that a new global reserve currency would be mostly downside, for this reason. Then again as a US citizen I have a vested interest.