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China wants to get rid of the dollar

This comes via the Financial Times (Hat tip CR):

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”.

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.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

3 Comments

  1. smoody says:

    This is clearly the direction world finance has to take, but I doubt there’s sufficient political will to actively pursue the ‘Chinese solution.’ So it’s interesting that China is the first government to air the idea–not the G20, the ECB, the US Treasury or the Fed–though it must be obvious to all. The creditor nation takes the lead.

    • smoody,

      This is a big reason I am not a dollar bull despite the rally in the USD that ended just a while ago. Yes, Europe has huge problems. But, the Euro is not the world’s reserve currency and the eurozone does not have the massive current account deficit the US has. In my view, the dollar hasmore to lose from fiat money weakness than the euro.

      We should expect others to join China in this declaration. The G-20 meeting will be very interesting. Take a look at this post about Paul Davidson’s ideas:

      http://www.creditwritedowns.com/2009/01/paul-davidson-reforming-the-worlds-international-money.html

      I think this would be a good framework.